A Small Business Guide to Pro Forma Financial Statements

Pro Forma Financial Statements

In summary, while pro forma financial statements can provide useful insights, users must be aware of their pitfalls, particularly the risk of manipulation and misinformation. Robust understanding and cautious interpretation of these statements is required for accurate economic decision-making. 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.

  • Internal teams can view the information in these statements to weigh multiple options for moving the business forward.
  • They can show the projection of what money will be tied up in receivables, equipment, and inventory.
  • Arguably, the statement of cash flow is the most important of the pro forma documents.
  • These are like regular financial statements, except they deal with hypothetical future financial situations.
  • After this, use your costs and revenue projections to find out what your future net income might be.
  • 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.

These reports provide key stakeholders, investors, and creditors the foresight needed to make decisions and strategically plan. Managers and individual contributors can also benefit from creating pro forma statements, enabling them to understand different factors impacting business units. The disadvantage of using a pro forma balance sheet is that it is really just a prediction.

Contents

Our template offers a P&L at a glance, a monthly sales forecast, and graphs that highlight monthly sales, gross profit, and net income. Now that we understand what a pro forma is and why they’re so uniquely insightful, let’s zoom in on how companies can use them. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

  • For the effects of the business combination, only show the current and immediately preceding periods.
  • These statements offer a structured and organized way to assess the potential financial implications of certain business decisions, actions, or events before they occur.
  • First and foremost, pro forma financial statements can offer a detailed preview of a company’s expected financial performance.
  • Pro forma financial statements are financial reports issued by an entity, using assumptions or hypothetical conditions about events that may have occurred in the past or which may occur in the future.
  • For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and never mistake one for the other.

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 Pro Forma Financial Statements for a pro forma balance sheet to cover four years of operations. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning.

Informing Stakeholders about Financial Implications of CSR Activities

Businesses use pro forma financial documents internally to aid in decision-making and externally to showcase the effect of business decisions. Securities and Exchange Commission has guidelines to govern the preparation of pro forma financial statements for public companies. To prepare your pro forma income statement, you’ll need to determine your estimated revenue projections. The statement of cash flow indicates the amount of money that goes in and out of a business.

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