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Pro Forma Financial Statements

By 22 December 2022May 30th, 2023No Comments

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. Pro forma financials offer businesses ways to make realistic assumptions about future growth rates and costs. According to Johnson, this is useful when you’re seeking outside capital (either debt or equity) to grow.

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There are no universal rules that companies must follow when reporting pro forma earnings. This is why it is important for investors to distinguish between pro forma earnings and those reported using generally accepted accounting principles (GAAP). In financial accounting, a pro forma earnings report excludes unusual or nonrecurring transactions.

How to Create A Pro Forma Statement of Cash Flow

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. GAAP enforces strict guidelines when companies report earnings, while pro forma figures are better thought of as hypothetical earnings. As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly. In this case, the company is projecting the future, based on its knowledge of past sales and expenses and factoring in expected changes.

  • You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement.
  • A pro forma invoice requires only enough information to allow customs officials to determine the duties needed from a general examination of the included goods.
  • A pro forma financial statement is a projection showing numbers that do not reflect the actual results from a company’s history.
  • If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory.
  • Pro forma financial statements are essentially “what-if” generators, giving you the ability to play through different hypothetical scenarios and explore their potential impact on your business.
  • The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements.

In reality, no one knows exactly how much revenue will be made or how much expenses will be incurred at the end of a given period; however, a realistic forecast can be determined. 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.

What Pro Forma Financials Do for Your Business

This pro forma balance sheet can also be used for corporate retail or wholesale businesses. There are a variety of pro forma reports that can be used to help businesses make better financial decisions. The three most common types of pro forma reports are the income statement, the balance sheet, and the cash flow statement. The income statement shows a company’s revenues and expenses over a specific period of time, while the balance sheet shows a company’s assets, liabilities, and equity at a specific point in time. The cash flow statement shows how much cash a company has generated and used over a specific period of time.

What Is A Pro Forma Statement?

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). They are built into the data to give a picture of a company’s What Is A Pro Forma Statement? profits if certain nonrecurring items are excluded. Pro forma statements offer a realistic estimate of what a merger would look like. For instance, “They can help you identify redundancies, and any new addition that needs to be made,” said Taylor.

Why create pro forma statements?

They have articles governing the preparation of pro forma financial statements for public companies. These are Regulation S-X Article 11, and Regulation S-X 8-05 for smaller companies from 17 CFR 210. Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering (IPO). This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO. The pro forma financial statements, including pro forma earnings per share calculated, must be submitted.

What Is A Pro Forma Statement?

The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses. Simply put, pro forma financial statements are financial reports that are created on hypothetical assumptions. For example, in creating a pro forma income statement, you would need to forecast revenue for future periods.

For the effects of the business combination, only show the current and immediately preceding periods. This approach is useful for seeing how a prospective acquisition could have altered the financial results of the acquiring entity. 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. Even public companies are not required to get their pro forma document audited by an independent auditor, according to the SEC.

  • This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO.
  • Pro forma financial statements are projections of future expenses and revenues, based on a company’s past experience and future plans.
  • Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering (IPO).
  • Nobody can predict the future, and managers might (even with the best intentions) use overly optimistic assumptions in their pro formas.

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“The statements also provide them with the assurance that you understand the operations of your business and what can cause fluctuations in your earnings,” said Taylor. 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.

Knowing how the pro forma documents are compiled and what is left out is also critical when comparing different pro forma statements. Understanding this methodology and the decisions behind it will enable accurate comparisons and information to investors. Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous. However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions. By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions. Datarails’ FP&A solution is a one-stop solution for effective planning and building pro forma financial statements.

Assessing Potential Mergers

If you don’t know how each of the companies defines its pro forma figures, you may be comparing apples to oranges. A pro forma invoice requires only enough information to allow customs officials to determine the duties needed from a general examination of the included goods. A pro forma invoice is a preliminary bill of sale sent to a buyer in advance of a shipment or delivery of goods. The invoice will typically describe the purchased items and other important information, such as the shipping weight and transport charges.

  • For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and never mistake one for the other.
  • When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios.
  • They differ from pro forma statements in that they are not projections, but rather historical reports — therefore, they do not consider things like litigation costs, restructuring charges, and other one-time items.
  • Pro forma analyses are meant to paint a better picture of what is happening with the company, irrespective of one-time events, but considering the specific industry’s standards.
  • A normal balance sheet covers two years, but it is reasonable for a pro forma balance sheet to cover four years of operations.

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