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Use this free template to create your own historical with acquisition pro forma documents. Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles (GAAP) adjusted statements. Pro forma financial statements are not computed using GAAP and are often called non-GAAP. GAAP-adjusted statements are uniform financial statements guided by rules of the Financial Accounting Standard Board (FASB).
Creating a Pro Forma Statement
Any documents that deal with a company and its earnings must follow the Generally Accepted Accounting Principles (GAAP), established by the Securities Exchange Commission (SEC). For small businesses, application for a Small Business Administration loan often requires the production of a pro forma financial document. Regardless of the arena in which a pro forma document is used, it is an important tool for forecasting outcomes and ensuring that the desired outcomes are met. Pro forma financial statements serve to show how a company’s major changes, like selling off a brand or merging with another company, might affect its bottom line.
It covers infusions of money from external sources, as well as any interest you need to pay and how these circumstances impact the business. Pro forma financial statements in Excel can help you figure out how to finance your business or impress lenders with your adaptive business model. Pro forma statements are monetary reports detailing how your business would fare based on hypothetical situations. In other words, they proforma p&l help you make accurate predictions about what will happen to your company in the future.
You can use them to study how changes in the price of labor, materials, overhead, and the cost of goods affect the bottom line. Use these models to test the goals of a company’s plan, provide findings that may be understood, and offer better, more accurate data than other methods. New financial models use computer programs that has made this testing better, which enables quick calculation for real-time decision making. Pro forma analyses are meant to paint a better picture of what is happening with the company, irrespective of one-time events, but considering the specific industry’s standards. In some respects, this type of analysis is a more accurate depiction of the company’s financial health and outlook.
Their primary purpose is to aid in business planning, investment decision making, and to show the potential impact of a proposed transaction on a company’s financial health. 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. The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses.
Pro forma financial statements: What to include and how to create them
They differ from pro forma statements in that they are not projections, but rather historical reports — therefore, they do not consider things like litigation costs, restructuring charges, and other one-time items. Pro forma financial statements are most useful when analyzing potential business decisions or anticipating the impact of future events. However, they should not be used as a substitute for traditional financial statements when assessing a company’s overall financial health or stability. Additionally, pro forma statements can be misleading if based on unrealistic or overly optimistic assumptions, and users need to scrutinize their underlying premises carefully. Pro forma financial statements provide a hypothetical look at how a company would perform based on a set of credible assumptions about one or more transactions it is contemplating.
Problems with Pro Forma Financial Statements
These statements are based on assumptions and estimates, helping companies understand the impact of various scenarios on their financial position. The three primary components of pro forma financial statements are the Pro Forma Income Statement, Pro Forma Balance Sheet, and Pro Forma Cash Flow Statement. Pro forma financial statements should adhere to Generally Accepted Accounting Principles (GAAP) in order to provide accurate and reliable information to investors and other stakeholders. Pro forma financial statements may present an optimistic picture of a company’s financial health, intentionally or unintentionally, that differs from the reality per Generally Accepted Accounting Principles (GAAP). The adjusted nature of pro forma statements allows management to exclude certain items that they consider non-recurring or extraordinary. All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet.
- Pro forma financial statements are essential tools for businesses to plan and project their future financial performance.
- Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors.
- Like weather forecasts, they’re helpful for planning, but not guarantees of what will happen—especially if those projections use rosy financial assumptions.
- When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios.
Firm of the Future
There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements. Often, the difference between a past balance sheet and a pro forma balance sheet is that the pro forma balance sheet reports additional periods, sometimes even interim figures. 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.
However, the information is affected by outstanding estimated days of sales, or the average number of days that payment has not been made by the customers. The closer the projection is to the actual numbers reported, the more accurate it is. Further, if a company has a stable order backlog, the pro forma statement of cash flow is more accurate. Finally, and regardless of its relative accuracy, a pro forma statement of cash flow forces management to think about the future expected cash flow and whether it is enough. Yes, creating pro forma statements requires more work, but it pays off in showing you exactly what your future net income, liabilities, and cash on hand would be under certain circumstances. Pro forma, a Latin term meaning “as a matter of form”, is a set of financial statements prepared using hypothetical transactions or scenarios.
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Statements of cash flow, or cash flow statements, measure the sources of a company’s cash and how it uses that cash over the stated period. Pro forma statements of cash flow estimate how much cash inflow and outflow is expected in one or more future periods. Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding. In the case of estimated cash overages, the company can produce a plan for investment.
- This type of projection could be shorter term (from the beginning of the current fiscal year).
- But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.
- As you follow the steps below and gather more information, you may have to circle back to your original assumptions and modify them as needed.
However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party. The SEC guides auditors to ensure that they do not take on too much responsibility for the company’s claims. Using pro forma templates can save you valuable time when creating your own pro forma income statements. If you are considering acquiring another company or pivoting the direction your business is headed, you’ll want to understand how that will impact your income. Creating a pro forma cash flow statement can help you determine how quickly you will become liquid after this transaction, and you can also determine how many more liabilities it will create.
Evaluating Business Potential
Also, continuously compare your forecasts with actual performance to refine your methods. You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. 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.
If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. Companies must now provide standard GAAP results alongside any pro forma figures and explain all adjustments made. The SEC can impose hefty fines on companies that mislead investors with pro forma numbers, yet it often hasn’t—in the Trump Hotels case, as with many to follow, it let the company off with a warning. The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done.
The pro forma income statements considers past data, but its projections reflect the addition or subtraction of events or things. Many of the items listed above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception. This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important.