A financial forecast may be used in lieu of pro forma financial statements. According to the SEC, this does not take the place of the pro forma balance sheet, but the pro forma income statement may be withheld. The difference is that the financial forecast details the company’s expected results of operations as a single-point estimate or a range.
Public companies that prefer to use a condensed combined balance sheet can use this template to create their own condensed balance sheet. A normal balance sheet covers two years, but it is reasonable for a pro forma balance sheet to cover four years of operations. The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements. A pro forma financial statement uses hypothetical data or assumptions about future values to project performance and financial position over a period that hasn’t yet occurred. Here’s a closer look at what pro forma financial statements are, how they’re created, and why they’re a key aspect of financial decision-making.
Pro forma documents, in any form, are essentially like letters of intent, expressing what an invoice or transaction is anticipated to look like after completion. The documents are often used to express interest in business transactions or reveal the intended purpose and outcome of the transaction. We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. All programs require the completion of a brief online enrollment form before payment.
Common Assumptions Regarding Revenue Growth
You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position. 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.
Strategies for Integrating Pro Forma Statements into Business Planning
When companies merge or acquire another, they create pro forma statements to show the financial impact. For example, when Microsoft Corporation (MSFT) acquired Activision Blizzard in 2023, it created pro forma statements showing how combining the two companies would affect revenues, costs, and profits. When used in a business plan, it represents financial forecasts based on managers’ or analysts’ assumptions about the company. There is an analysis of past performance and future assumptions based on which the projection is made.
Pro Forma Financial Statements (with Templates and Examples)
This is because a budget is calculated by looking at past budgets and weighing up the predicted cost of future expenses. Pro forma financial statements are a form of financial report that businesses use to project future conditions. Investment pro forma projections showcase the company’s ability to generate returns on investments, giving investors the confidence to commit their capital. Business owners can tailor these projections to highlight their business’s unique strengths, ultimately appealing to a broad range of potential investors.
- The SEC assumes that that proceeds from any additional shares will be used to fund dividends.
- You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing.
- Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements.
- But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.
- Compiled pro forma financial statements can form the basis for calculating financial ratios and financial models, which test assumptions and relationships of your company’s plan.
There are other stable variables that aren’t influenced by sales on the income statement, including operating expenses, depreciation and amortization, and interest expense. The COGS figure does directly vary with sales; if it does not, something is wrong with your what is pro forma income numbers. The COGS forecast is the COGS/Sales ratio from several years multiplied by the sales forecast. You can address this fact simply with a final paragraph in the compilation reports, and the author may elect to include the reason for the lack of independence.
A pro forma income statement projects your business’s revenue, expenses, and profits over a set period. It provides a better understanding of future profitability, helping with pro forma valuation and decisions like pricing or cost-cutting. By using a pro forma model, you can simulate how changes in sales or expenses will impact your bottom line, making it easier to choose a strategy for growth. Projections that estimate a company’s future financial performance based on hypothetical scenarios.
Misleading or overly positive pro forma financial projections are considered a form of fraud by the SEC. This might be the introduction of a new product, the acquisition of another company, the purchase of new equipment or the closing of a money-losing division. The objective is to examine various alternatives and determine the best course for the business. Optimistic pro forma financials help managers prepare for increases in sales and profits.
- The company’s 35% gross margin assumption may be too optimistic, or the tax rate assumed in the analysis is much lower than the actual tax rate.
- Pricing is based on high demand for the product, and if the cost of sales is controlled, the company’s profitability moves higher.
- This is because sometimes pro forma figures vastly differ from statements generated within a UK GAAP framework.
- It’s possible that your budget is based on the financial information that’s found in your pro forma statement.
- The company knows it will pay a 30% tax rate on the average earnings; the 30% is not a percentage of sales.
- That would mean that your pro forma statements would show what your income, account balances and your cash flow would look like with an extra £50,000.
This means that it can be a useful piece of data that can help to assess a company’s future prospects. Using tools like forecasting and scenario planning, decision-makers can estimate the organization’s future financial position and determine actionable strategies to optimize performance. There are no strict regulations for internal pro forma statements, but public companies must follow certain disclosure rules when using them in reports or filings, particularly with the SEC.
Pro Forma Statements of Cash Flow
By understanding and utilizing pro forma financial statements, companies can make more informed decisions, develop strategies, and improve their overall financial planning and management. Use pro forma financial statements when you’re planning significant changes, such as launching a new product, expanding operations, or seeking investment. These components come together to help you understand your business from both a finance and accounting perspective. 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.
They do not include one-time items and do not conform to Generally Accepted Accounting Principles (GAAP). Pro forma financial statements often play a significant role in public reporting, especially when dealing with the Securities and Exchange Commission (SEC). Companies may use pro forma statements to present their financial results, adjusted for specific events such as acquisitions or divestitures. This provides stakeholders with a clearer understanding of the company’s financial position and helps them make informed decisions.
All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet. The same holds true for the process of preparing income statements and cash flow statements. It differs when you begin forecasting various line items and calculating how those projections impact your bottom line. Pro forma financial statements help you plan your next big move, but creating them doesn’t have to take up all your time. With accounting tools like QuickBooks Online Advanced, you can simplify your financial forecasting and focus on growing your business. Whether you’re assessing a potential investment or preparing for expansion, accurate projections are key.
In accounting, pro forma total expenses are usually used in a financial forecast that can help with financial modeling. These costs include advertising and marketing costs, rent, utilities, and administrative costs. Depreciation and amortization are also operating expenses but are often separately listed in the income statement.