All in all, they provide you with invaluable information—the sort of information you need to make the right choices for your business. This approach is useful for seeing how a prospective acquisition could have altered the financial results of the acquiring entity. In this case, pro forma statements are like dipping your toe into the water before diving into the pool. If the water feels too cold – the pro forma financial projections and expected results aren’t favorable – it’s probably not a great idea to take a dip.

• A business will analyze old financial documents while considering any potential changes adjustments that will happen in the near future.
• Using pro forma reports, companies can project the impact of a business move based on recent, accurate financial data.
• To figure your pro forma gross profit for next year, subtract the pro forma cost of goods sold from the pro forma sales.
• For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and never mistake one for the other.
• There are several types of pro forma statements, including the income statement, balance sheet, and cash flow statement.

They can look forward or backward, revealing insights that standard financial statements simply cannot provide. Estimating a balance sheet is a useful tool for the investors, management and creditors to analyze how the financial position of a company is impacted. This can prompt a warning signal for the stakeholders about the vulnerability of the company’s position if a worst-case scenario occurs for a company. Pro forma financial statements provide predictions on how the future might unfold for companies you’re investing in.

Mastering Pro Forma Financial Statements: The Three You Need

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.

That’s when hiring a professional is the fastest and most cost-effective approach. Pro forma analysis is based on assumptions about the future, such as future sales, costs, and expenses. These assumptions may not always be accurate, which can cause misleading results. Pro forma analysis is an excellent tool for businesses to get a handle on their financial situation and make informed decisions about their growth. Pro forma analysis can demonstrate to potential investors that your business has a great chance of being financially successful in various future situations. This includes the cost of leasing or purchasing a new facility, as well as the cost of hiring new staff.

Types of Pro Forma Statements in Business Plans

Assumptions form the bedrock of pro forma statements; hence, a reliable pro forma statement is a financial model prepared on the back of realistic and justifiable assumptions. Finance professionals and business owners need to consider all the likely scenarios that affect the finances of a company in order to come up with accurate financial forecasts. Carry out extensive research and review prior financial statements in order to arrive at the best assumptions. Unrealistic assumptions will lead to inaccurate and unreliable pro forma statements. For example, a one-off significant expenditure for heavy machinery can throw off the financial results in the period that it is acquired. A pro forma financial statement can exclude the financial impact of this purchase to show what the profit margin will be without the one-off capital investment.

• One of the main disadvantages of pro forma financial statements is that they are inherently speculative and do not reflect actual past or present performance.
• Learners enrolled in the course learn the language of accounting and how to create financial statements and forecasts to make strategic decisions.
• If the water feels too cold – the pro forma financial projections and expected results aren’t favorable – it’s probably not a great idea to take a dip.
• Pro forma financial statements incorporate hypothetical numbers or estimates.
• This metric determines the financial outcomes of any acquisition or merger and tells the parent company whether the transaction will be accretive (good) or dilutive (bad) to the financial state of the company.

This pro forma business plan demonstrates the viability of our company and its potential for long-term success. We have a strong track record of financial success, and we are well-positioned to continue growing our business. Our pro forma statements show that we are expected to generate positive net income, and have a strong financial position and healthy cash flow.

What are Pro Forma Financial Statements?

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 bookkeeping for startups transparently, sometimes it’s useful to include or exclude information. In particular, you might want to know how an anticipated change may affect a company’s earnings.

• For cases in which your company is specifically seeking funding, you want to show your potential investors how the company’s financial results will change with their investment.
• Cash flow is king and knowing that a business will generate future cash flow based on underlying assumptions is critical for business survival.
• This means that it should define the transaction, the entities involved, and the periods of time.
• These assumptions may not always be accurate, which can cause misleading results.
• 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.
• Simply import financials and then use the dashboard on the Pro Forma Template to choose various custom scenarios.

With that information, you can conduct ratio analyses using hypothetical numbers and gain insight into how projects might affect the value of your investment. When deciding whether or not to invest in a company or a project, it’s reasonable to wonder how the future will unfold. There’s no way to predict the future with certainty, but you can analyze multiple “what if” scenarios to understand the potential outcomes. Pro forma financial statements enable investors to do that with available information. Even public companies are not required to get their pro forma document audited by an independent auditor, according to the SEC.