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What Are Pro Forma Financial Statements?

• 28 Oct 2021

When it comes to making business decisions, so much relies on numbers. To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate that your ideas make financial sense.

While certain financial statements —such as balance sheets, income statements, cash flow statements, and annual reports—help provide a historical snapshot of a business’s performance, they often lack the ability to provide foresight when planning for the future. For this reason, professionals typically turn to forecasts and financial projections to guide their plans and answer critical “what if” questions. Pro forma financial statements are a common type of forecast that can be useful in these situations.

Here’s a closer look at what pro forma financial statements are, how they’re created, and why they’re a key aspect of financial decision-making.

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What Is a Pro Forma Financial Statement?

A pro forma financial statement leverages hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred.

In the online course Financial Accounting , pro forma financial statements are defined as “financial statements forecasted for future periods. They may also be referred to as a financial forecast or financial projection.”

The course notes that these projections can be used “as a depiction of what the financial statements for the business will look like over a certain period of time, if the assumptions made when preparing them hold true.”

Since the term “pro forma” refers to projections or forecasts, it can apply to a variety of financial statements, including:

• Income statements
• Balance sheets
• Cash flow statements

Whether you’re trying to interpret pro forma financial statements or prepare them, these projections can be useful in guiding important business decisions. In fact, business owners, investors, creditors, and other key decision-makers all use pro forma financial statements to measure the potential impact of business decisions.

How Are Pro Forma Financial Statements Used?

Traditionally, financial statement analysis is used to better understand a company’s performance over a specified period. While this provides insight into a company’s historical health, creating pro forma financial statements focuses on its future. For this reason, these reports can be leveraged in several ways, including analyzing risk, projecting investments, and showing expected results before the end of a reporting period.

One of the most important uses of pro forma reports is related to decision-making and strategic planning efforts. For example, you might create pro forma financial statements to reflect the outcomes of three investment scenarios for your business. Doing so can allow you to conduct a side-by-side comparison of possible outcomes to determine which is favorable and guide your planning process.

Creating Pro Forma Financial Statements

Keep in mind that the general process of creating pro forma financial statements isn’t significantly different from that of creating traditional statements. The difference lies in the assumptions and adjustments made about various inputs, while the format and calculations remain the same.

There are, however, specific methods used for these forecasts. The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements. This is typically used when creating pro formas internally.

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.

All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet . The same holds true for the process of preparing income statements and cash flow statements. It differs when you begin forecasting various line items and calculating how those projections impact your bottom line.

Beyond the Numbers

The true value of pro forma statements goes beyond the numbers they show. These reports provide key stakeholders, investors, and creditors the foresight needed to make decisions and strategically plan. Managers and individual contributors can also benefit from creating pro forma statements, enabling them to understand different factors impacting business units.

Remember: There are limitations to pro forma financial statements. Since these documents are based on assumptions, they shouldn’t be taken as fact. Rather, they can inform decisions using hypothetical data based on historical trends.

Taking an online course like Financial Accounting can help you understand how to create and interpret different kinds of financial statements so you can find meaning in them. Learners enrolled in the course learn the language of accounting and how to create financial statements and forecasts to make strategic decisions.

Do you want to learn more about what's behind the numbers on financial statements? Explore Financial Accounting , one of three courses comprising our Credential of Readiness (CORe) program , to discover how you can develop an intuitive knowledge of financial principles and statements to unlock critical insights into performance and potential.

About the Author

Pro Forma Financial Statements (with Templates and Examples)

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

April 21, 2022

This article is Tax Professional approved

Pro forma definition

According to Merriam-Webster , “pro forma” means:

• Made or carried out in a perfunctory manner or as a formality
• Based on financial assumptions or projections

I am the text that will be copied.

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”).

When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions.

There are three major pro forma statements:

• Pro forma income statements
• Pro forma balance sheets
• Pro forma cash flow statements

Pro forma statements look like regular statements, except they’re based on what ifs, not real financial results. As in, “What if my business got a $50,000 loan next year?” Your pro forma statements for that scenario would show what your income, account balances, and cash flow would look like with a $50,000 loan.

Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant . This is because GAAP compliant reports must be based on historical information.

Pro forma statements don’t need to meet the strictest accounting standards , but must be clearly marked as “pro forma” and can’t be used for things like filing taxes. 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).

However, pro forma statements are still extremely useful. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

Different but related: you can send clients pro forma invoices to let them know how much their order would be if they placed it today.

Why create pro forma statements?

Creating pro forma statements for future scenarios can help you:

• Get financed, by showing lenders or investors how you would use their money to sustainably grow your business.
• Plan for the future, by considering best, worst, and most likely case scenarios in detail.
• Anticipate changes that may affect your business as it grows, such as entering a new tax bracket.

For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Pro forma statements vs. budgets

It may be tempting to think of a pro forma statement as the same as a business budget . After all, you create both in anticipation of the future. And both help you plan how you’ll use your money. But budgets and pro forma statements are two distinct financial tools.

Think of it this way: A pro forma statement is a prediction, and a budget is a plan. Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions.

For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year. So, when you create next year’s budget, you can include that extra $7,000—maybe spending $4,000 over the course of the year to pay down the principal on a loan , while adding $3,000 to savings.

Types of pro forma statement

There are four main types of pro forma statements. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

1. Full-year pro forma projection

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year.

2. Financing or investment pro forma projection

You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position.

3. Historical with acquisition pro forma projection

This type of pro forma projection looks at the past financial statements of your business, plus the past financial statements of a business you want to buy . Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

Pro forma templates

To create a pro forma statement, you can use the same template you’d use for a normal financial statement. You may want to use Bench’s free templates:

• Income statement
• Balance sheet
• Cash flow statement

How to create pro forma statements

The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

Creating a pro forma income statement

There are five steps to creating a pro forma income statement:

• Set a goal for sales in the period you’re looking at. Let’s say you want to increase your income by $18,000 over the course of one year.
• Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months.
• Plan how you’ll match your production schedule. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to you—trust your experience as a business owner.
• It’s time for the “loss” part of “ Profit and Loss .” Calculate the cost of goods sold for each month in your projection. Then, deduct it from your sales. Deduct any other operating expenses you have, as well.
• Prepare your pro forma income statement using data you’ve compiled in the prior four steps.

One note: your pro forma statements will be much more accurate if your bookkeeping is up to date. That way, when you project future periods, you’re basing it off the reality of your business today.

How Bench can help

To predict the future, you first need to understand the past. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started. We may not be a crystal ball, but we’re the next best thing. Learn more .

Example pro forma income statement:

Rosalia’s Reliable Recordings

Creating a pro forma cash flow statement

You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast used for decision making.

Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. You’ll have to make plans to borrow money and pay it off.

On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment.

Example pro forma cash flow statement

Mickie’s Murakami Museum

Creating a pro forma balance sheet

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.”

The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Example pro forma balance sheet

Daily Dumpling Deliveries

Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. It’s time to create a small business budget .

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Pro Forma Financial Statements: A Comprehensive Guide for Businesses

• Banking & Finance
• Bookkeeping
• Business Operations
• Starting a Business

Pro forma financial statements play a crucial role in business planning and decision-making processes. These financial reports are based on hypothetical scenarios, enabling business owners and managers to evaluate potential situations that could occur in the future. By utilizing pro forma statements, companies can project the financial impact of various business decisions, such as launching new product lines, expanding to new locations, or restructuring a department.

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.

Key Takeaways

• Pro forma financial statements help businesses make informed decisions by evaluating hypothetical scenarios
• Components of pro forma statements include income statements, balance sheets, and statements of cash flow
• These statements are essential tools for strategic planning and assessing the impact of various business decisions

Understanding Pro Forma Statements

Definition and purpose.

Pro forma financial statements are hypothetical financial reports that project the future financial performance of an entity, based on expected income, expenses, assets, and liabilities. They are created using assumptions about future values and conditions, which serve to forecast financial performance over a period that has not yet occurred. Their primary purpose is to aid in business planning, investment decision making, and to show the potential impact of a proposed transaction on a company’s financial health.

Significance to Investors

Investors find pro forma financial statements valuable in evaluating a business’s potential for growth and profitability. These statements help investors to:

• Identify trends: Comparing the projected numbers with historical trends can reveal areas of opportunity or concern.
• Assess risk: By reviewing pro forma statements, investors can see how the business may be affected under various hypothetical scenarios, such as changes in the economy, market, or industry.
• Make informed decisions: Investors can use pro forma statements to estimate returns on investment or potential value of a company, and to decide whether to buy or sell securities.

Differences Between GAAP and Pro Forma

Financial statements prepared using Generally Accepted Accounting Principles (GAAP) are based on a company’s historical financial performance, whereas pro forma financial statements focus on future projections. The main differences include:

• Basis of calculations : GAAP financials use historical data, while pro forma financials use forward-looking data.
• Accounting standards : GAAP financial statements follow strict accounting standards, whereas pro forma financial statements may deviate from these standards, relying on a company’s assumptions.
• Usage : GAAP statements are used to assess past performance, make comparisons across different periods, and analyze trends; pro forma statements are used for planning, forecasting, and scenario analysis.

It is crucial to note that pro forma financial statements should be used in conjunction with GAAP-compliant financials to gain a comprehensive view of a company’s health and potential growth.

Components of Pro Forma Financial Statements

Pro forma financial statements are essential tools for businesses to plan and project their future financial performance. These statements are based on assumptions and estimates, helping companies understand the impact of various scenarios on their financial position. The three primary components of pro forma financial statements are the Pro Forma Income Statement, Pro Forma Balance Sheet, and Pro Forma Cash Flow Statement.

Pro Forma Income Statement

The Pro Forma Income Statement, also known as the projected income statement, provides an estimate of the company’s future revenues and expenses. This statement helps businesses plan for growth, identify potential risks, and make informed decisions based on expected profitability. The main components of a pro forma income statement include:

• Revenue : The projected sales generated by the company during a specific period.
• Cost of Goods Sold : The estimated cost of producing or purchasing the products sold.
• Gross Profit : The difference between revenue and cost of goods sold.
• Operating Expenses : The anticipated expenses associated with running the business, including salaries, rent, and marketing.
• Net Income : The estimated profit or loss, calculated by subtracting operating expenses from gross profit.

Pro Forma Balance Sheet

The Pro Forma Balance Sheet provides an overview of the company’s projected assets, liabilities, and equity. This statement helps businesses understand their anticipated financial position and evaluate their solvency and liquidity. The main components of a pro forma balance sheet include:

• Assets : The resources a company expects to own or control, such as cash, accounts receivable, inventory, and fixed assets.
• Liabilities : The obligations a company anticipates incurring, such as accounts payable, loans, and taxes payable.
• Equity : The residual interest in the company’s assets, representing the difference between assets and liabilities. This includes retained earnings and contributed capital.

Pro Forma Cash Flow Statement

The Pro Forma Cash Flow Statement offers insight into the company’s anticipated cash inflows and outflows, enabling businesses to plan and manage their liquidity. This statement presents an estimation of cash flows from operating, investing, and financing activities. The main components of a pro forma cash flow statement include:

• Operating Activities : The cash flows generated from a company’s core business operations, such as sales and expenses.
• Investing Activities : The cash flows associated with purchases and sales of assets, such as property, equipment, or investments.
• Financing Activities : The cash flows related to borrowing, repaying loans, issuing stock, or paying dividends.

By understanding and utilizing pro forma financial statements, companies can make more informed decisions, develop strategies, and improve their overall financial planning and management.

Creating Pro Forma Statements

Forecasting and assumptions.

When creating pro forma financial statements, the first step is to forecast future revenues, expenses, and other financial data based on a company’s past performance and experience. It is important to make reasonable and educated assumptions to provide an accurate projection of the company’s future financial performance. Some common assumptions used when creating pro forma statements include:

• Expected growth rates
• Changes in market conditions
• Alterations in the company’s strategy or operations
• Expected changes in costs or pricing

Preparing Hypothetical Scenarios

In addition to using historical data and assumptions, pro forma financial statements can incorporate hypothetical scenarios. These scenarios provide a range of possible financial outcomes based on various “what-if” situations. For example, consider a software company that plans to launch a new product in six months. The company can create multiple pro forma statements based on different launch scenarios:

• Scenario 1 : The software product has a successful launch, generating significant sales and revenue.
• Scenario 2 : The software product has a moderate launch, with sales and revenue matching current market conditions.
• Scenario 3 : The software product experiences a weak launch, with sales and revenue falling below market expectations.

Creating a variety of hypothetical scenarios can help gain insight into the potential financial impacts of different decisions, risks, and opportunities.

Projecting Future Performance

Once you have established a solid foundation of assumptions and hypothetical scenarios, you can begin projecting future performance using the pro forma financial statements. This process involves utilizing the following statements:

• Pro Forma Income Statement : Estimates future revenues, expenses, and net income.
• Pro Forma Balance Sheet : Reflects the company’s projected financial position, including assets, liabilities, and equity.
• Pro Forma Cash Flow Statement : Showcases expected cash inflows and outflows, helping a company plan for liquidity needs.

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.

Analyzing Pro Forma Statements

Financial ratios and metrics.

When analyzing pro forma financial statements , it is essential to use various financial ratios and metrics to evaluate a company’s performance adequately. These ratios can provide valuable insights into the company’s financial health. Key ratios include:

• Liquidity ratios , such as the current ratio and quick ratio, help assess the company’s ability to meet short-term obligations.
• Solvency ratios , such as the debt-to-equity ratio, evaluate the company’s long-term financial stability and its ability to meet long-term debts.
• Profitability ratios , including the gross margin and return on equity (ROE), gauge the company’s earnings relative to its investments and equity.
• Efficiency ratios , like inventory turnover and the accounts receivable turnover, reveal the effectiveness of the company’s assets management.

These ratios, derived from balance sheets and income statements, can be compared to industry benchmarks to understand how the business is performing against competitors.

Evaluating Business Potential

To gain a clear understanding of a company’s potential for future growth, pro forma earnings must be examined in conjunction with the anticipated financial impact of various business decisions. This analysis enables investors and management to:

• Assess the potential profitability of new projects or investment opportunities.
• Estimate the effect of price changes for products or services.
• Evaluate the implications of business expansions—that may involve mergers, acquisitions, or entry into new markets.
• Gauge the potential impact of changes in cost structures, such as modifications in labor costs.

Using tools like forecasting and scenario planning, decision-makers can estimate the organization’s future financial position and determine actionable strategies to optimize performance.

Risk Analysis

An important aspect of analyzing pro forma statements is identifying potential risks that might affect the company’s financial performance. Risk analysis involves evaluating factors that could negatively impact revenue, increase costs, or alter the overall business dynamics. These factors include:

• Market risks: Changes in consumer preferences, increased competition, or market saturation.
• Operational risks: Disruptions in the supply chain, inefficient production processes, or employee turnover.
• Financial risks: Interest rate fluctuations, exchange rate volatility, or changes in credit terms.

A comprehensive risk analysis enables management to make well-informed business decisions and devise contingency plans to minimize the company’s exposure. This, in turn, helps safeguard the organization’s bottom line and ensure a robust financial standing in the long run.

Strategic Use of Pro Forma Projections

Pro forma financial statements are used by business owners and companies for various strategic purposes. These include business planning and budgeting, funding and investment attraction, and mergers and acquisitions.

Business Planning and Budgeting

Companies use pro forma projections to create a detailed budget, forecasting revenues, expenses, and cash flow, which usually span over three to five years. This provides insights into the financial health and growth potential of the business. It helps companies to:

• Make data-driven decisions
• Identify areas for cost savings
• Determine feasible growth strategies
• Allocate resources efficiently

By leveraging pro forma projections, businesses can test hypothetical scenarios and make informed decisions, effectively planning and structuring their financial activities.

Funding and Investment Attraction

Pro forma financial statements are critical in attracting funding and investments for businesses. These projections provide potential investors with a clear understanding of the business’s:

• Future growth potential
• Risk management strategies
• Financial stability

Investment pro forma projections showcase the company’s ability to generate returns on investments, giving investors the confidence to commit their capital. Business owners can tailor these projections to highlight their business’s unique strengths, ultimately appealing to a broad range of potential investors.

Mergers and Acquisitions

In mergers and acquisitions, pro forma financial statements play an important role in revealing the financial impact of a potential transaction. Companies create historical with acquisition pro forma projections that showcase combined financial position of both organizations. This helps in assessing:

• Expected synergies
• Post-acquisition financial performance
• Integration costs

By identifying these financial outcomes, companies can better evaluate the potential benefits and risks associated with mergers and acquisitions, ensuring that the decision to pursue the transaction is well-informed and in line with their strategic goals.

Real-World Application of Pro Forma

Public reporting and the sec.

Pro forma financial statements often play a significant role in public reporting, especially when dealing with the Securities and Exchange Commission (SEC). Companies may use pro forma statements to present their financial results, adjusted for specific events such as acquisitions or divestitures. This provides stakeholders with a clearer understanding of the company’s financial position and helps them make informed decisions.

Key aspects of pro forma financial statements in public reporting:

• Financial forecast based on hypothetical scenarios
• Used for decision-making by investors, creditors, and other stakeholders
• Adjustments for specified events, such as acquisitions

Case Studies of Successful Use Cases

1. Business Expansion:

A company plans to expand its operations by opening a new manufacturing facility. They prepare pro forma financial statements to estimate the impact on future revenue, expenses, and profitability, considering various factors such as initial investment, operating costs, and expected sales. This helps them align their growth strategy and make informed decisions on whether or not to proceed with the expansion.

2. Mergers and Acquisitions:

A company is considering acquiring a smaller competitor. They create pro forma statements combining their own historical financial information with that of the acquisition target. This enables them to better understand the combined entity’s future financial performance and potential synergetic effects.

3. Restructuring:

A company facing financial challenges decides to restructure its operations to improve efficiency. They use pro forma financial statements to analyze different restructuring scenarios, such as cost reduction initiatives, refinancing options, or divestitures. This assists them in evaluating the long-term viability and profitability of their restructuring plan.

Learning from Pro Forma Mistakes

While pro forma statements can provide valuable insights, they can also be subject to misuse or misinterpretation. Fraudulent activities may involve manipulating pro forma results to present a rosier financial picture than reality, potentially misleading investors and other stakeholders.

To avoid such pitfalls and maintain a neutral and clear stance, companies should:

• Clearly disclose the basis of any adjustments or assumptions made
• Ensure the use of consistent methodologies across multiple scenarios
• Conduct thorough sensitivity analyses, incorporating a range of possible outcomes
• Seek guidance from accounting or financial experts, when necessary

By understanding the real-world application of pro forma financial statements and learning from past mistakes, businesses can use these tools effectively to drive informed decision-making and achieve better outcomes.

Limitations and Criticisms of Pro Forma

Potential for misrepresentation.

Pro forma financial statements may present an optimistic picture of a company’s financial health, intentionally or unintentionally, that differs from the reality per Generally Accepted Accounting Principles (GAAP). The adjusted nature of pro forma statements allows management to exclude certain items that they consider non-recurring or extraordinary. This level of discretion opens the door for worst-case scenarios , where pro forma statements might be utilized to paint an overly favorable picture of the company’s performance, potentially veiling fraudulent activities or significant financial issues.

A relevant example of this issue can be observed in cases when companies release pro forma earnings and provide little or no reconciling information, making comparisons with audited GAAP financial statements difficult. Thus, it is essential for decision-makers, such as investors and analysts, to be aware of the potential for misrepresentation in pro forma disclosures and to remain vigilant in their research and due diligence.

Understanding Limitations in Decision Making

While pro forma statements provide valuable insights for companies’ internal management, their usefulness is limited for external decision-making by investors or other stakeholders. These statements often focus on estimates and projections, rather than actual financial data, which can result in an unclear picture of a company’s performance. Furthermore, pro forma statements might not take into account the full range of worst-case scenarios , increasing the risk inherent in making decisions based on these projections.

In order to navigate the limitations of pro forma statements, it is crucial for decision-makers to:

• Understand the basis : Scrutinize the methods used to create pro forma statements, such as non-recurring items excluded or other adjustments made by management.
• Compare with GAAP : Cross-check the pro forma disclosures with audited financial statements, ensuring a more comprehensive and accurate understanding of the company’s financial health.
• Evaluate risks : Assess the likelihood and potential impact of worst-case scenarios not captured by the pro forma statements, incorporating this knowledge into the decision-making process.

Despite their limitations, pro forma financial statements have a place in financial planning and forecasting. However, recognizing their limitations and staying cautious in the decision-making process is key to fully leverage their value while avoiding potential pitfalls.

Legal and Ethical Considerations

Gaap compliance.

Pro forma financial statements should adhere to Generally Accepted Accounting Principles (GAAP) in order to provide accurate and reliable information to investors and other stakeholders. While pro forma statements are used to illustrate the potential impact of a significant transaction on historical financial data, they must still adhere to GAAP requirements, which are designed to ensure consistency and comparability across different financial reports.

For example, when preparing pro forma financial statements, the following GAAP principles should be considered:

• Revenue Recognition : Ensure that revenue is recognized in accordance with GAAP standards, which typically means recognizing revenue when it is earned and realizable.
• Consistency : Apply accounting policies and methods consistently across all financial reports, including pro forma statements, to ensure comparability between different periods and scenarios.
• Conservatism : Exercise caution in making assumptions and estimates when preparing pro forma statements, to avoid overstating potential revenues or understating potential costs.

It is also important to keep in mind that the SEC (Securities and Exchange Commission) requires companies to provide a thorough and compliant pro forma financial information when significant business combinations or real estate transactions occur.

Addressing Fraudulent Pro Forma Practices

As with all financial reports, there is a risk that pro forma financial information could be used for fraudulent purposes. To mitigate this risk, companies should implement certain policies and procedures to ensure the accuracy and integrity of their pro forma statements:

• Internal Controls : Implement robust internal controls over the financial reporting process, including controls related to the preparation of pro forma statements. This may involve segregating duties between those who generate the data for the pro forma statements and those responsible for reviewing them.
• Documentation : Maintain detailed records supporting the assumptions and estimates used in the preparation of pro forma statements. This documentation should be readily available for review by auditors or regulatory authorities when necessary.
• Transparency : Clearly disclose the basis for any adjustments made in pro forma statements, such as one-time charges or non-recurring items. This includes providing a detailed reconciliation between historical financial statements and the pro forma information.
• Oversight : Establish a process for independent review and approval of pro forma financial information by individuals with appropriate expertise, such as an audit committee or external auditor.

In summary, ensuring legal and ethical compliance in pro forma financial statements is crucial to maintain investor confidence and uphold the integrity of financial reports. By adhering to GAAP requirements and implementing safeguards against potential fraudulent practices, companies can produce accurate and reliable pro forma information that effectively illustrates the potential impact of significant transactions on their financial position and results of operations.

Frequently Asked Questions

What is the purpose of pro forma financial statements in assessing a company’s financial health.

Pro forma financial statements provide a hypothetical look at how a company would perform based on a set of credible assumptions about one or more transactions it is contemplating. This enables businesses to evaluate the potential impact of new product launches, expansions, or other strategic decisions, making them essential tools for planning and decision-making.

How do pro forma and traditional profit and loss statements differ?

Traditional profit and loss statements are based on actual financial results, providing an accurate representation of a company’s past performance. Pro forma statements, on the other hand, are based on hypothetical scenarios, such as the impact of a specific business decision or a future event. In essence, pro forma statements are projections, while traditional statements are historical records.

What distinguishes pro forma financial statements from prospective financial statements?

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.

Are there specific instances where pro forma financial statements should not be utilized?

Pro forma financial statements are most useful when analyzing potential business decisions or anticipating the impact of future events. However, they should not be used as a substitute for traditional financial statements when assessing a company’s overall financial health or stability. Additionally, pro forma statements can be misleading if based on unrealistic or overly optimistic assumptions, and users need to scrutinize their underlying premises carefully.

Is adherence to GAAP required for pro forma financial statements?

While pro forma financial statements are not subject to the same strict adherence to Generally Accepted Accounting Principles (GAAP) as traditional financial statements, it is essential to maintain transparency and consistency in the presentation and preparation of these projections. Misleading or inaccurate pro forma statements can result in a loss of credibility and trust with stakeholders, making it crucial to approach them with integrity and objectivity.

How do pro forma financials assist in cash flow forecasting and management?

Pro forma financial statements, including cash flow statements, provide insights into a company’s anticipated cash inflows and outflows based on specific business scenarios. This allows management to anticipate potential liquidity issues, evaluate financing options, and make informed decisions regarding cash flow management. In essence, pro forma cash flow statements contribute to strategic planning and help minimize financial risks.

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How a Pro Forma Statement Can Help Your Small Business

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As a business owner, you know the importance of financial planning and forecasting. 

Pro forma financial statements are powerful tools that can help you project future financial performance, assess potential investments, and evaluate the impact of business decisions.

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What does pro forma mean?

Pro forma is a Latin term that means "as a matter of form" or "for the sake of form." 

In business and accounting, it describes financial statements that are based on assumptions or estimates rather than actual historical data. 

Maybe you’re considering taking out a small business loan or merging with a larger company. A pro forma statement projects the impact of those decisions, showing whether your company’s financial health is expected to improve, decline, or remain the same after the event takes place. 

Pro forma statements can omit certain information. For example, a company may exclude one-time expenses, such as restructuring costs or a legal settlement, in order to present a more accurate picture of ongoing operations.

Pro forma statements, budgets, and invoices are typically used for planning, forecasting, or decision-making purposes.

What are pro forma financial statements?

Pro forma financial statements forecast estimated future financial performance rather than relying solely on historical data. 

Typically, these statements include a pro forma income statement, balance sheet , and cash flow statement , all based on hypothetical scenarios and assumptions.

Pro forma statements are usually preliminary or illustrative. They’re meant to give you a glimpse into a company's potential performance rather than strict adherence to the accounting rulebook.

Companies engaging in mergers and acquisitions often prepare pro forma financial statements to offer a picture of their future finances. These statements play a crucial role in negotiations and valuation discussions.

Sharing a pro forma statement also helps you communicate your growth strategy to lenders and investors. 

Critics of pro forma financial statements argue that companies use this freedom to cherry-pick what to include or exclude, molding the numbers to fit a desired narrative.

Pro forma invoices

Pro forma invoices are preliminary invoices sent to customers before the actual transaction takes place. Think of it as a "pre-invoice.” It outlines the products or services being offered, their quantities, prices, and other essential details

Pro forma invoices are the preferred method of doing international business, according to the U.S. International Trade Administration .

These invoices allow buyers to obtain necessary permits or secure financing before goods are shipped out.

Pro forma invoices also assist with customs clearance by providing necessary information to custom officials for the import and export process. It’s like a financial roadmap to ensure a smooth international trade journey.

While regular invoices are binding and indicate an actual sale, pro forma invoices are a prelude to the real deal. Pro forma invoices don't demand payment or initiate financial transactions.

You can find basic templates for creating pro forma invoices online, or you can create your own with a Microsoft Excel spreadsheet.

Many accounting software programs, such as Sage Accounting and FreshBooks , offer features and templates specifically designed for generating pro forma invoices.

With Sage , for example, you can select a pro forma template, input the information, save a copy for your records, and email it directly to the client. There’s also an option to convert it to a full invoice later.

Different billing and invoicing software also offers this feature. Companies like Zoho Books , for example, offer a pro forma template on their website you can download and use for free.

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Pro forma budgets

A pro forma budget is a projected financial plan that outlines anticipated revenue, expenses, and cash flows for a specific period. 

Pro forma budgets can be useful for assessing the financial feasibility of new projects or projecting the impact of cost-cutting measures.

So, how is it different from a traditional budget?

A regular budget focuses on your current financial situation and sets spending limits based on historical data. It helps you manage day-to-day operations. A pro forma budget, on the other hand, takes things a step further by considering future events or changes.

Let’s say you're planning to launch a new product line. With a pro forma budget, you can estimate the revenue and expenses associated with your new venture. You might consider costs like research and development, manufacturing, marketing, and distribution. 

By projecting the financial outcomes of your product launch, you can assess its viability and make adjustments before it goes live. 

Downsides of pro forma statements

While pro forma statements serve a purpose, they can also be misleading. Excluding certain expenses or items can paint an overly optimistic — or even unrealistic — picture of a company's financial health. 

Businesses have the freedom to use their own discretion when calculating pro forma earnings. They can include or exclude certain items based on what they believe truly represents their company's performance or future prospects.

Just remember, like any financial information, it's important to read between the lines and dig into the assumptions behind impressive pro forma numbers. 

The U.S. Securities and Exchange Commission (SEC) requires companies to provide clear explanations on pro forma statements and reconcile pro forma figures to Generally Accepted Accounting Principles (GAAP). 

Using pro forma projections to grossly misrepresent GAAP-based results and mislead investors is considered fraudulent and punishable by law under SEC regulations. 

Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder. She focuses on small businesses, retirement, investing and taxes. 

Pro forma frequently asked questions (FAQs)

Businesses use pro forma statements to examine the potential impact of future events based on certain assumptions. 

Pro forma statements allow companies to make informed decisions based on projections, attract investors, and assess the impact of mergers and acquisitions. 

By adjusting for these events, businesses can gauge potential financial impact and make smarter strategic choices.

Pro forma statements are not bound by the same rigorous standards as audited financial statements. As a result, their accuracy heavily depends on the integrity of the company preparing them.

Pro forma statements rely on forward-looking information, which can be incredibly difficult to predict. Economic conditions, market dynamics and other external factors outside a company’s control can throw even the most well-researched pro forma statements off course. 

That’s why you shouldn’t rely solely on pro forma financial statements.

Regular financial statements are prepared in accordance with Generally Accepted Accounting Principles and provide an accurate depiction of a company's historical financial performance. 

Pro forma statements, on the other hand, are more like "what if" scenarios. They’re created to show how a company's financials might look under different situations or to exclude certain non-recurring costs.

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What Is Pro Forma?

• Definition/Examples of Pro Forma Financials

How Pro Forma Financial Statements Work

Types of pro forma statements, what it means for individual investors.

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A pro forma financial statement is a projection showing numbers that do not reflect the actual results from a company’s history.

Key Takeaways

• Pro forma financial statements illustrate how a company’s financial position might change in the future.
• Projections about the future are not required to follow the strictest accounting standards, but companies must avoid committing fraud when creating pro formas.
• Because it’s impossible to predict the future, pro forma financial statements should only be considered an estimate.

Definition and Examples of Pro Forma Financials

Pro forma financial statements project how a company might perform in the future if the business takes an assumed course of action. It may include a best-case or worst-case scenario.

For example, the company might merge with or purchase another business, and the outcome could affect both cash flow and profits. Alternatively, the organization might need to make a major equipment purchase, and it’s important to know the financial impact of that transaction. In both cases, a pro forma could detail the expected results.

• Alternate name : Pro forma financial statement

While pro forma often refers to assumptions about future events, it can also refer to financial reports with irregular transactions removed. For example, if a company experienced significant restructuring charges in a given period, a pro forma might show how the company would have performed if those charges never occurred.

When deciding whether or not to invest in a company or a project, it’s reasonable to wonder how the future will unfold. There’s no way to predict the future with certainty, but you can analyze multiple “what if” scenarios to understand the potential outcomes. Pro forma financial statements enable investors to do that with available information.

Companies in the U.S. follow Generally Accepted Accounting Principles (GAAP) as a best practice. While GAAP standards set guidelines on reporting information accurately and transparently, sometimes it’s useful to include or exclude information. In particular, you might want to know how an anticipated change may affect a company’s earnings. For example, if an energy company is planning to build a new power plant, investors may wonder how that project will affect the company’s profits. Pro forma exercises provide a preview of expected outcomes.

While pro forma financial statements project the future, there is no guarantee that those predictions are accurate. Unexpected events, bad assumptions, and other factors can lead to dramatically different results.

