Pro Forma: What It Means and How to Create Pro Forma Financial Statements

A pro forma income statement is an estimate of your company’s financial performance over a period of time. It shows your expected revenue and expenses and can be used to assess the viability of your business. Since pro forma financial statements and financial projections are quite similar, proforma example they may be considered synonymous. However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions. By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions.

  • Think of a proforma invoice as a ‘pre-invoice.’ It provides a customer with an estimated cost of the transaction, prior to the actual delivery of goods or services.
  • In other words, if you’re trying to attract investment capital or have an M&A transaction on your mind, you’ll want to use something more detailed and tailored for the purpose.
  • All we’re focused on here is determining whether the business is operationally profitable and that we’re capturing all of our future revenue and future expenses.
  • For example, a bakery customer might agree to the price of a cake on a pro forma invoice, and the baker will deliver the cake once it is ready.
  • Business owners can tailor these projections to highlight their business’s unique strengths, ultimately appealing to a broad range of potential investors.
  • Specific documentation is required before goods can pass through customs into the U.S.
  • Pro forma financial statements, including cash flow statements, provide insights into a company’s anticipated cash inflows and outflows based on specific business scenarios.

A budget is a plan for how you will use your resources to achieve specific goals. It shows your expected income and expenses and can help you to stay on track financially. Other individual line items can also be easily forecasted, such as the cost of goods sold, since it can be assumed it will proportionally grow with sales.

Terms and Conditions

It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Businesses create annual budgets that fall in line with a company’s profitability and production goals. Accracy is not a public accounting firm and does not provide services that would require a license to practice public accountancy. Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”). We forecast that our capital expenditures will increase in line with our sales, at a rate of 20% per year.

Pro forma, a Latin term meaning “as a matter of form”, is a set of financial statements prepared using hypothetical transactions or scenarios. They are most commonly used to show a company’s financial statements including the effects of a planned M&A deal, however, they can also be used in other scenarios. According to Russell’s projections, he reaches the highest earnings when he hires a full-time administrative assistant. More significantly, the pro forma income statement reveals that hiring a part-time assistant is nearly as lucrative as bringing someone on full-time. If you take out the loan, you might share the pro forma financial statements with the lender to demonstrate your ability to repay the loan.

Understanding Limitations in Decision Making

The Securities and Exchange Commission (SEC) consistently updates its stringent rules on preparing pro forma statements for the public. Still, pro forma financials are not regulated to the same extent as historical financial statements. In accounting, pro forma refers to financial reports based on assumptions and hypothetical situations, not reality. Businesses use pro forma financial documents internally to aid in decision-making and externally to showcase the effect of business decisions. With Accracy, you get a crystal clear image of your financial history so you can focus on planning your future.

Pro forma financial statements are hypothetical financial reports that project the future financial performance of an entity, based on expected income, expenses, assets, and liabilities. They are created using assumptions about future values and conditions, which serve to forecast financial performance over a period that has not yet occurred. 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.

Expense Forecast

Small business owners draft pro forma financial statements to quantify the impact of potential business decisions, such as taking out a loan to grow your business. Pro forma financial statements give you and your team something to consider before signing on the dotted line. Misleading or inaccurate pro forma statements can result in a loss of credibility and trust with stakeholders, making it crucial to approach them with integrity and objectivity. In summary, ensuring legal and ethical compliance in pro forma financial statements is crucial to maintain investor confidence and uphold the integrity of financial reports. By understanding and utilizing pro forma financial statements, companies can make more informed decisions, develop strategies, and improve their overall financial planning and management.

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