A pro forma sales forecast is a strategic tool businesses use to predict revenue growth by closely analyzing customer demand, prevailing industry trends, and broader economic factors. This forecast is a comprehensive roadmap, helping organizations set realistic and achievable sales targets. In accounting, pro forma total expenses are usually used in a financial forecast that can help with financial modeling. There are no strict regulations for internal pro forma statements, but public companies must follow certain disclosure rules when using them in reports or filings, particularly with the SEC. For accurate forecasting, prepare for variability by creating multiple scenarios and regularly update projections based on new data.
For this, we need historical data from last year, which is 2021 for this article. Companies often use pro forma statements to present their finances in the most favorable light. During the late 1990s dot-com boom, many internet companies used pro forma results to transform losses into apparent profits by excluding significant costs. For instance, a tech company might have shown pro forma profits by leaving out stock-based compensation expenses, even though these represent real costs to shareholders. From the Latin meaning “for the sake of form,” pro forma generally means something done for the sake of appearances, or formality. In finance, pro forma statements are projected, hypothetical views that reflect “what-if” scenarios.
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- This historical analysis forms the basis for making accurate projections.
- When preparing your statement, remember that you can remove certain lines that would be required in GAAP like non-recurring operations or discontinued operations.
- The pro forma income statements considers past data, but its projections reflect the addition or subtraction of events or things.
- 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.
- By analyzing these projections, businesses can gain valuable insights into their anticipated profitability and highlight potential financial challenges that may arise.
Although the two documents share commonalities, they are two distinct financial tools that you can use to benefit your business. Update your pro forma statements whenever significant changes occur in your business or the market. When your financial statements are put into pro forma financial statements, you adjust material charges, credits, and tax effects to the transactions. In other words, you get an idea of what your financial results would have been if the event had already occurred. These are factually supported by the data from the original financial statements. If your company must produce an introductory paragraph with its pro forma documents, it should describe the content of your pro forma documents.
Accounting
Pro forma financial statements are projections that consider hypothetical situations, such as a proposed transaction or a new product launch. Prospective financial statements, on the other hand, provide a forecast of a company’s future financial position based on current business conditions and expected trends. While both types of statements involve predictions, pro forma statements focus on specific scenarios, whereas prospective statements provide a broader outlook on the company’s potential performance. The information gathered from each of these statements can help a company make business decisions, secure funding, and drive strategic planning. In summary, pro forma financial statements serve as a valuable tool for forecasting, preparing hypothetical scenarios, and projecting future performance to ensure a company’s long-term financial success.
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 for a pro forma balance sheet to cover four years of operations. While this might give a clearer picture of regular operations, it could also make the company’s financial health appear better than it is.
A lot of it is about trial and error, so make sure that you are taking the time to edit, adjust and refine your model whenever you need to. Before compiling this information into your pro forma model, make sure you are gathering information from reputable sources. After you have set up the initial grid of rows and columns, it is important to properly format the cells.
Analyzing Your Pro Forma Financial Statements
A pro forma cash flow statement template is used to project a company’s cash inflows and outflows over a specified future period, enabling strategic planning and risk management. On the other hand, pro forma financial statements are forward-looking projections that forecast a company’s financial performance under hypothetical scenarios or assumptions. While they provide valuable insights into potential future outcomes, it’s essential to recognize that pro forma projections are based on assumptions and may not always reflect actual results. Understanding pro forma financial statements involves various components, such as income statements, balance sheets, and statements of cash flow. Each of these elements provides a financial snapshot of a company’s hypothetical future performance. By combining these components, it is possible to create a comprehensive financial projection that can help inform strategic decisions and evaluate the potential return on investment.
These include business planning and budgeting, funding and investment attraction, and mergers and acquisitions. This financial statement provides a detailed projection of future revenue, expenses, and net income, offering a comprehensive overview of expected financial performance. By analyzing these projections, businesses can gain valuable insights into their anticipated profitability and highlight potential financial challenges that may arise. Similarly, pro forma statements are used to help executives evaluate potential business decisions. For example, a manufacturer might create pro forma statements to compare the financial impact of building a new factory versus outsourcing production. Just as you might create a household budget by looking at last year’s expenses and planning for changes, companies create pro forma budgets to map out their financial future.
Free Excel Template: Pro Forma Financial Statements
Pro forma financial statements serve to show how a company’s major changes, like selling off a brand or merging with another company, might affect its bottom line. While these projections can be valuable and clarifying, investors should treat them as educated guesses rather than guarantees. For example, if a company spends $50 million restructuring its business, GAAP rules require this cost to be included in earnings. However, in its pro forma statements, the company might exclude this expense, arguing it’s a one-time event that doesn’t reflect ongoing business performance. GAAP requires companies to include all costs of doing business, even one-time expenses that may not recur.
- For example, a business may use a pro forma financial statement to show what a businesses profit was if it sold off an arm of the company.
- While finance focuses on forward-looking projections, accounting relies on historical data—pro forma financial statements help bridge the gap between the two.
- The information gathered from each of these statements can help a company make business decisions, secure funding, and drive strategic planning.
- For example, GAAP statements are required to include non-recurring expenses, which might distort the firm’s true financial position.
- As we just discussed, we’ll need to know three numbers before adding new debt to our balance sheet.
Formatting the Cells for Clear and Accurate Information
In this way, your management team (or C-suite) has all the information they need to make informed decisions. If you enable them, they have the best and worst-case scenarios that review the fiscal impact of their decisions and possible ways to mitigate risk. You could deliver to them two sets of pro forma financial statements, and two risk assessment templates to use to discover their best option.
By using a pro forma model, you can simulate how changes in sales or expenses will impact your bottom line, making it easier to choose a strategy for growth. 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. There may be several how to build a pro forma sets of these pro forma documents, each based on different potential investment amounts, or just one based on what you think you need. For this projection, you need to determine where in your company the investments would be parlayed.
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Excel offers the ability to interact with complex models and calculate the financial outcomes of various investments. In addition, Excel allows users to quickly test different assumptions in the financial model and to make adjustments as needed. Moreover, Excel is relatively easy to use, even with basic knowledge of the software. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. Long-term Liabilities are the second section representing longer-term decisions, and much like fixed assets, it’s harder to make blanket statements like we made for the “current” sections. The last thing we need to do is add up our current and fixed assets to get total assets, which is the line we need to match with total liabilities and equity.
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The COGS forecast is the COGS/Sales ratio from several years multiplied by the sales forecast. Net income will come from the income statement, and depreciation will come from the “capital expenditure and depreciation” we just derived. The balance sheet will project changes in your business accounts over time. Finally, subtract your operating expenses from your gross margin to arrive at your net income. This give your pro forma earnings and is the moment of truth, revealing whether your business is on track to make a profit or if adjustments are needed.
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