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

6 + 0 = ?

Family Member Stealing from Business

The best way to reduce the chance of embezzlement from a family business is to provide education to all employees, implement strict rules about how the company’s assets and funds can be used, and put in place controls that will spot wrongdoing immediately.

Director Stole Money from Company

An example of embezzlement is when a corporate director took money from a cash register and used the funds for his benefit.

Can You Force a Business Partner Out?

Partnership agreements and partnership law guide business partnerships. The partnership agreement determines when and how one partner may force another out of the business. Business partnership law controls the procedure for forcing a partner out if there is no partnership agreement.

Can I Take My Business Partner to Court?

You can take a business partner to court by suing the partner. You may use the business partner for embezzlement, breach of fiduciary duty, fraud, or negligence.

7 Tips for Buying Out a Business Partner

There are many reasons to buy out a business partner, including giving you complete control of the company. The steps for buying out a business partner include: 1) Determining the assets you’re buying, 2) Clear communication, 3) Hire an attorney and CPA, 4) Retain expert in business valuation, 5) Draft a partnership buyout agreement, 6) Determining buyout financing…

What to do if someone breaks a verbal agreement?

If someone breaks a verbal agreement, the first thing to do is to determine if the verbal agreement is valid. If the agreement is valid, hire and lawyer and sue for money damages or specific performance.

How to Register a Business Name in California

To register a business name in California, check if an existing business already uses the name. Then, register the business name with the California Secretary of State if the company is going to be an entity. Register the business's name with the city’s county recorder if the business is not an entity.

Is a Verbal Contract Enforceable in California?

A verbal contract is generally enforceable in California, with some exceptions. Two of several exceptions to enforcing oral contracts are contracts that involve real estate leases, buying or selling real estate.

7 Best Women Business Organizations

For women business owners, it is critical to develop connections with fellow professionals in order to create useful networks. There are plenty of associations that support women, and which can be very beneficial for small business owners looking for advice and fellowship.

5 Unsecured Business Credit Cards for Startups

What is an unsecured business credit card? An unsecured credit card does not require a personal guarantee from the business owner. Small business owners prefer an unsecured credit card.

10 Facts About Business Before Starting A Business

1) More than 50% of new businesses survive their first year in business. 2) Less than 50% of family-owned businesses are passed to their children. 3) 40% of business experience challenges in the supply chain…

Advantages of Buying an Existing Business

Starting a new business is challenging. Buying an existing business has its advantages, including knowing what is already there and improving on it: trained employees, existing customers, and operating expenses.

SBA CAPLines

SBA CAPLines are SBA lines of credit that help a small business improve short-term cash flow. The SBA CAPLines have four types of credit: 1) Seasonal CAPLine, 2) Contract CAPLine, 3) Builders CAPLine, and 4) Working CAPLine.

Deceit Definition | Definition of Fraud

Deceit as defined is tortious fraud or deceit occurs when a party “willfully deceives another with the intent to induce him to alter his position to his injury or risk.” Civ. Code § 1709. Fraud has three meanings: 1) A person made a false promise, 2) A person conceal important facts, and 3) A person intentionally misrepresent an important fact.

Is Small Business Loan Secured or Unsecured

Although a small business loan may be secured or unsecured, nearly always, the loan is secured. The bank loans are nearly always secured by the business’s accounts receivable, intangible assets, and tangible property, if any exists.

See all articles: Business | Corporate | Employment

Family Member Stealing from Business

The best way to reduce the chance of embezzlement from a family business is to provide education to all employees, implement strict rules about how the company’s assets and funds can be used, and put in place controls that will spot wrongdoing immediately.

Director Stole Money from Company

An example of embezzlement is when a corporate director took money from a cash register and used the funds for his benefit.

Can You Force a Business Partner Out?

Partnership agreements and partnership law guide business partnerships. The partnership agreement determines when and how one partner may force another out of the business. Business partnership law controls the procedure for forcing a partner out if there is no partnership agreement.

Can I Take My Business Partner to Court?

You can take a business partner to court by suing the partner. You may use the business partner for embezzlement, breach of fiduciary duty, fraud, or negligence.