Unknown Future

A pro forma financial statement is supposed to include reasonably accurate information. However, companies that create these documents have some leeway in their assumptions. They might be overly optimistic or omit important information investors need to know about.

Companies are generally prohibited from creating misleading or fraudulent pro forma financial statements. Still, there may be some gray areas, so use caution when relying on future projections.

Some of the most commonly used financial statements for pro forma are the income statement, the cash flow statement, and the balance sheet.

Pro forma financial statements might show the expected impact of any projects in the pipeline. For example, they may assume a company plans to build a new facility to produce more goods for customers.

A pro forma income statement would show how the company’s revenues and expenses might change and ultimately affect company profits. Income statements would show how much it would cost a company to pursue the project and how much revenues might improve after completion.

A pro forma cash flow statement could detail any payments involved in a hypothetical project. For example, the company might have to pay for land, materials, and fees to contractors who build the facility. Later, after the project is completed, the cash flow statement might assume increased payments from customers.

The pro forma balance sheet might change if the new facility adds to the company’s property, plant, and equipment entries. And if the company uses debt to fund the project, there might also be a substantial loan balance on the liabilities side of the balance sheet.

Pro forma financial statements provide predictions on how the future might unfold for companies you’re investing in. With that information, you can conduct ratio analyses using hypothetical numbers and gain insight into how projects might affect the value of your investment.

While it’s helpful to know what a company’s management has planned, it’s important to view these projections with skepticism. Nobody can predict the future, and managers might (even with the best intentions) use overly optimistic assumptions in their pro formas. So consider the possibility of less-optimistic outcomes as well.

Securities and Exchange Commission. " Cautionary Advice Regarding the Use of 'Pro Forma' Financial Information in Earnings Releases ." Accessed Aug. 16, 2021.

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Pro-Forma Forecast: What it is, How it Works, Example

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

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What Is a Pro-Forma Forecast?

A pro-forma forecast is a financial forecast based on pro-forma income statements, balance sheets, and cash flow statements. Pro-forma forecasts are usually created from pro-forma financial statements and are forecasted using basic forecasting procedures. When making these forecasts, revenues will usually provide the initial groundwork for the forecast, and expenses and other items are calculated as a percentage of future sales.

Key Takeaways

• A pro-forma forecast is a financial forecast based on pro-forma financial statements.
• The pro-forma forecast is intended to show the improved financial condition of a company if a beneficial change takes place.
• Pro-forma forecasts do not have to abide by generally accepted accounting principles (GAAP) rules.
• As pro-forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly.

Understanding a Pro-Forma Forecast

Pro-forma financials used in the pro-forma forecast will usually reflect the predicted state of the business after a large or important transaction has taken place. The inclusion of anticipated future events in the pro-forma financial statements allows the company a unique opportunity to sculpt the presentation of the company's financial situation in a way that normally wouldn't be allowed under generally accepted accounting principles (GAAP) rules.

Often, events depicted in the pro-forma financial statements have yet to occur, so the actual financial picture of the company may be very different from the picture presented. Forecasts made from these financial statements may or may not contain an even higher degree of deviation from the actual state of the company.

A pro-forma forecast, similar to any sort of pro-forma report, is not required to abide by GAAP. As a result, they often reflect the best-case scenario, which the firm would like to portray to investors. It takes a skilled analyst to unpack the marketing from the actual numbers. Of course, the analyst can always just use the audited financial statements in their analysis as opposed to pro-forma statements and forecasts; however, these forecasts can be a valuable clue as to how the company intends to increase its value and what type of growth they are aiming for.

Example of a Pro-Forma Forecast

For example, XYZ Company is a publicly-traded maker of widget presses. After many years of research and development (R&D), they have applied for a patent on a new type of widget press technology. If they are granted the patent, they will be the only company that can use this new technology for 10 years. This new technology will allow XYZ Company to manufacture widget presses at half their current cost and several times more quickly. This could potentially make them the preferred provider in the space and help them gain market share.

To demonstrate this potential good fortune on the company's financial statements, XYZ Company may draw up pro-forma financial statements that show the predicted effects of lower costs and increased sales on the company's financial situation. Pro-forma forecasts made off of the assumption that this patent will be granted might show larger than normal yearly sales increases as XYZ Company steals market share from its less technologically advanced and more expensive competitors. Of course, if the patent isn't granted, all of this would be highly inaccurate.

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Pro Forma Business Plan Template & Financial Statements

Written by Dave Lavinsky

What are Pro Forma Financial statements?

A pro forma business plan is simply another name for a business plan. The term “pro forma” specifically means “based on financial assumptions or projections” which all business plans are. That is, all business plans present a vision of the company’s future using assumptions and projections. “Pro forma” most specifically refers to the financial projections included in your plan, as these are entirely based on future assumptions.

Pro forma financial statements are a type of statement that provides estimates or financial projections for a company. They are often used by businesses to plan for upcoming periods or quarters, assess new opportunities, or track progress against goals.

Why include a Pro Forma Statement in your Business Plan

A pro forma statement is important for your business plan because it gives investors and lenders an idea of your company’s potential financial health. They use your pro forma statements in determining whether to invest in your company or not. Among other things, they consider the likelihood your company will achieve the financial results you forecast, and their expected return on investment (ROI). Your pro forma financial statements also help you to identify and track key financial indicators and metrics over time.

Writing a Pro Forma Business Plan

When writing a pro forma business plan, you will need to include information such as your company’s sales forecasts, expenses, capital expenditure plans, and funding requirements. You should also include a pro forma income statement, balance sheet, and cash flow statement.

Importance of a Pro Forma Income Statement in Business Plans

The pro forma income statement is a crucial financial tool that can be used to assess the viability of your business. It shows a company’s expected revenue and expenses over a period of time and can help you to identify potential problems early on.

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Types of pro forma statements in business plans.

There are several types of pro forma statements, including the income statement, balance sheet, and cash flow statement.

Pro Forma Income Statement

A pro forma income statement is an estimate of your company’s financial performance over a period of time. It shows your expected revenue and expenses and can be used to assess the viability of your business.

Example 5 Year Annual Income Statement

Pro Forma Balance Sheet

A pro forma balance sheet is an estimate of your company’s financial position at a specific point in time. It shows your assets, liabilities, and equity, and can be used to assess your company’s financial health.

Example 5 Year Annual Balance Sheet

Pro Forma Cash Flow Statement

A pro forma cash flow statement is an estimate of how your company’s cash flows over a period of time. It shows your expected cash inflows and outflows and can be used to assess your company’s financial health and ensure you never run out of money.

Example 5 Year Annual Cash Flow Statement

Pro Forma Income Statements for a Business Plan

Pro forma statements for a business plan can take many different forms, but they all typically include information on sales forecasts, expenses, capital expenditure plans, and funding requirements. A pro forma statement that is included in a business plan template should also include financial projections and break-even analysis. 

Cash Flow Statements and Pro Forma Income Statements

The main difference between a cash flow statement and a pro forma income statement is that a cash flow statement shows your actual cash inflows and outflows, while a pro forma income statement shows your estimated future financial performance. 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.

Pro Forma Statements and Budgets

Pro forma statements and budgets are both financial tools that can be used to track the progress of a business. However, there are key differences between them.

A budget is a plan for how you will use your resources to achieve specific goals. It shows your expected income and expenses and can help you to stay on track financially.

A pro forma statement estimates your company’s future financial performance. It shows your expected revenue and expenses and can be used to assess the viability of your business.

Both pro forma statements and budgets can be useful tools for businesses. However, budgets are more focused on short-term planning , while pro forma statements are more concerned with long-term financial planning.

Business Plan Pro Forma Template and Example

The following is an example of a pro forma business plan:

Executive Summary

In this pro forma business plan, we forecasted our company’s sales, expenses, and capital expenditures over the next three years. We also estimated our funding requirements and outlined our plans for growth. Our pro forma income statement shows that we are expected to have positive net income each year of the forecast period. Our pro forma balance sheet shows that we will have a strong financial position, with increasing equity and minimal debt. Lastly, our pro forma statement predicts healthy cash flow throughout the three-year period. We believe that these results demonstrate the viability of our business and its potential for long-term success.

