Mastering Pro Forma Financial Information: A Complete Guide

The potentially tricky thing, in this case, is if we need to deal with existing depreciation. The easiest way to handle depreciation is to look at the income statement for prior periods, which is where depreciation lives. If we don’t need to purchase any assets, then we can forecast the same asset values into the future. In the case of our restaurant, we’ll assume the current level of kitchen equipment is sufficient for now.

• Learn how to create pro forma financial statements in this comprehensive guide.
• Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors.
• I’m Mike Dion, your guide through the maze of business finance and accounting.
• Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles (GAAP) adjusted statements.
• Such an approach ensures that the estimations for future changes on the pro forma balance sheet are grounded in actual historical patterns and trends observed within previous records.
• There are three main financial statements that are prepared based on presumptions and projections.

Steps to Create a Pro Forma Income Statement

The closer the projection is to the actual numbers reported, the more accurate it is. Further, if a company has a stable order backlog, the pro forma statement of cash flow is more accurate. Finally, and regardless of its relative accuracy, a pro forma statement of cash flow forces management to think about the future expected cash flow and whether it is enough. Gathering accurate and comprehensive financial data is crucial for creating a reliable pro forma balance sheet. Conduct thorough research, analyze historical trends, and engage with appropriate stakeholders such as your finance team or external advisors. By ensuring the accuracy and completeness of your financial data, you set a solid foundation for the subsequent steps in creating a pro forma balance sheet.

Forecasting Capital Contributions

Keep in mind pro forma statements do not usually include one-time costs such as restructuring costs. The frequency at which a business should update its pro forma budget—be it monthly, quarterly, or yearly—is determined by the company’s requirements and how often substantial changes occur. Businesses that actively update these forecasts ensure they sustain precision and trustworthiness within their financial planning efforts.

Preparing a Pro Forma Cash Flow Statement

• In this way, your management team (or C-suite) has all the information they need to make informed decisions.
• For the effects of the business combination, only show the current and immediately preceding periods.
• GAAP-adjusted statements are uniform financial statements guided by rules of the Financial Accounting Standard Board (FASB).
• The pro forma financial information shows a tight first six months post-renovation, with cash reserves taking a dip.
• Frequently, pro forma income statements extend their financial projections across at least three years.
• Arguably, the statement of cash flow is the most important of the pro forma documents.
• 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.

This is because GAAP compliant reports must be based on historical information. But keep in mind pro forma statements don’t only plan for the worst—you can also plan for a best-case scenario, like increased cash flow. 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. You must ensure that the scenarios you choose align with your long-term business goals and the trends in your industry. For example, if you want to capture a larger market share, your projections should account for the necessary increase in sales and market penetration efforts.

HOW TO PREPARE PRO FORMA FINANCIAL STATEMENTS STEP BY STEP?

By analyzing projected sales, how to make pro forma balance sheet cost of goods sold, operating expenses, and taxes, the pro forma profit & loss statement means businesses can estimate future net income. In practice, pro forma statements allow businesses to present expected financial outcomes—excluding unusual or nonrecurring transactions. It helps facilitate strategic planning and financial analysis with a clear view of potential growth and profitability.

Macroeconomic indicators such as GDP growth, inflation, and consumer spending patterns provide context for projected revenue figures. Industry-specific factors, including consumer preferences or regulatory changes, can also influence revenue outlooks. Pro forma reporting involves creating financial projections based on hypothetical scenarios and assumptions. These projections serve as valuable insights into how a business might perform in the future under different conditions. Unlike traditional financial statements, which reflect historical performance, pro forma reports look ahead, offering stakeholders a glimpse into potential outcomes.

With Cultivate Advisors, we can help you navigate your pro forma expenses and leverage them to benefit your business. Whether you need help with your pro forma gross profit or you’re looking for information on an investment pro forma projection, we are here to help! In accounting, pro forma total expenses are usually used in a financial forecast that can help with financial modeling. The closing cash and cash equivalent calculated using both methods should be equal to the cash and cash equivalent balances in the pro forma balance sheet. 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.

Pro forma adjustments should reflect both internal strategies, such as cost-cutting measures, and external factors, such as new regulations or economic conditions. Here’s a historical example of a pro forma income statement, courtesy of Tesla Inc.’s (TSLA) unaudited pro forma condensed and consolidated income statement for the year ended Dec. 31, 2016. This wasn’t just any oven; it was the heart of the bakery’s expansion plan, significantly impacting both assets and liabilities.

You may be wondering why we calculated the interest, as we didn’t use it, and that’s very astute of you to notice. We calculated interest because although we don’t explicitly need it now, we do need principal and interest separated to complete the other pro forma financial statements (which we won’t cover right now). Creating the balance sheet is a crucial step as it consolidates and summarizes the financial information for stakeholders to evaluate. The balance sheet provides a snapshot of the company’s assets, liabilities, and equity, enabling stakeholders to assess its financial position. Start by taking the information from your income statement and using the cash flow statement to determine where your money is going. This statement can be part of a larger cash flow that’s used for financial accounting and decision-making.

If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. Many of the items listed above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception. This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important. Not all these things should be left off, but the decisions of what is left off should be well thought out and explained to potential investors, so they have a clear indication of what they are viewing.

Pro Forma Long-Term Assets

Likewise, illustrating projected cash flows encompassing operational, investment-related, and financing activities based on envisioned situations is the purpose of a sample pro forma cash flow statement. A pro forma balance sheet provides an estimation of a company’s financial position by detailing its assets and liabilities for a certain future date, thus presenting an anticipated financial scenario. Such projected balance sheets are commonly required by banks and various financing bodies to evaluate the economic standing of a business.