7 Tips for Buying Out a Business Partner

There are many reasons to buy out a business partner, including giving you complete control of the company. The steps for buying out a business partner include: 1) Determining the assets you’re buying, 2) Clear communication, 3) Hire an attorney and CPA, 4) Retain expert in business valuation, 5) Draft a partnership buyout agreement, 6) Determining buyout financing…

What to do if someone breaks a verbal agreement?

If someone breaks a verbal agreement, the first thing to do is to determine if the verbal agreement is valid. If the agreement is valid, hire and lawyer and sue for money damages or specific performance.

How to Register a Business Name in California

To register a business name in California, check if an existing business already uses the name. Then, register the business name with the California Secretary of State if the company is going to be an entity. Register the business's name with the city’s county recorder if the business is not an entity.

Is a Verbal Contract Enforceable in California?

A verbal contract is generally enforceable in California, with some exceptions. Two of several exceptions to enforcing oral contracts are contracts that involve real estate leases, buying or selling real estate.

7 Best Women Business Organizations

For women business owners, it is critical to develop connections with fellow professionals in order to create useful networks. There are plenty of associations that support women, and which can be very beneficial for small business owners looking for advice and fellowship.

5 Unsecured Business Credit Cards for Startups

What is an unsecured business credit card? An unsecured credit card does not require a personal guarantee from the business owner. Small business owners prefer an unsecured credit card.

10 Facts About Business Before Starting A Business

1) More than 50% of new businesses survive their first year in business. 2) Less than 50% of family-owned businesses are passed to their children. 3) 40% of business experience challenges in the supply chain…

Advantages of Buying an Existing Business

Starting a new business is challenging. Buying an existing business has its advantages, including knowing what is already there and improving on it: trained employees, existing customers, and operating expenses.

SBA CAPLines

SBA CAPLines are SBA lines of credit that help a small business improve short-term cash flow. The SBA CAPLines have four types of credit: 1) Seasonal CAPLine, 2) Contract CAPLine, 3) Builders CAPLine, and 4) Working CAPLine.

Deceit Definition | Definition of Fraud

Deceit as defined is tortious fraud or deceit occurs when a party “willfully deceives another with the intent to induce him to alter his position to his injury or risk.” Civ. Code § 1709. Fraud has three meanings: 1) A person made a false promise, 2) A person conceal important facts, and 3) A person intentionally misrepresent an important fact.

Is Small Business Loan Secured or Unsecured

Although a small business loan may be secured or unsecured, nearly always, the loan is secured. The bank loans are nearly always secured by the business’s accounts receivable, intangible assets, and tangible property, if any exists.

5 Steps on How to Build Business Credit with Bad Personal Credit

It is challenging but not impossible to build business credit if an entrepreneur has bad personal credit. A good credit score can set a business up for success. Even if a business owner has a poor personal credit score, he or she should still try to build up their company’s credit score.

3 Advantages of Balance Sheet

The benefits of a balance sheet assist business owners in having an overview of their income, assets, and liabilities. A balance sheet is necessary for lenders to determine how much money to loan a company.

How to Select an Entity Type For A Business

There are many factors when selecting an entity type for a business. Entrepreneurs should consider control, investors or shareholders, taxation, growth, and future needs.

How to Sell on Facebook Marketplace as a Business

Facebook Marketplace is a business service that lists and sells services and products. The marketplace is free for individuals. Businesses pay a 5% fee on services or products sold.

What does principal mean on a loan?

A loan principal is the amount of money that is borrowed. For example, when a bank approves and loans a person or business $100,000, that $100,000 is the loan principal.

What is a micropreneur mean?

Some popular types of micropreneurs include Airbnb hosts, bloggers, life coaches, tutors, and photographers.

Payment Upfront Meaning & 5 Tips for Getting Upfront Payments from Customers

Upfront payments can be beneficial to many small business owners. Upfront payments protect the owner emotionally and financially. There is no fear of customers disappearing without paying for products or services. It is also a great method by which to build trust with customers. It can also help improve cash flow, thereby letting the business grow and flourish.

See all articles: Business | Corporate | Employment

© Copyright | Nakase Law Firm (2019)