How to Create Pro Forma Financial Statements in Excel
Pro-forma forecasts are usually created from pro-forma financial statements and are forecasted using basic forecasting procedures. When making these forecasts, revenues will usually provide the initial groundwork for the forecast, and expenses and other items are calculated as a percentage of future sales. For publicly-held companies, the SEC requires an introductory paragraph showing the proposed transactions, the company, the period covered, and what the pro forma information describes. The SEC also requires the pro forma balance sheet, pro forma income statement(s), and explanatory notes that provide adjustment justifications and pertinent detail.
What are the benefits and limitations of pro forma financial statements?
This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO. The pro forma financial statements, including pro forma earnings per share calculated, must be submitted. Pro forma financial statements are used to project a company’s expected financial performance based on specific assumptions. They assist in financial planning, decision-making, and evaluating the potential impact of different business strategies or scenarios. For instance, a startup seeking venture capital funding may use pro forma financial statements to outline projected revenue growth, expenses, and potential return on investment. Likewise, a company looking to secure a bank loan for a new facility might provide pro forma statements to showcase its ability to meet debt obligations.
What’s the Difference Between Pro Forma and GAAP Financials?
We’re going to take you through the steps necessary to create a basic full-year pro forma projection using an income statement, cash flow statement, and balance sheet. However, we’re lobbing another caveat your way – take our proforma example walk-throughs with a grain of salt since they’re only a glimpse into the basic pro forma process. To illustrate the process of creating pro forma financial statements, meet Sally, the owner of Centerfield Sporting Goods.
Preparing Hypothetical Scenarios
By understanding and utilizing pro forma financial statements, companies can make more informed decisions, develop strategies, and improve their overall financial planning and management. This projection looks backward (at one or more years) at another company’s financial statements. Using this combination, the projections shows how they would have done together. This type of projection could be shorter term (from the beginning of the current fiscal year). Use this free template to create your own historical with acquisition pro forma documents.
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. The two types of accounting that use pro forma are the financial and managerial accounting. The pro forma documents in financial accounting act as financial reports to attract prospective investors or compute company earnings. On the contrary, the pro forma documents in managerial accounting serve as internal financial statements.
An example of pro forma
The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include. You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position. Start composing your pro forma by projecting your company’s overall sales and costs of goods sold (COGS).
- 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.
- When I first ventured into the realm of business budgeting for my startup, I felt like a novice treasure hunter without a map.
- Pro forma financial statements also play a critical role in risk management.
- The SEC (Securities and Exchange Commission) has the reputation to consistently update and change its strict rules and regulations on pro forma financial statements.
- Investment pro forma projections showcase the company’s ability to generate returns on investments, giving investors the confidence to commit their capital.
- Remember, what distinguishes these pro forma statements from your standard financials are the adjustments, not the calculations or even the format.
- 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.
- We’re going to provide a specific income statement template for us to walk through together.
- 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.
- It was a lesson in the importance of balancing our financial ecosystem carefully.
- Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).
They have articles governing the preparation of pro forma financial statements for public companies. These are Regulation S-X Article 11, and Regulation S-X 8-05 for smaller companies from 17 CFR 210. Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering (IPO).
- Often, events depicted in the pro-forma financial statements have yet to occur, so the actual financial picture of the company may be very different from the picture presented.
- Here’s a closer look at what pro forma financial statements are, how they’re created, and why they’re a key aspect of financial decision-making.
- While pro forma statements provide valuable insights for companies’ internal management, their usefulness is limited for external decision-making by investors or other stakeholders.
- You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement.
- They have multiple uses for multiple scenarios, ranging from sales growth projections and risk analysis to more intricate M&A or investment purposes.
- Management uses it to make informed decisions about events or transactions.
- When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios.