Pro Forma Financial Statements: Templates and Examples

Pro Forma Financial Statements: Templates and Examples

Deriving from the Latin word “for form”, financial reports are used to create hypothetical scenarios that take into account different situations and their impact on the business. When it comes to accounting, pro forma statements are financial reports for your business based on these hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future, and are very useful for securing funding from investors or lenders.

Pro forma statements appear like normal statements, but as mentioned, they are based on hypothetical situations. For example, if your business secured another £500,000 of funding next year, what would your balances, cash flow and income look like? How would this look different with a £500,000 loan?

Pro forma financial statements are useful tools that business owners, investors, creditors, or decision-makers can use to examine different scenarios/options of future events based on certain financial assumptions.

  • They can help you get financed by showing lenders how exactly you will use their money to grow your business.
  • They can help you plan for the future by allowing you to project and test the best, worst and most probable scenarios in extreme detail.
  • They can help you think ahead to external changes that may impact your business (recessions, legislative changes, or changes to your tax category).
  • You can create pro formas as part of the financial forecast and modelling.

Helpful for planning, these statements allow you to compare multiple options or scenarios simultaneously. This can help you decide between 2 decisions or proposals/strategies. (Essentially, you will be A/B testing for future decisions).

They can be used to project the impact of financial decisions on your company. If you are a startup, you will most likely use them if you need to know various scenarios based on different decisions;

  • If you need funding, and need to show investors various options.
  • If you’re thinking about refinancing debt or changing tax brackets.

For investors, you can present the pro forma statement and show specifically how their money can be allocated in multiple ways to present options to them. Most of the time they are prerequisites for investors.

There are 3 types of pro forma statements; income, cash flow and balance sheet pro forma statements.

Full Year Forecast

Takes into account all financials for the year including up to the present time, then adds projected outcomes for the rest of the year. Helps show investors what finances could look like at the end of the year.

Financing or investment pro forma projection

If you are trying to secure investors or validate a financial valuation of your business, use this to account for an injection of cash from an outside source and how it will impact your business. Also, incorporate any interest payments you must make.

Historical with acquisition

This forecast looks at your financial statements from the past and adds the past financial statements of the businesses you wish to acquire. It merges the two to show what your financials would have looked like if you made the acquisition earlier. You can also show partners what your company might look like if you purchase the other business now.

Risk Analysis

This type of projection examines the best and worst case scenarios and helps you plan for challenges that may arise in the future. For example, what if your main supplier raises prices? How will this impact your business? These forecasts allow you to take these types of external factors into account and plan for various outcomes

How to Create a Pro Forma Statement of Income

  1. Set a sales goal for the period. For example, you may want to increase income by X amount.
  2. Next, create a production schedule that maps out how you’ll achieve this income goal across the time period. For example, you can break down how much income you need to make each month.
  3. Now, plan for specifically how you’re going to reach this production goal you’ve set. You might want to increase your sales staff, raise your pricing, or simply increase the volume of sales per month, maybe using a quota.
  4. Here, you’ll want to calculate COGS, the cost of goods sold. You should deduct this and any other operating expenses from your sales projection.
  5. Compile your pro forma statement using the material listed in the previous steps.

Example:

Pro forma profit and loss statement template
Pro forma profit and loss statement template
Pro forma profit and loss statement template

How to create a pro forma Balance Sheet

  1. Start by transferring the change in retained earnings from your pro forma statement of income across to the balance sheet.
  2. Next, identify any changes or adjustments to your current assets/liabilities that may vary depending on the different sales performance scenarios that you’ve used in your income projection.
  3. Lastly, add assets, owner’s equity, and total liabilities to complete the pro forma balance sheet.

You can incorporate previous balance sheets to display how your business got from “Balance A” (previous) to “Balance B” (new/projected balance). The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Pro forma balance sheet template
Pro forma balance sheet template
Pro forma balance sheet template

How to create a pro forma Cash Flow Statement:

Your pro forma cash flow statement will look very similar to your normal cash flow statement. This means taking data from your income statement, then using the cash flow statement to plan out where your money is going and what you’ll have on hand at a certain time. Remember, the only significant difference between the 2 types of cash flow statements is the adjustments, not the actual calculations.

Your cash flow provides multiple insights into your business. If it is negative, you will not have enough cash on hand to run your business — you’ll need to either raise more money or take out another loan to cover your costs.

If it is positive, this means you’ll have enough extra cash to pay off loans, or save for another investment or acquisition.

  1. Add up your cash-on-hand and cash receipts (i.e. sales, loans, interest income).
  2. Then, note your outgoing cash flows, such as the cost of sales, salaries, etc.
  3. Next, add up all your operating expenses, as well as any other expenses like income taxes and cash disbursements.
  4. Finally, calculate the total cash payments, net cash change, and end cash position to arrive at your completed pro forma cash flow statement.
Pro forma cash flow statement template
Pro forma cash flow statement template
Pro forma cash flow statement template

Always keep in mind that pro forma statements are based on hypothetical scenarios. While they can provide meaningful insight to your investors and for yourself, the projections can vary and end up being inaccurate. You must be careful when creating your forecasts and compliment them with other financial documents to gain a diverse view of your finances from various angles.

Try using a free cash flow management tool such as Airbank. Airbank is a unified financial management solution that marries your bank statements to generate your cash flow statements automatically. That way you don’t have to go through the messy process of waiting for your accounting statements, or transferring and categorising all your transactions yourself.

Airbank allows you to connect your bank accounts, which auto-categorises all your historic transactions. In addition, you can also initiate new payments and have them categorised for your cash flow statements from the get-go as well. Airbank then produces your direct cash flow statement for you in real-time and even lets you input your cash flow forecast numbers in the spreadsheet based on your planned billings.

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