What is Pro-Forma Financial Statements

A pro-forma financial statement is a type of forecast that can be helpful in making financial predictions.

Jason runs a successful hardware store. For a few months, he has been thinking about expanding his business. By looking at his past financial statements, he can see that his company has enjoyed steady growth. However, Jason wants to attract investors. He knows that potential investors will want to see proof that the business can grow even further, and that its future is positive. In order to make projections about future performance, Jason puts together a pro-forma financial statement. The pro-forma financial statement makes assumptions about Jason’s business – about how it will perform over the next year. Jason gives the pro-forma financial statement to the potential investors, showing how his business is predicted to grow over the next twelve months based on current data. The investors are impressed, and they agree to help expand Jason’s hardware company.

Brad Nakase, Attorney

Email  |  Call (888) 600-8654

A company’s success often depends on how well a business owner can understand numbers, or finance. Understanding the role of numbers in running a business is crucial. Getting the approval of shareholders and attracting investors depends on an owner’s ability to express his or her ideas in a way that makes financial sense.

When it comes to understanding a business’ numbers, some financial statements provide a view of the company’s past performance. These financial statements include documents such as balance sheets, income statements, annual reports, and cash flow statements. While these kind of documents can help business owners understand their past financial performance, they do not necessarily provide a good assessment of where the company is going. Essentially, when a business owner is planning for the future, these numbers do not provide foresight, or the ability to see ahead.

When it comes to planning for the future, professionals like to look at forecasts and financial projections. This manner of report allows them to create appropriate plans and answer “what if” questions. A pro-forma financial statement is a type of forecast that can be helpful in making financial predictions.

What Is a Pro-Forma Statement?

A pro-forma financial statement uses hypothetical information or predictions about future values to project a company’s performance in a future period of time. This type of statement may also be referred to as a financial forecast or financial projection. The projections provided by the statement show what the business’ financial statements would look like if the assumptions made actually happen as predicted.

The phrase “pro-forma” refers to forecasts or projections, so it can be used to describe different types of financial statements. These might include:

  • Income statements
  • Balance sheets
  • Cash flow statements

Pro-forma financial statements can be very helpful for companies in that their projections can be used to help make business decisions. When a business owner, investor, creditor, or other decision-maker weighs the pros and cons of a major decision, they often use pro-forma financial statements to guide them.

How are Pro-Forma Statements Used?

Financial statement analysis is generally used to assess and understand a company’s financial performance over a certain period of time. This type of statement explores a company’s financial health on a historical basis by only looking at the past. A pro-forma financial statement, by contrast, focuses on future performance. These reports can analyze different aspects of future performance. These aspects include assessing risk, projecting investments, and predicting expected results before a reporting period ends.

One of the main purposes of a pro-forma report is to aid decision-making and assist in strategic planning. For example, let’s say a company has three investment opportunities to consider. How does the business owner assess them and know which one to pick? He or she can create a pro-forma financial statement to reflect the predicted outcomes of each investment scenario. This side-by-side comparison can help show which option is best for the business. The business owner can thereby plan accordingly and develop a strategy going forward.

How Does One Create a Pro-Forma Statement?

Creating a pro-forma financial statement is actually not that different than putting together a traditional financial statement. The primary difference between the two is the assumptions made about inputs. The format and calculations, however, stay the same.

That said, when a company puts together a forecast, it uses certain methods to make predictions. If a business uses the percent of a sales forecasting method, then the company must figure out future expected sales and find patterns across accounts.

Some line items can be easily predicted, such as the cost of sold goods. It can be assumed that the cost of goods will grow in proportion with sales. Some line items, such as income tax expense, do not correlate with sales. However, businesses can predict that income tax will be a percentage of income before taxes.

The Significance of Pro-Forma Statements

Pro-forma statements do not just contain numbers. They are important reports that can guide the decision-making process of shareholders, investors, and creditors. They can, in fact, affect the way a company does business and help determine whether it succeeds or fails. Managers and owners can benefit from creating pro-forma statements, because they will be able to see how different factors affect their business.

However, it should be remembered that pro-forma statements are just projections. While they can offer insight, they should not be taken as fact.

Learn more about: Business | Corporate | Employment Law

Free Consultation

1 + 1 = ?

Best Applicant Tracking Systems for Businesses of All Sizes

Best Applicant Tracking Systems for Businesses of All Sizes

Find the best applicant tracking systems for startups to enterprises, featuring automation, customization, and advanced candidate management tools. Compare top ATS platforms like Workable, Greenhouse, and Breezy HR to streamline hiring and enhance team efficiency.
How Do I Draft a Contract Termination Letter

How Do I Draft a Contract Termination Letter?

A contract termination letter formally ends an agreement while maintaining professionalism and clarity. This guide outlines key elements, writing steps, and sample templates to ensure a smooth process.
What Should a California Termination Letter Include

What Should a California Termination Letter Include?

A California termination letter must include the termination date, reasons for dismissal, and compensation details while maintaining legal compliance. Clear communication, professionalism, and defined next steps help avoid disputes and ensure a smooth transition.
LLC vs S Corp - Choosing the Best Business Structure

LLC vs S Corp: Choosing the Best Business Structure

Choosing between an LLC and an S Corp impacts taxation, liability, and management structure. Business owners should evaluate growth potential, tax implications, and operational complexity before selecting the best option.
How to Find a Small Business Accountant

How to Find a Small Business Accountant?

