What are Pro Forma Financial Statements: Ultimate Guide

You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now. 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 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.

• Effective business planning hinges on the ability to foresee and navigate potential financial scenarios.
• Pro forma cash flow for the medium-term refers to estimating revenues for items that haven’t been billed as well as expenses needed to support the revenue.
• In the business lending world, lenders will look at a company’s pro forma balance sheet to determine the debt-to-equity ratio for additional lending.

Pro forma statements show the underlying assumptions about the shipment and what the documentation will look like if the assumptions are proven true. Simply, a “pro forma invoice” is a “confirmed purchase order” where buyer and supplier agree on detail and cost of the product to be shipped to the buyer. A pro forma invoice is generally raised when the seller is ready for dispatching the material but they want to ensure that the payment is being sent before dispatch. And similarly, the customer also wants to know which components are included in the pro forma invoice to avoid disagreements later. 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.

It’s not called “amateur forma” for a reason

This is a form of A / B testing for strategic business management and planning. Pro forma is a Latin term that means “for the sake of form” or “as a matter of form,” but in modern parlance, it has come to mean a standard document, form, or financial statement. GAAP’s goal is to ensure a company’s financial statements are complete, consistent, and comparable, no matter what their industry or business sector.

• 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.
• You can also assess these potential strategies, investments, and other partnership opportunities.
• They have articles governing the preparation of pro forma financial statements for public companies.
• However, for all regular income statements presented in a filing, there must also be a pro forma statement.

This allows investors and partners to see the financial status of the company at the end of the fiscal year. For example, in its fiscal year 2021 annual report, Best Buy (BBY) noted a $21 million price-fixing litigation settlement, received in relation to products purchased and sold in prior fiscal years. Because this is a nonrecurring item, the company subtracted this gain from its operating revenues in its pro forma income statement, to report a “non-GAAP operating income” of $2.7 billion. They have multiple uses for multiple scenarios, ranging from sales growth projections and risk analysis to more intricate M&A or investment purposes. Unfortunately, most organizations don’t have a fleet of battle-tested CPAs to fully leverage pro formas, especially startups and small businesses.

Unknown Future

This is considered an estimate of the expected cash flow at a particular point in the future. 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. A pro forma invoice is the same as a commercial invoice, which, when used in international trade, represents the details of an international sale to customs authorities.

What is the purpose of a pro forma statement?

The documents are often used to express interest in business transactions or reveal the intended purpose and outcome of the transaction. Pro forma is Latin for “as a matter of” or “for the sake of form.” It is used primarily in reference to the presentation of information in a formal way, assuming or forecasting pieces of information that may be unavailable. Using pro forma results to grossly misconstrue GAAP-based results and mislead investors is deemed by the U.S. Securities and Exchange Commission (SEC) to be fraudulent and punishable by law. Pro forma financials in the United States boomed in the late 1990s when dot-com companies used the method to make losses appear like profits or, at a minimum, to reveal much greater gains than indicated through U.S. The Millers’ Trump-endorsed ally, former GOP gubernatorial nominee and current congressional candidate Darren Bailey, also signed the loyalty oath.

When your financial statements are put into pro forma financial statements, you adjust material charges, credits, and tax effects to the transactions. In other words, you get an idea of what your financial results would have been if the event had already occurred. These are factually supported by the data from the original financial statements. Often, the difference between a past balance sheet capital losses and a pro forma balance sheet is that the pro forma balance sheet reports additional periods, sometimes even interim figures. Public companies that prefer to use a condensed combined balance sheet can use this template to create their own condensed balance sheet. A normal balance sheet covers two years, but it is reasonable for a pro forma balance sheet to cover four years of operations.

What types of pro forma financial statements are commonly used?

Pro forma statements of cash flow estimate how much cash inflow and outflow is expected in one or more future periods. Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding. In the case of estimated cash overages, the company can produce a plan for investment.

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These are like regular financial statements, except they deal with hypothetical future financial situations. They are both important in terms of financial reporting, but they differ in terms of what they communicate. Before delivering an actual invoice, send a client a pro forma invoice that lists the cost of the goods and services you’re planning to provide. A pro forma invoice isn’t binding; it’s a way to make sure you and the client are on the same page before agreeing to the transaction. Management’s responsibility is to never get caught by surprise, anticipate changes and always be prepared for upcoming conditions.

We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English. Pro forma results may contain adjustments to GAAP numbers in order to highlight important aspects of the company’s operating performance. State election records show that Trump’s other GOP primary opponents, former South Carolina Gov. Nikki Haley and former New Jersey Gov. Chris Christie, did not sign the state loyalty oath. Challenges against Trump are pending in 15 other states, according to an organization tracking them, and his name has for now been struck from the ballot in two others — Colorado and Maine.