Pro forma financial statements: Definition, uses, and benefits

Then, he breaks down even complex problems into one or two elements to help them break through their barriers of growth. The Budget Tracking Template is another way to get a clear picture of the organization’s spending and forecast how those expenses will impact the bottom line. With permission controls, external stakeholders only can view the template, letting the accounting team change any numbers to avoid accidents. Simply import financials and then use the dashboard on the Pro Forma Template to choose various custom scenarios.

• They differ from pro forma statements in that they are not projections, but rather historical reports — therefore, they do not consider things like litigation costs, restructuring charges, and other one-time items.
• You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.
• This statement can be part of a larger cash flow that’s used for financial accounting and decision-making.
• In many cases, pro forma statements (or at least some form of financial projections) are prerequisites for investment.

There are several other types of templates that could be helpful for a business other than the ones already presented here. There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements. Use the templates found here to create your own cash flow statement forecast. Change the dates and time periods to reflect the projection you need to create. Be advised that issuing pro forma financial statements to the public can be problematic, especially since the pro forma statements and the GAAP statements can vary so widely. Investors should be cautious when evaluating these types of statements because they present a considerably more favorable picture of the business.

For example, if you were contemplating taking on an investor, it would give you a risk vs. reward scenario. For example, sales might be presented as 15% higher (best case), 5% higher (expected), 20% lower (worst case). If material costs increase sharply, or there is a shortage of labor, the cost of sales will increase. Pro forma financials in normal balance the United States boomed in the late 1990s when dot-com companies used the method to make losses appear like profits or, at a minimum, to reveal much greater gains than indicated through U.S. The statements are presented to the company’s management to help it make a decision on a proposed action based on its potential benefits and costs.

Can You Compare Pro Forma Statements From Different Companies?

If you don’t know how each of the companies defines its pro forma figures, you may be comparing apples to oranges. A pro forma invoice requires only enough information to allow customs officials to determine the duties needed from a general examination of the included goods. Pro forma results may contain adjustments to GAAP numbers in order to highlight important aspects of the company’s operating performance. 3240.3Pro forma adjustments should be referenced to footnotes which clearly explain the assumptions involved. As a business partner, he helps his clients get a holistic view of their financial health by slowing down to talk about numbers.

In addition, it’s easier to prove sustainability by presenting well-researched pro forma statements to a would-be stakeholder. Your business might benefit by following the SEC guidelines for public companies outlining how to use pro forma statements, even if you’re not a publicly traded business. Another important thing to remember when preparing pro forma statements is to use credible data and not over-rely on hypothetical information, so your estimates are as close to accurate as possible.

Pro forma cash statements

And as we mentioned earlier, they are not in compliance with GAAP, which means they have to be labeled as pro forma and cannot replace formal financial statements. These are models that forecast the expected result of the proposed transaction. For example, if a company is considering an acquisition or a merger, it may publish a pro format statement of the expected impact of the move on its future earnings and expenses. Pro forma financials are not computed using generally accepted accounting principles (GAAP) and usually leave out one-time expenses that are not part of normal company operations, such as restructuring costs following a merger.

They might be overly optimistic or omit important information investors need to know about. For example, the company might merge with or purchase another business, and the outcome could affect both cash flow and profits. Alternatively, the organization might need to make a major equipment purchase, and it’s important to know the financial impact of that transaction. Pro forma financial statements project how a company might perform in the future if the business takes an assumed course of action. At Cultivate Advisors, our revenue management consultants can help you put together a pro forma income statement to give you confidence and insight into how your company will perform in various scenarios. A pro forma cash statement makes it easy to see how operating activities would be affected if your cash flows were to increase (or dry up).

What Can the Statement of Cash Flows Tell Us?

This new technology will allow XYZ Company to manufacture widget presses at half their current cost and several times more quickly. This could potentially make them the preferred provider in the space and help them gain market share. The limitation of these statements is that they show the business owner nothing more than a prediction. No matter how good or bad that portrayal may seem, it’s only a good guess as to what may happen.

• [SAB Topic 4B] Similarly, undistributed earnings or losses of partnerships should be reclassified to paid-in capital in the pro forma statements.
• Smaller reporting companies should present pro forma information for other current or probable transactions if that presentation would be material to investors.
• Taylor suggested starting the process with actual data that has been audited (if you have an auditor), or at a minimum have been validated as accurate.
• Use this basic cash flow template to compare your business cash flows against different time periods.
• However, when these debt investors are paid back, then the repayment is a cash outflow.

Unfortunately, there are also disadvantages that accompany pro forma financial statements. To create a pro forma cash flow, you need to know your current cash position. To demonstrate the steps of building a pro forma cash flow, let’s use a hypothetical company, West Coast Shoe Wholesalers, Inc.

Small Business Budget Template

A pro forma cash flow statement could detail any payments involved in a hypothetical project. For example, the company might have to pay for land, materials, and fees to contractors who build the facility. Later, after the project is completed, the cash flow statement might assume increased payments from customers. 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.

While pro forma often refers to assumptions about future events, it can also refer to financial reports with irregular transactions removed. For example, if a company experienced significant restructuring charges in a given period, a pro forma might show how the company would have performed if those charges never occurred. A cash flow proforma statement is a practice in which a voluntary statement regarding cash is reported to present a financial forecast. This is considered an estimate of the expected cash flow at a particular point in the future. 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. Forecasts made from these financial statements may or may not contain an even higher degree of deviation from the actual state of the company.

Main Types of Pro Forma Statements

It’s used to show the company’s ability to operate in the long term and short term based on existing cash inflows. Over the past couple of years, supply chains have been totally redrawn, and businesses have been forced to evolve how and where they do business. In some cases, that’s created tremendous new opportunities organizations can leverage to chalk up some growth. 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. Therefore, it is quite possible that the predictions made by the Pro Forma Financial Statements will not be completely inaccurate and may have fallacies. Finally, wrap up all your data and subtract your total liabilities from your total assets to see if your start-up has enough assets to continue.

Risk analysis lets you take the future for a test ride, and try out different outcomes. Remember that the indirect method begins with a measure of profit, and some companies may have discretion regarding which profit metric to use. While many companies use net income, others may use operating profit/EBIT or earnings before tax. Certain pro forma disclosures are required by GAAP (e.g., ASC 805) and should be provided where applicable. Those presentations may differ in style and content from the requirements of S-X Article 11.

An income statement is one of the most critical financial statements in every accountant’s toolbox. It’s often referred to as a profit and loss (P&L) statement, and it summarizes all net income, net sales, and expenses over a given https://online-accounting.net/ period. In accounting, pro forma statements are a way to test out various business situations that might happen in the future. Looking at how those scenarios could play out makes it easier to prepare if they happen in real life.