Building Pro Forma Financial Statements A Step-by-Step Guide

While finance focuses on forward-looking projections, accounting relies on historical data—pro forma financial statements help bridge the gap between the two. Accounting software with advanced accounting capabilities, like QuickBooks, can help here. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast. Unlike GAAP financial statements, pro forma statements do not follow standardized accounting principles.

Expense Adjustments

Non-recurring items, such as gains from asset sales or extraordinary legal settlements, are excluded to provide a stable view of profitability. For example, a company might exclude the gain from selling a subsidiary, as it does not reflect ongoing operations. Transparent documentation of these exclusions is critical to maintaining investor trust. This wasn’t just any oven; it was the heart of the bakery’s expansion plan, significantly impacting both assets and liabilities. The oversight led to a considerable underestimation of future liabilities (since the oven was to be financed) and, by extension, equity.

Mastering Pro Forma Financial Statements: The Three You Need

Companies often highlight pro forma net income in earnings releases to emphasize operational performance. By excluding items like restructuring costs, they can present a more favorable view of profitability. To ensure transparency, companies provide detailed reconciliations and explanations of these adjustments. They are used by management to project financial results based on assumptions. An income statement is based on actual company data, and a pro forma income statement is based on assumptions.

A solid financial forecasting strategy helps you avoid cash shortfalls by showing where funds are coming from and how you’ll spend them. While pro forma statements can be clarifying, investors need to understand their significant limitations. Like weather forecasts, they’re helpful for planning, but not guarantees of what will happen—especially if those projections use rosy financial assumptions. To create pro forma financial statements, you can proforma income enlist the help of a certified public accountant (CPA) or use a template.

Calculate pro forma total operating expenses

This foresight is crucial for maintaining a realistic view of your financial obligations and ensuring you don’t find yourself in hot water down the line. When I first ventured into the realm of business budgeting for my startup, I felt like a novice treasure hunter without a map. My quest for data led me down various paths, from scouring through forgotten files on my computer to diving deep into the depths of online research databases.

• You’ll learn the best practices for generating the statement and how this financial tool can improve business forecasting.
• During the late 1990s dot-com boom, many internet companies used pro forma results to transform losses into apparent profits by excluding significant costs.
• Sometimes, you’ll need more tailored forecasts, like full-year projections or risk analysis.

This calculation is based on the normalized net income that excludes non-recurring expenses. Pro-Forma EPS aims to find the stream of earnings from operations, which can be used to forecast future EPS. Following GAAP guidelines, a company may, for example, report a net loss for a quarter. But if that loss came as a result of one-time litigation expenses or restructuring, the company may prepare pro-forma statements that show a profit. Pro-forma earnings in the first sense are sometimes reported by publicly traded companies that want to present a more positive picture of their financial condition to investors.

Helps with decision-making and strategic financial planning

A pro tip here is to always err on the side of caution; it’s better to be pleasantly surprised than caught off guard. Cost of goods sold (COGS) includes costs directly related to producing the product or service. Successful SMBs use financial tools to forecast business performance based on assumptions. Pro forma statements typically project 1-3 years into the future, but this can vary depending on your business goals or the type of forecast needed. To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate your ideas make financial sense.

Pro forma, a Latin term meaning “as a matter of form”, is a set of financial statements prepared using hypothetical transactions or scenarios. They are most commonly used to show a company’s financial statements including the effects of a planned M&A deal, however, they can also be used in other scenarios. Pro-forma financial statements may help managers identify a company’s core value drivers and analyze changing trends within company operations.

• Needless to say, I had to redo the entire analysis, a humbling reminder of the importance of double-checking your work and considering all aspects of your business operations.
• GAAP-conforming financial statements must be included with pro forma submissions.
• Update your pro forma statements whenever significant changes occur in your business or the market.
• If you enable them, they have the best and worst-case scenarios that review the fiscal impact of their decisions and possible ways to mitigate risk.

This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important. Knowing how the pro forma documents are compiled and what is left out is also critical when comparing different pro forma statements. Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors. One of the most important uses of pro forma reports is related to decision-making and strategic planning efforts. For example, you might create pro forma financial statements to reflect the outcomes of three investment scenarios for your business. Doing so can allow you to conduct a side-by-side comparison of possible outcomes to determine which is favorable and guide your planning process.

After all, we still need to pay salaries, rent, utilities, and any other required costs. Here’s a basic list of common small business startup costs that turned up with a quick search. Remember that our chosen methods for generating new business will need to change as the business grows. We may bring in $15K per month, making 300 cold calls a day, but we won’t be able to make $150K per month making 3,000 cold calls each day because it probably isn’t possible. If we want to extend this forecast further into the future, we simply focus on increasing our revenue-driving activities (as long as they’re working). There are many different revenue drivers, but our chosen method for generating new business should be appropriate for the amount we charge customers.

The accuracy of pro forma projections depends on the quality of your assumptions. While they offer valuable insights, projections are estimates, so it’s important to account for potential variability. Publicly traded companies must use GAAP statements for official reporting to investors, regulators, and tax authorities, as required by law. These statements must follow strict accounting rules to ensure transparency and consistency.

Bea projects a 20% increase in sales for the next year, keeping her estimates conservative to stay grounded. You’d consider the rain forecast (seasonal trends), whether you’re planting more thirsty plants (new products), and how well your soil retains moisture (cash on hand). When projecting your assets, consider both your current resources and those you plan to acquire.

Business Insights

Nothing feels better than that first online sale, but as your business grows, so will your admin. Get free guides, articles, tools and calculators to help you navigate the financial side of your business with ease. Our team is ready to learn about your business and guide you to the right solution.

But generally, these are the steps you need to take to create them—and the info your pro forma statements should include. This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year. Learn how to build, read, and use financial statements for your business so you can make more informed decisions. Assumptions form the bedrock of pro forma statements; hence, a reliable pro forma statement is a financial model prepared based on realistic and justifiable assumptions.

The limitations should discuss the challenges of predicting the financial future of a company. Use the templates found here to create your own cash flow statement forecast. Change the dates and time periods to reflect the projection you need to create.