Our company is XYZ, a leading provider of ABC products and services. We have been in business for 10 years, and our products are sold in over 10 countries. We have a strong track record of financial success, and we are now looking to expand our operations into new markets. In order to do this, we need to raise $5 million in funding.

Business Plan Pro Forma

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.

Sales Forecast

We forecast that our sales will increase by 20% in each year of the forecast period. This growth will be driven by our expansion into new markets, as well as our continued focus on innovation and customer service.

Expense Forecast

We expect our expenses to increase at a slower rate than our sales, due to our economies of scale. We anticipate that our expenses will increase by 15% in Year 1, 10% in Year 2, and 5% in Year 3.

Capital Expenditure Forecast

We forecast that our capital expenditures will increase in line with our sales, at a rate of 20% per year. We plan to invest heavily in research and development, as well as new product launches.

Funding Requirements

We estimate that we will need to raise $5 million in funding in order to expand our operations into new markets. We plan to use this funding to invest in research and development, as well as to cover the costs of marketing and new product launches.

Cash Flow Forecast

Our pro forma cash flow statement predicts healthy cash flow throughout the three-year period. We expect to have positive cash flow in each year of the forecast period.

This pro forma business plan demonstrates the viability of our company and its potential for long-term success. We have a strong track record of financial success, and we are well-positioned to continue growing our business. Our pro forma statements show that we are expected to generate positive net income, and have a strong financial position and healthy cash flow. We believe that this business plan provides a clear roadmap for our company’s future growth.

A pro forma business plan is an important tool for any business owner. 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. If you’re not sure where to start, we can help. 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. So what are you waiting for? Get started today and ensure your company’s success tomorrow.

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What are Pro Forma Financial Statements: Ultimate Guide

August 29, 2023

Adam Hoeksema

Effective business planning hinges on the ability to foresee and navigate potential financial scenarios. This is where Pro Forma Financial Statements come into play. More than just a reflection of a company's current financial standing, pro forma financial statements illuminate the possible paths a business could tread in the future. By offering a 'what could be' outlook based on specific assumptions, they play a critical role in forecasting the financial outcomes of various business decisions or events.

In this guide, we'll explore the following Pro Forma questions:

What are pro forma financial statements?

What are pro forma financial statements based on, what is the purpose of pro forma statements, how to create pro forma statements.

• What financial statements should be included in a pro forma statement?

Example Pro Forma Statements

Pro forma financial statements are financial reports that depict a company's hypothetical financial performance under certain assumed conditions or events. The term "pro forma" is Latin for "as a matter of form" or "for the sake of form". Unlike standard financial statements which reflect the company's actual historical performance, pro forma statements are based on certain adjustments or hypothetical scenarios. These could range from potential mergers and acquisitions to changes in the company's capital structure or a significant shift in its operations.

Pro forma financial statements are based on various assumptions and scenarios that a company believes might occur in the future or are contingent upon a certain event taking place. These assumptions might include:

• Sales and revenue projections based on market research.
• Anticipated costs and expenses.
• Projected capital expenditures.
• Expected changes in the industry or regulatory environment.
• Proposed business strategies, such as mergers, acquisitions, or expansions.
• Any known future events that may have a significant impact on the company's finances.

The main purpose of pro forma statements is to provide stakeholders, especially management and potential investors, with a forward-looking view of a company’s potential financial position. These statements offer a structured and organized way to assess the potential financial implications of certain business decisions, actions, or events before they occur. By previewing these hypothetical scenarios, a company can better prepare, strategize, and make informed decisions.

What are pro forma financial statements used for?

Pro forma financial statements serve multiple purposes:

Decision Making : Management teams use these statements to assess the potential outcomes of various business strategies and make informed choices.

Investor Relations : Companies can use pro forma statements to communicate potential changes to their investors, ensuring transparency and managing expectations.

Financing Activities: When seeking financing or undergoing mergers and acquisitions, pro forma statements can provide potential lenders or acquirers with a clearer picture of a company’s financial trajectory post-transaction.

Budgeting and Planning: These statements allow businesses to create more accurate budgets, foresee potential financial challenges, and make necessary adjustments in advance.

Risk Assessment: By visualizing different financial scenarios, companies can evaluate potential risks and develop contingency plans.

Creating pro forma statements requires a systematic approach, ensuring accuracy and the incorporation of all relevant assumptions. Here's a step-by-step process:

Step 1: Establish the Objective

Determine why you're creating the pro forma statements. Is it for a potential investment, a change in business operations, a potential merger or acquisition, or securing financing? Your objective will guide your assumptions.

Step 2: Gather Historical Data

• Start with your most recent financial statements. This includes the income statement, balance sheet, and cash flow statement.
• Analyze historical trends in revenues, costs, and other pertinent financial metrics.

Step 3: List Down Assumptions

• Clearly articulate and document assumptions that will be used in the pro forma. Common assumptions include projected sales growth, anticipated changes in costs, expected capital expenditures, or macroeconomic factors.
• Consider internal factors, like changes in operations or strategies, and external factors, like market conditions or regulations.

Step 4: Create the Pro Forma Income Statement

• Project revenues based on your sales forecasts and other assumptions.
• Estimate cost of goods sold (COGS) based on past percentages or any known changes in costs.
• Project operating expenses, considering historic trends and any anticipated changes.
• Estimate other income and expenses, such as interest or taxes.
• Calculate the net profit or loss by subtracting total expenses from total revenues.

Step 5: Develop the Pro Forma Balance Sheet

• Forecast assets:
• Current assets (cash, accounts receivable, inventory)
• Fixed assets (property, equipment)
• Intangible assets (patents, copyrights)
• Forecast liabilities:
• Current liabilities (accounts payable, short-term debts)
• Long-term liabilities (long-term debts, lease obligations)
• Calculate equity, which is derived from assets minus liabilities.

Step 6: Construct the Pro Forma Cash Flow Statement

• Start with the projected net income from the pro forma income statement.
• Adjust for non-cash expenses, like depreciation.
• Consider changes in working capital (accounts receivable, accounts payable, inventory).
• Factor in projected capital expenditures.
• Deduct any planned debt repayments or dividends to project the end-of-period cash balance.

Step 7: Integrate Contingent Events (If Applicable)

If your pro forma is centered around a specific event, such as a potential acquisition, merger, or introduction of a new product line, make sure you incorporate the financial impact of that event in the projections.

Step 8: Review, Adjust, and Validate

• Continuously compare the pro forma statements against actual financial results as they come in.
• Adjust your assumptions and projections if you observe significant variances.
• Validate your assumptions by seeking input from experts, such as industry analysts or financial consultants.

Step 9: Documentation and Presentation

• Clearly document all assumptions and methodologies used in the creation of the pro forma statements.
• Make the statements easily readable, incorporating charts or graphs if necessary.
• Remember, transparency is crucial. Ensure that stakeholders understand that these are projections based on assumptions, not guaranteed outcomes.

Step 10: Continual Updates

Business conditions change, and unforeseen events occur. Regularly update pro forma statements to reflect the latest information and insights.

Resource: Creating a Real Estate Pro Forma: A Step-by-Step Guide

Throughout this section, we will be referencing our pro forma templates. If you're searching for one tailored to your industry and spanning 5 years, we have 100+ different industry templates available for selection. 

Pro Forma Income Statement

This projects revenues and expenses to show the anticipated net profit or loss.

Pro Forma Balance Sheet

‍ This shows what the company's financial position might look like at a future date, given the assumptions made.

Pro Forma Cash Flow Statement

This projects how cash is expected to flow in and out of the business over a future period.

Pro Forma Graphs ‍

Visual tools are often the quickest way to grasp information. Our template offers a P&L at a glance, a monthly sales forecast, and graphs that highlight monthly sales, gross profit, and net income.

