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. Stable businesses can generally estimate income tax expense as a percentage of income before taxes. To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate that your ideas make financial sense. GAAP enforces strict guidelines when companies report earnings, while pro forma figures are better thought of as hypothetical earnings. 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.

A pro forma cash flow statement can show you how your business will look if cash flows maintain a consistent rate. It can reveal if your company will be in the negative or positive months and years from now. A pro forma balance sheet can be prepared to project a future financial state. It can show you the depreciated value of your assets like equipment or inventory. It can also show you how much you would owe suppliers or other entities if prices and interest rates remain the same or change.

Unknown Future

Examples of long-term assets are tangible assets such as land, cars, and buildings. Before you can calculate total (long-term) assets, you need to calculate individual assets. For example, considering that the value of land is not depreciated over time, the value of land will be the same as the original purchase price. Buildings and vehicles, on the other hand, are subject to depreciation, so you need to calculate their value. You need to subtract this from the initial purchase price to calculate the asset value. Proforma revenue, often found in the form of a proforma income statement, represents start-up revenue in a tuned format, excluding certain costs.

• If you're looking for an investment, you can provide lenders and investors with pro forma financial statements that can show them how you plan to scale your business.
• Because these govern bookkeeping and accounting practices, including how we make financial reports they must use real historical data.
• A pro forma cash flow statement can show you how your business will look if cash flows maintain a consistent rate.
• They’re not actual historical financials nor do they reflect current accounting standards that were followed by submitted audit reports; but rather predictions about how those standards would affect the company’s finances if implemented at some later date..
• If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

Financial Statement Analysis The section of the pro forma statement that analyzes historical financial statements such as balance sheets, income statements and cash flow statements provides a basis for informed decisions about future business strategy. It is important to consider key ratios such as debt to equity ratio or return on investment (ROI) during analysis to get a broad picture, confirm your assumptions and better refine your projections. According to the SEC, this does not take the place of the pro forma balance sheet, but the pro forma income statement may be withheld. The difference is that the financial forecast details the company’s expected results of operations as a single-point estimate or a range. The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses.

It can help you to anticipate multiple different factors that can happen after you make a major business move. Companies report both GAAP and non-GAAP (pro forma) earnings when the two reveal different things. Investors, analysts, and creditors often like to look at both sets of numbers. In the U.S., the generally accepted accounting principles (GAAP) refer to a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB).

Pro Forma Balance Sheet

Russell creates a pro forma income statement for next year to inform his decision. Russell follows The Ascent’s guide to forecasted financial statements to generate the document. In accounting, pro forma refers to financial reports based on assumptions and hypothetical situations, not reality. Businesses use pro forma financial documents internally to aid in decision-making and externally to showcase the effect of business decisions. A pro forma income statement would show how the company’s revenues and expenses might change and ultimately affect company profits.

What does Pro Forma Mean?

This is the main limitation of pro forma because these scenarios hinge on multiple factors going the way you expect them to. Also, investors may be skeptical when you present them with pro forma statements, as you can embellish these numbers. Pro forma statements allow you to make feasible guesses as to what your financial position will be in the next quarter and year. These inform important business decisions concerning things like budgeting, cost-cutting, increasing sales, or potential investments.

Mastering Pro Forma Financial Statements: The Three You Need

Assumptions should reflect the upcoming planned activities or initiatives that could affect revenue generation positively or negatively—for example; new product launch or an increase in marketing spend. In law, pro forma court rulings are intended merely to facilitate the legal process (indeed to move matters along). Businesses create annual budgets that fall in line with a company’s profitability and production goals. Use this Word template to create your own compilation report, as per the AICPA’s guidance. 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.

GAAP Statements

You will also need access to other crucial information such as expected sales growth rates and market trends relevant to your industry. In some countries, customs may accept a pro forma invoice (generated by the importer and not the exporter) if the required commercial invoice is not available at the time when filing entry documents at the port of entry to get goods released from customs. The U.S. Customs and Border Protection, for example, uses pro forma invoices to assess duty and examine goods, but the importer on record is required to post a bond and produce a commercial invoice within 120 days from the date of entry. If the required commercial invoice is needed for statistical purposes, the importer has to produce the commercial invoice within 50 days from the date Customs releases the goods to the importer. The term is used in legal and business fields to refer to various types of documents that are generated as a matter of course. As a business owner or entrepreneur, it’s essential to have a clear understanding of your financial projections.

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