A small business accountant helps manage expenses, track income, and ensure tax compliance. Choosing the right accountant improves financial accuracy and supports business growth.
Are verbal agreements binding in California

Are Verbal Agreements Binding in California?

A verbal agreement can be legally binding in California, but its enforceability depends on the circumstances and type of contract. Courts may recognize implied or oral contracts, but proving their existence requires evidence like workplace policies, employment history, or industry standards.
How can you prove a verbal agreement in court

How Can You Prove a Verbal Agreement in Court?

A verbal agreement can be legally binding, but proving its existence requires strong evidence like correspondence, witness testimony, or performance records. Written contracts remain the best way to prevent disputes and ensure enforceability in legal proceedings.
Where Can I Find a Small Business Lawyer Near Me

Where Can I Find a Small Business Lawyer Near Me?

Find a small business lawyer by leveraging professional networks, legal directories, and online resources to compare expertise and pricing. Ask key questions about experience, fees, and communication to ensure the right legal fit for your business.
What Is Promissory Estoppel - Legal Definition and Examples

What Is Promissory Estoppel? Legal Definition and Examples

Promissory estoppel prevents a party from denying a promise when another party has reasonably relied on it and suffered harm. Courts may enforce such promises even without formal consideration to ensure fairness and prevent financial injustice.

See all articles: Business | Corporate | Employment

Best Applicant Tracking Systems for Businesses of All Sizes

Best Applicant Tracking Systems for Businesses of All Sizes

Find the best applicant tracking systems for startups to enterprises, featuring automation, customization, and advanced candidate management tools. Compare top ATS platforms like Workable, Greenhouse, and Breezy HR to streamline hiring and enhance team efficiency.
How Do I Draft a Contract Termination Letter

How Do I Draft a Contract Termination Letter?

A contract termination letter formally ends an agreement while maintaining professionalism and clarity. This guide outlines key elements, writing steps, and sample templates to ensure a smooth process.
What Should a California Termination Letter Include

What Should a California Termination Letter Include?

A California termination letter must include the termination date, reasons for dismissal, and compensation details while maintaining legal compliance. Clear communication, professionalism, and defined next steps help avoid disputes and ensure a smooth transition.
LLC vs S Corp - Choosing the Best Business Structure

LLC vs S Corp: Choosing the Best Business Structure

Choosing between an LLC and an S Corp impacts taxation, liability, and management structure. Business owners should evaluate growth potential, tax implications, and operational complexity before selecting the best option.
How to Find a Small Business Accountant

How to Find a Small Business Accountant?

A small business accountant helps manage expenses, track income, and ensure tax compliance. Choosing the right accountant improves financial accuracy and supports business growth.
Are verbal agreements binding in California

Are Verbal Agreements Binding in California?

A verbal agreement can be legally binding in California, but its enforceability depends on the circumstances and type of contract. Courts may recognize implied or oral contracts, but proving their existence requires evidence like workplace policies, employment history, or industry standards.
How can you prove a verbal agreement in court

How Can You Prove a Verbal Agreement in Court?

A verbal agreement can be legally binding, but proving its existence requires strong evidence like correspondence, witness testimony, or performance records. Written contracts remain the best way to prevent disputes and ensure enforceability in legal proceedings.
Where Can I Find a Small Business Lawyer Near Me

Where Can I Find a Small Business Lawyer Near Me?

Find a small business lawyer by leveraging professional networks, legal directories, and online resources to compare expertise and pricing. Ask key questions about experience, fees, and communication to ensure the right legal fit for your business.
What Is Promissory Estoppel - Legal Definition and Examples

What Is Promissory Estoppel? Legal Definition and Examples

Promissory estoppel prevents a party from denying a promise when another party has reasonably relied on it and suffered harm. Courts may enforce such promises even without formal consideration to ensure fairness and prevent financial injustice.
What is straight-line depreciation and how is it used in accounting

What Is Straight-Line Depreciation and How Is It Used in Accounting?

Straight-line depreciation allocates an asset’s cost evenly over its useful life, ensuring consistent expense recognition in financial statements. Businesses favor this method for its simplicity, accuracy, and alignment of expenses with revenue across accounting periods.
What is net income and how is it calculated in accounting

What Is Net Income and How Is It Calculated in Accounting?

Net income shows a company's profitability after subtracting expenses from revenue, making it a crucial financial health metric. Businesses and investors analyze net income to assess stability, guide decisions, and evaluate overall performance.
What is a lien and how does it affect property ownership

What Is a Lien and How Does It Affect Property Ownership?

A lien is a legal claim on property that secures debt repayment, affecting ownership and financial flexibility. Unpaid liens can complicate sales, refinancing, and creditworthiness, requiring resolution before transferring property rights.
What is a hold harmless agreement and when is it used

What Is a Hold Harmless Agreement and When Is It Used?

A hold harmless agreement shields one party from liability for damages caused by inherent risks in contracts. Common in high-risk industries, these clauses protect businesses, landlords, and contractors from legal claims.
What Does LLC Mean, and What Are Its Benefits

What Does LLC Mean, and What Are Its Benefits?

An LLC provides limited liability protection and pass-through taxation, shielding owners from business debts while simplifying tax obligations. Forming an LLC requires choosing a state, selecting a name, appointing a registered agent, and filing necessary documents.

See all articles: Business | Corporate | Employment

463
© Copyright | Nakase Law Firm (2019)