In summary, pro forma financial statements serve as forward-looking tools, offering insights into a company's potential financial trajectory across different scenarios. Grounded in well-reasoned assumptions, these statements are invaluable for guiding management, investors, and stakeholders. Crafting such documents, however, can induce undue stress for business owners. This is where our Premium Pro Forma Templates come in. Including our Free Pro Forma Template . For business owners seeking to clarify their financial projections, our Pro Forma Template serves as a direct and effective tool, instilling confidence in guiding your business forward.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 50,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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Pro Forma: Understanding Its Application in Business Financial Analysis

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Pro Forma Definition

“Pro forma” is a Latin term that means “for the sake of form” and, in finance, it refers to a method of calculating financial results using certain projections or modifications. It is often used to present a hypothetical financial situation, such as a company’s earnings if a certain event such as a merger, acquisition, or new capital investment were to occur.

Pro Forma in Forecasting and Budgeting

In financial management, pro forma plays a vital role in forecasting and budgeting. It allows organizations to prepare and plan for future financial circumstances. The key advantage of using pro forma in this context is to anticipate both future revenues and expenses.

Estimating Future Revenues

By developing a pro forma income statement, businesses can predict potential revenues. This forecast considers existing and upcoming sales, market circumstances, and strategic initiatives. Here, pro forma figures aren't just guesswork – they're grounded in detailed research and analysis.

Companies examine historical data, present trends, and future projections before deciding on the most probable income. Ensuring these estimates are as precise as possible allows for a realistic view of future financial health.

Budgeting Expenses

A pro forma statement is not merely beneficial in revenue prediction – it's equally significant in expense budgeting. Pro forma budgeting assists businesses in estimating future costs with a high degree of precision.

Expense budgeting involves predicting operating and non-operating expenses. Companies can determine potential costs, such as labor, rent, utilities, interest payments, and other overhead expenditures.

Overall, pro-forma-based budgeting serves as a preventive measure against overspending. By developing a detailed pro forma budget, companies can formulate an effective strategy to maintain cost efficiency and promote financial stability.

To summarize, pro forma serves as an important tool in forecasting and budgeting. It enables businesses to estimate future profits and budget expenses more accurately, ensuring long-term financial well-being.

Pro Forma Financial Statements vs. GAAP

Revenue recognition.

The method of revenue recognition in pro forma financial statements and GAAP varies significantly. In pro forma, firms may recognize revenue once the order is placed rather than when the cash is received or the service is delivered. This is in authorized anticipation of a sale and in accordance with Non-GAAP guidelines, making it possible to provide a more ideal financial outlook to investors.

On the other hand, GAAP requires revenue to be recognized when earned and realizable. This might be when a product is delivered or a service has been provided, ensuring the revenue is indeed earned and not merely anticipated, providing a safer, more realistic representation of a firm's financial health.

Expense Recognition

With respect to expense recognition, pro forma statements often exclude certain types of expenses considered non-recurring or extraordinary, such as restructuring costs, litigation charges, or costs associated with a merger or acquisition. This can inflate income figures, presenting a rosier financial picture than what truly exists.

However, under GAAP, all ordinary and extraordinary expenses have to be recognized in the period they are incurred. This ensures an authentic representation of the costs a firm incurs to generate its reported revenues. Consequently, financial statements under GAAP typically look less optimistic in comparison to pro forma statements.

Presentation of Financial Positions

Pro forma financial statements provide a “what-if” scenario analysis about the potential financial status of the company assuming certain changes in its activities. It allows the presentation of business plans or strategies which if implied, will have an impact on the firm's cash flow, profits, and overall financial strength.

Conversely, GAAP financial statements refer to the true, historical representation of the financial position. These financials are based on actual business transactions of a company for a given time period. They show reliable and consistent information which is comparable across different periods and companies.

While both pro forma and GAAP financial statements have their uses, they should ideally be viewed in tandem, to provide both a hopeful outlook as well as a realistic grounding of a company's financial standing for informed decision making.

Advantages and Disadvantages of Using Pro Forma Statements

Pro forma financial statements offer several key benefits, particularly for internal management. These statements provide leaders with a forward-looking tool, enabling them to make strategic decisions with a focus on future projections.

Benefits of Pro Forma Financial Statements

One of the primary advantages of pro forma financial statements is their facilitation of strategic planning . By offering a forecast of financial results, these documents can guide internal management in aligning their strategies with their financial aspirations.

Another crucial benefit is the role these statements play in scenario analysis . They allow organizations to model various business scenarios and examine their potential financial outcomes. This can be immensely helpful during pivotal periods, such as budget planning or significant operations adjustments.

Pro forma statements also promote enhanced communication within an organization. For instance, they can aid in clarifying budget numbers or conveying potential financial consequences associated with specific business decisions.

In addition to internal use, many organizations use pro forma statements as a tool for attracting investors , by showcasing projected profitability under certain conditions or following potential strategic moves.

Limitations of Pro Forma Financial Statements

Despite these significant benefits, pro forma financial statements also have limitations. One of the most critical of these is their lack of standardization . Unlike other financial statements, there are no set guidelines or standards governing the creation of pro forma statements. This lack of regulations may lead to inconsistencies in how different organizations prepare and present these documents.

Another significant limitation is their potential to mislead investors . As the figures presented in a pro forma statement are often based on hypotheticals or assumptions, they may fail to accurately represent a company's actual financial position. If the assumptions prove incorrect, the projections will invariably be inaccurate. This risk can create a disconnect between investor expectations and the reality of a company's fiscal health.

In conclusion, while pro forma financial statements are powerful strategic tools for businesses, their effectiveness and credibility heavily rely on the validity of the underlying assumptions and the integrity of the organization compiling them. Given these advantages and challenges, users of pro forma statements should interpret them carefully, viewing them as a potential outlook rather than a firm guarantee of future performance.

Regulatory Issues Regarding Pro Forma

Public companies in the United States using pro forma financials must adhere to certain regulations, primarily issued by the Securities and Exchange Commission (SEC). The SEC is an agency designed to protect investors by regulating and controlling securities transactions.

The SEC Rule 10b-5

Under this rule, the SEC prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. Despite pro forma financials' theoretical conformance to GAAP (Generally Accepted Accounting Principles), concerns arise when companies use them selectively or misleadingly. Manipulating the presentation of financial information, even if technically accurate, could be considered an attempt to deceive investors, potentially triggering infringement of Rule 10b-5.

Regulation G and Item 10(e) of Regulation S-K

These regulations specifically focus on non-GAAP financial measures, such as pro forma. According to Regulation G, a public company that discloses non-GAAP financial measures must also present the most directly comparable GAAP measures and reconcile the two. Meanwhile, Item 10(e) of Regulation S-K sets forth additional restrictions for these disclosures in SEC filings and earnings releases.

But compliance with these stipulations doesn't guarantee absolute accuracy or honesty. Companies might exclude certain expenses to paint an artificially rosy picture of their performance, counting on the general public and some investors being unaware of what has been left out.

Enforcement Actions and Penalties

In case of violation of these regulations, the SEC can take enforcement action against the offending company. The SEC has the power to seek a court order requiring the company to comply with the laws, can levy fines, and even ban individuals from acting as officers or directors of public companies.

These regulatory measures indicate that while pro forma can be a useful tool, it is essential for users to understand the context and potential for manipulation. Always take a thorough and critical look at pro forma figures and the explanations provided by the company.

Pro Forma in Mergers and Acquisitions

In the context of mergers and acquisitions (M&A), pro forma financial statements play a critical role in providing stakeholders with a glimpse into the potential financial situation of the combined entities. Particularly, these provide a forecast of the future financial position by integrating the historical financial information of both companies.

Role of Pro Forma in M&A

During M&A, pro forma financials can contribute in several ways.

They help in evaluating the economic viability of the merger or acquisition and assist the management to understand the possible financial outcomes. Pro forma statements exhibit how the transaction would affect the revenues, expenses, and ultimately the company's bottom line. They also give a sense of what synergies might be realized post-transaction by eliminating overlapping costs or leveraging shared resources.

Pro Forma Financial Statements

Generally, three main financial reports are used in the pro forma analysis: the income statement, the balance sheet, and the cash flow statement.

The pro forma income statement combines the income statements of both companies, adjusts for items such as cost savings or restructuring charges expected as a result of the transaction. Similarly, the pro forma balance sheet combines the balance sheets of both entities and accounts for purchase price allocation adjustments, which may be to goodwill, other intangible assets, or deferred taxes. Lastly, the pro forma cash flow statement uses inputs from the pro forma income statement and balance sheet to project the combined entity’s future cash flows.

