A pro forma balance sheet is a balance with forecasted future values. As we know, balance sheets contain a running balance of all existing assets, liabilities, https://personal-accounting.org/how-to-create-a-pro-forma-balance-sheet/ and equity for a business. Pro Forma’s contain running balances for the assets, liabilities, and equity we wish to have in the future.

• In this way, your management team (or C-suite) has all the information they need to make informed decisions.
• A common size balance sheet displays the relative percentage of each asset, liability, and equity line item compared to the total assets, liabilities, and equity.
• However, like any template, you need to adjust it to suit your needs.
• If interim period balance sheets were submitted, the company should pick up from where they left off.

We will project three years of financial statements for a startup business company. Finally, with the pro forma income statement and balance sheet complete, we can now knock out the cash flow statement. Every small business should create a budget, and the budgeted financial results are pro forma statements. An owner may create pro forma reports to assess the potential profitability of a product, or to determine if a business expansion makes financial sense.

Pro Forma Financial Statements (with Templates and Examples)

To avoid something like this, you'd use a pro forma cash flow statement, plug in a decrease in cash flow and see how this affects your other operations. If you're expecting a decrease in cash flow, you'd use a pro forma cash flow statement to try and estimate the effects, and make adjustments accordingly. It's also illegal to mislead potential investors with overinflated pro forma projections. They know certain things about their next year which will play a role in determining the pro forma balance sheet.

• The company’s management is responsible for the documents’ overall validity.
• For example, our company may need to hold a certain amount of cash to meet basic expenses.
• That’s when hiring a professional, like those at CFOshare, is the fastest and most cost-effective approach.

Focused on future strategy, not just historic numbers, we help small to mid-sized businesses and startups reduce financial risk and grow. You get access to our consistent team of experts — priced by the hour, so you only pay for what you need. We’re collaborative, explaining what the numbers mean, rather than just emailing reports. 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. Line items like income tax expense, on the other hand, typically don’t change directly with sales.

Pro forma statement of cash flows

Remember, what distinguishes these pro forma statements from your standard financials are the adjustments, not the calculations or even the format. These assumptions can be off by a little or a lot, but the bottom line is their outcomes should not be weighed too heavily in decision-making without other indicators to back up the assumption. 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.

How to create a pro forma statement of cash flows

A traditional balance sheet is historical, a tabulation of what has already occurred. Pro forma balance sheets, like the pro forma, is future-looking, often 5 years into the future. As a startup founder, your goal is to plan for your business with a pro forma rather than to review what historically took place.

What Are Pro Forma Financial Statements?

These events could include costs surrounding an acquisition or merger, or a write down of intangibles, such as depreciation and good will. These items are excluded since they are unique events that will not reoccur. As one-time events, the expenses would have little effect on a company’s ongoing cost structure.

The sales total and customer payment history helps the firm determine the accounts receivable balance. The definition of pro forma is “as a matter of form”, or “for the sale of form”. This Latin term is also used to define a type of financial information.

This step includes accounts payable, payroll, and any other expenses within the range of you pro-forma balance sheet. Imagining again that we are accounting for the month of July, it would include any money owed that month to consultants, employees, labor services, or loan payments. If you don’t have a finance background or know nothing about forecasting, you may simply waste your time trying to build your own pro forma financials. That’s when hiring a professional, like those at CFOshare, is the fastest and most cost-effective approach. Do you want to learn more about what's behind the numbers on financial statements?