Nailing down the intended function from each individual case upfront helps everyone stay organized while compiling input data points needed so output reports can clearly depict results without any ambiguity at all times. For example, if you’re starting up a business from scratch, the pro-forma should give you an idea of revenue expectations during the first year based on market trends etc. Pro Forma Financial Statements are an insightful way to investigate fictitious scenarios, but it’s important to remember that they are based on forecasts, not facts.

  • Further, they can represent if your company could run out of money, and how much is necessary to keep it afloat.
  • Basic templates for creating pro forma statements can be found online, or they can be created using a Microsoft Excel spreadsheet to automatically populate and calculate the correct entries based on your inputs.
  • 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.
  • “We believe that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating current period performance and in assessing future performance,” the company says.
  • You can calculate a base percentage of sales by averaging sales over a certain time frame, and then use that percentage to estimate your projections.

Further, they can represent if your company could run out of money, and how much is necessary to keep it afloat. If your company has a high debt-to-equity ratio, it will show on the balance sheet. This pro forma balance sheet can also be used for corporate retail or wholesale businesses. Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements. Regular income statements, sometimes called statement of financial performance, are exacting, in that they reflect the exact income figures your company had in past years.

But if not, the losses might deplete the company’s capital base and create financial hardships. Pro formas can reveal the company’s capacity to absorb a worst-case situation and be able to continue operating. The term pro forma is Latin and can be translated to mean “for the sake of form.” Companies use pro formas to evaluate what-if scenarios and how they could impact their business. Regularly update pro forma statements to claiming a dependent without a ssn reflect the latest information and insights. If your pro forma is centered around a specific event, such as a potential acquisition, merger, or introduction of a new product line, make sure you incorporate the financial impact of that event in the projections. Some might think it refers to a type of financial statement or projection made by companies, while others may assume that it relates only to real estate transactions.

What Are the Advantages and Disadvantages of Pro Forma Financial Statements?

A pro forma financial statement is supposed to include reasonably accurate information. However, companies that create these documents have some leeway in their assumptions. They might be overly optimistic or omit important information investors need to know about. Companies in the U.S. follow Generally Accepted Accounting Principles (GAAP) as a best practice. While GAAP standards set guidelines on reporting information accurately and transparently, sometimes it’s useful to include or exclude information.

  • 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.
  • After the values of all these liabilities have been recorded, they must be added together to calculate the final value of the total liabilities.
  • Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.
  • That section of the Constitution bars insurrectionists from seeking public office.

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. Some of the most commonly used financial statements for pro forma are the income statement, the cash flow statement, and the balance sheet. While pro forma financial statements project the future, there is no guarantee that those predictions are accurate. Unexpected events, bad assumptions, and other factors can lead to dramatically different results.

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What does Pro Forma Mean?

Together, the documents help you assess whether your business’s financial health improves, declines, or remains the same following the decision. In other words, the different types of pro forma statements are basically the same financials you’re already accustomed to, just using hypothetical data for future periods. So, as you’ll see once we discuss how to create pro formas in just a bit, they don’t require you to recreate the financial reporting wheel, at least in terms of format. 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.

What types of pro forma financial statements are commonly used?

An income statement, also known as a profit and loss statement, shows the revenue and expenses of a business over a specific period. Through the net income equation, one can determine their bottom line and how much funds they have to carry over to the next period. The preparation of pro forma statements in various economic environments is useful for management to examine the consequences of rises in expenses or economic downturns.

types of pro forma statements

A pro forma income statement uses the pro forma calculation method, mainly to draw the attention of potential investors to specific numbers when a company issues its quarterly earnings announcement. Internal teams can view the information in these statements to weigh multiple options for moving the business forward. Investors can look at these to see a glimpse of their potential impact if they were to finance a business.

Pro Forma

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. Further, organizations may want to develop their pro forma financial statements while they are doing an annual review of their business plan.