Valuation Techniques

Pro forma financials feed into valuation techniques such as the Discounted Cash Flow (DCF) model or comparative company analysis, which assists investors and stakeholders in concluding a fair price for the transaction.

Delayed Effects

Keep in mind that pro forma figures will not always precisely reflect actual results due to unforeseen changes in the economic environment or implementation of the merger or acquisition.

Importance of Transparency

Transparency in creating pro forma financials is crucial to avoid misleading investors. The SEC (Securities and Exchange Commission) closely monitors the proper disclosure of these estimates, and any misleading or fraudulent representations can lead to severe penalties.

Ultimately, pro forma financials allow potential investors, company management, and other stakeholders to make informed decisions about the desirability and impacts of a potential merger or acquisition.

Implications of Pro Forma on Corporate Social Responsibility (CSR)

In the intersection of pro forma financials and CSR lies the ability of businesses to anticipate the financial outcomes of their social responsibility decisions and activities. Here, the robust forecast flexibility provided by pro forma can prove invaluable in planning and executing CSR initiatives.

Utilizing Pro Forma in CSR Strategy

To begin with, companies may decide to incorporate a certain CSR initiative into their operations. Such a decision has inherent financial implications – both immediate and future-oriented. However, these monetary outcomes are not always easy to forecast with traditional methods due to the complex interplay between business performance and societal impact.

By leveraging pro forma, businesses can create hypothetical yet realistic financial statements that consider present conditions as well as future occurrences. These assumptive financial statements help businesses understand the immediate financial implications of a CSR initiative, such as the costs related to the implementation of a new green technology.

Long Term Implications

Apart from immediate financial implications, pro forma allows companies to project the long-term financial effects of their CSR initiatives as well. For instance, the aforementioned green technology may result in long term savings due to reduced energy consumption. Pro forma can be used to model these long term savings, providing a more holistic view of the CSR initiative's financial implications.

Investor Relations

Another aspect where pro forma plays a helpful role in CSR is investor relations. Investors are increasingly interested in the CSR record of companies not only for ethical reasons but also as a measure of risk and potential profitability. By using pro forma to demonstrate prospective financial results of CSR initiatives, businesses can provide reassurances to investors about the profitability or financial viability of these initiatives.

Cautionary Note

However, it's pertinent to remember that while pro forma provides flexibility and depth in financial forecasting, it isn't a silver bullet. The hypothetical scenarios it crafts depend on the accuracy of the underlying assumptions. Therefore, careful attention must be given to these assumptions when using pro forma to forecast CSR financial implications.

Thus, pro forma can serve as a potent tool for businesses to plan and execute CSR initiatives by offering a comprehensive representation of their financial implications. However, the effectiveness of the method ultimately relies on the quality and realism of the underlying assumptions.

Sustainability and Pro Forma

In keeping with the policy of integrating sustainability-related costs and revenues into pro forma financial statements, businesses commit to sustainable practices that reflect in their monetary matters. This refers to activities such as resource management or waste reduction that are beneficial for both the environment and the company's profit margins.

Incorporating Sustainability Cost

Consider a company transitioning from non-renewable to renewable energy sources for its operations. In such a case, the initial setup cost for the new resources can be substantial. Yet these expenses are typically one-time investments, after which the company can anticipate potential savings due to lower running costs. Recording these factors in pro forma income expenses can provide a more realistic forecasting model for the company's future.

Revenue from Sustainable Practices

Similarly, the revenue side of financials can often benefit from sustainable practices. Companies producing eco-friendly products can attract a growing consumer base increasingly conscious about environmental issues. Appealing to such market trends can directly impact the sales and profitability of a company. When estimating future income in the pro forma statement, these potential revenues should also be included.

In all, implementing sustainable practices can have a significant effect on a company's finances. By integrating these costs and projected revenues into pro forma financial statements, businesses get a deeper understanding of how sustainability influences their operation.

Planning for Long-term Impacts

Aside from understanding current costs and benefits, pro forma statements that reflect sustainability efforts also enable businesses to plan for long-term impacts. When an organization commits to sustainable practices, it's considering its lasting impact on the world. This approach often yields long term financial benefits, like energy cost savings or tax incentives. Thus, integrating sustainability into financial planning is not just a moral obligation; it's a strategic long-term decision that drives value for businesses and their shareholders.

Through pro forma statements that incorporate sustainability, companies better anticipate future responses to changes in business practices; fully understanding the financial impacts, devising strategies to maximize gains, or mitigate losses from such sustainable practices. This approach allows businesses to be ahead of the curve, financially prepared and strategically equipped to handle the unforeseen eventualities of sustainability initiatives.

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Pro Forma - Explained

What is pro forma.

Written by Jason Gordon

Updated at April 18th, 2024

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Pro forma is a Latin phrase that means as a matter of form. In business and investing, it refers to the manner in which a firm calculates and presents its financial results. The pro forma calculation method emphasizes current and projected figures.

How is Pro Forma Used?

Pro forma financial statements are designed to emphasize specific figures in a company's financial reports. The most notable examples of such reports are earnings statements published quarterly by public companies for shareholders and potential investors. Companies also use pro forma statements to highlight different financial transactions, like mergers and acquisitions. Pro forma statements do not have to comply with Generally Accepted Accounting Principles (GAAP). In fact, a company's pro forma figures often differ drastically from its standard GAAP documents. Since pro forma statements aren't restricted by GAAP, companies can create statements to emphasize the most important aspects of their business performance. 

Pro Forma in Accounting

Company financial statements are examples of pro forma in the accounting field. These reports are usually included in earnings statements, but they don't include unusual or nonrecurring transactions. By eliminating miscellaneous costs from financial statements, potential investors can get a clearer picture of core business performance. 

Pro Forma in Business 

From a business perspective, companies use pro forma financial statements to present an analyze the different aspects of potential investments, planned transaction, and more. These projections usually estimate the impact of a transaction on different areas of the business, including cash flows, projected revenues, tax costs, and more. Using pro forma reports, companies can project the impact of a business move based on recent, accurate financial data. 

Creating a Pro Forma Statement  

If you want to create your own pro forma financial statement, there are numerous templates available online for free. Here are the basic components of a standard pro forma income statements. Step one is estimating revenue outlooks for your business, and this step is commonly referred to as pro forma forecasting. Base your estimates on objective measures that you can back up with hard data. Research your topics and consult with experts to determine an average annual revenue stream, cash flow, and asset accumulation projections. The next step is projecting your liabilities and expenses. This category includes loans, credit balances, and costs from things like leases, utilities, and other operating expenses. Again, use objective measures and be rational when forecasting these figures. Last, forecast the cash flows. This part of the pro forma statement shows the amount of money going in and out of your business. It includes figures like net earnings, asset sales, dividends, and more. These three components make up a standard pro forma income statement. You can use them to generate your own pro forma statements for the use of prospective investors and management.

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Definition of pro forma

Did you know.

A lot of things are done for the sake of appearances. A teacher might get officially observed and evaluated every three years, even though everyone knows she's terrific and the whole thing is strictly pro forma. A critic might say that an orchestral conductor gave a pro forma performance, since his heart wasn't in it. A business owner might make a pro forma appearance at the funeral of a politician's mother, never having met her but maybe hoping for a favor from her son sometime in the future. In business, pro forma has some special meanings; a pro forma invoice, for example, will list all the items being sent but, unlike a true invoice, won't be an actual bill.

Examples of pro forma in a Sentence

These examples are programmatically compiled from various online sources to illustrate current usage of the word 'pro forma.' Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Send us feedback about these examples.

Word History

Latin, for form

1823, in the meaning defined at sense 1

Dictionary Entries Near pro forma

pro forma balance sheet

Cite this Entry

“Pro forma.” Merriam-Webster.com Dictionary , Merriam-Webster, https://www.merriam-webster.com/dictionary/pro%20forma. Accessed 8 May. 2024.

Legal Definition

Legal definition of pro forma.

Latin, for the sake of form

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