There are four main types of pro forma financial statements depending on the purpose of your financial forecast. He prepares his pro forma financial statements that predict the income to rise to $35000 next year. So, when you budget for next year, you can take that extra $15,000 into account.

  • In the Parliament of the United Kingdom, the equivalents are the Outlawries Bill in the House of Commons and the Select Vestries Bill in the House of Lords.
  • Whether done knowingly or unknowingly, serving pro forma statements as if they were GAAP compliant statements can get you in trouble.
  • Challenges against Trump are pending in 15 other states, according to an organization tracking them, and his name has for now been struck from the ballot in two others — Colorado and Maine.

However, pro forma financial statements help you create business plans, make financial forecasts, and get money from potential investors and lenders. 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. 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.

What types of assumptions are used in pro forma statements?

This then can reveal the theoretical efficacy of certain business strategies. They’re an extremely helpful tool for business planning, as they enable you to conduct side-by-side comparisons based on different financial assumptions that can help you decide between two proposals or potential strategies. Lenders want to feel comfortable that a business has sufficient working capital and liquidity to support its operations. For example, they will look at projections of changes in the current ratio, current assets divided by current liabilities, under different economic conditions to make sure that enough liquidity is being maintained. When presenting these ideas to other partners, lenders or to a board of directors, pro forma projections can clarify things.

  • In this case, you can create a case using external cash injections that shows how this affects your company’s financial position.
  • Income statements would show how much it would cost a company to pursue the project and how much revenues might improve after completion.
  • They’re generally created using Excel spreadsheets or specialized software programs designed for this purpose.
  • The term is used in legal and business fields to refer to various types of documents that are generated as a matter of course.
  • You should also highlight the main findings, implications, and recommendations of your pro forma financial statements.

The limitations should discuss the challenges of predicting the financial future of a company. While it’s helpful to know what a company’s management has planned, it’s important to view these projections with skepticism. Nobody can predict the future, and managers might (even with the best intentions) use overly optimistic assumptions in their pro formas. Pro forma financial statements might show the expected impact of any projects in the pipeline.

Problems with Pro Forma Financial Statements

Wise creation is looking at past data, analyzing trends, and using dependable financial assumptions to forecast future growth. This way, any information from these pro forma statements can be more reliable. They can not only actionably inform your other financial plans but also give investors peace of mind. Pro forma statements can also play a major role in getting your business financed.

Pro Forma Income Statement

As a slight aside, for more in-depth insights on pro forma adjustments as well as some handy best practices and examples, we urge you to look at our Ultimate Guide to Pro Forma Statements. For these walk-throughs, however, we’re assuming you’ve already looked over the different events and scenarios that can prompt pro forma adjustments. 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. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment. 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.

Pro Forma Statements vs. GAAP Statements: What’s the Difference?

You should also be prepared to answer questions, address feedback, and provide additional information or clarification if needed. You can improve budgeting, forecasting, and overall financial planning by looking at your goals and objectives and weighing them against your pro formas. You can also assess these potential strategies, investments, and other partnership opportunities. You can perform risk analysis and play with imaginary money to determine a reasonable amount to get you to a more profitable place.

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On the other hand, pro forma statements are financial projections and forecasts. They also use historical data but account for hypothetical factors added and subtracted to these statements. Along with historical data, turbotax self likely outcomes and financial assumptions are building blocks for these statements. They use these to make reasonable predictions about performance in future time periods usually projected over the course of a year.

If interim period balance sheets were submitted, the company should pick up from where they left off. If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. Pro forma income statements usually project a minimum of three years, whereas regular income statements may just be the year prior or based upon a lender’s request. According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim periods.