This means that it should define the transaction, the entities involved, and the periods of time. In this paragraph, you should offer a high-level explanation of the limitations and assumptions the pro forma documents were produced under. For example, if your company recently acquired or dispensed with another company, the assumptions would be the changes in finance expected. The limitations should discuss the challenges of predicting the financial future of a company. A pro forma financial statement leverages hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred.

• This aids in planning, decision-making, and assessing the potential outcomes of various business strategies.
• The SEC assumes that that proceeds from any additional shares will be used to fund dividends.
• More significantly, the pro forma income statement reveals that hiring a part-time assistant is nearly as lucrative as bringing someone on full-time.
• Unexpected changes in the business environment, market conditions, or regulatory landscape can render pro forma projections inaccurate.
• They have multiple uses for multiple scenarios, ranging from sales growth projections and risk analysis to more intricate M&A or investment purposes.

All that’s left is to fill in the blanks to make the template unique to the situation. The best way to package a quote for your goods and services is by using a pro forma invoice, also called a draft invoice. An investment projection would showcase what an influx of cash could potentially do to your business. For example, if you were contemplating taking Accounting Advice for Startups on an investor, it would give you a risk vs. reward scenario. Estimating and projecting the balance sheet is also a common practice because investors and creditors want to use the balance sheet to analyze debt ratios, liquidity levels, and overall leverage of the company. A budget is a plan for how you will use your resources to achieve specific goals.

Types of Pro Forma Statements in Business Plans

Creating a pro forma statement is important because it allows businesses to make informed financial projections based on assumptions and hypothetical scenarios. This aids in planning, decision-making, and assessing the potential outcomes of various business strategies. You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement.

• However, we only feel it right to issue a big ol’ caveat before we go any further.
• You can make pro forma adjustments based on new information and use these statements to find opportunities, reduce risk, and increase profits.
• Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).
• Lenders and investors will require such statements to structure or confirm compliance with debt covenants such as debt service reserve coverage and debt to equity ratios.
• Businesses create annual budgets that fall in line with a company’s profitability and production goals.
• Our team of experts has created a comprehensive business plan template that will guide you through the process of creating your own pro forma business plan.

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. The most common pro forma financial statements are projected balance sheets, income statements, and cash flow statements.

Financial Modeling Based on Pro Forma Projections

As you might’ve noticed, we’ve used the word hypothetical several times already. And while pro formas can be enormously helpful in looking at different financial models based on various assumptions, they’re still – you guessed it – hypothetical. The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. Use this Excel pro forma invoice template to create your own pro forma invoices. 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.

By outlining your sales, expenses, and profit, you can get a clear picture of your company’s financial health and make informed decisions about its future. Our team of experts has created a comprehensive business plan template that will guide you through the process of creating your own pro forma business plan. For example, if you make a sale today, it will be considered revenue in your income statement. But, if you don’t receive payment for that sale for 90 days, that would be reflected in your cash flow statement. A cash flow statement can help you to manage your finances effectively, while a pro forma income statement can help you to assess the viability of your business.

Limitations of pro forma financial statements

Factors like economic downturns, unforeseen expenses, or changes in competitive landscape should be carefully considered. In trade transactions, a pro forma invoice is a document that states a commitment from the seller to sell goods to the buyer at specified prices and terms. It is not a true invoice because it is not used to record accounts receivable for the https://business-accounting.net/what-is-a-full-charge-bookkeeper/ seller and accounts payable for the buyer. Let’s begin with the income statement, using a percent of sales forecast to keep everything straightforward. Start with an income statement from your most recent fiscal year and identify which items you’ll adjust for the projection. However, we only feel it right to issue a big ol’ caveat before we go any further.

It aids in assessing the potential financial stability of a business under different scenarios. By projecting the financial position at a specific point in time, companies can anticipate capital needs, evaluate solvency, and make strategic decisions regarding asset allocation and debt management. The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and taxes. In this section of the business plan, we will provide pro forma statements for our company’s sales, expenses, capital expenditures, funding requirements, and cash flow. These statements will demonstrate the viability of our business and its potential for long-term success.