Pro-Forma Financial Statements: How to Create a Pro Forma Statement?

Planning a business venture without a financial plan can be daunting. But pro forma financial statements can be the perfect solution here. Pro forma financial statements are hypothetical projections used in financial planning to forecast a business’s financial performance based on certain assumptions and scenarios.

These statements differ from actual financial statements, which reflect historical data. They are crucial for making informed decisions, setting realistic expectations, and strategizing business growth.

This article provides a comprehensive guide on what are pro forma financial statements and how to create your own pro forma financial statements, ensuring you’re ready for what lies ahead.

Pro Forma Financial Statement

Despite their speculative nature, pro forma statements are valuable for presenting potential financial outcomes to investors or lenders. It shows the financial viability of future projects or the overall growth prospects of a business. Let’s learn this concept better here.

What are pro forma financial statements?

A pro forma financial statement is a tool businesses use to forecast their financial health and performance in the future. These statements rely on assumptions and projections rather than past or current data. They help business owners understand how different decisions and scenarios might affect the company financially.

Below given the example for pro forma income statement for the period ending 31st December to 2025:

How do pro forma financial statements differ from actual financial statements?

Pro forma financial statements and actual financial statements serve different purposes and rely on different data sets. Here’s a simple breakdown of how they differ:

Benefits of using pro forma financial statements

Pro forma financial statements have multiple benefits, especially when planning and strategizing for the future of a business. These documents help businesses in several key ways:

• They enable companies to plan their future, considering scenarios like expansion, mergers, or new product launches. By forecasting financial outcomes, businesses can set realistic goals and strategies.
• Pro forma statements allow businesses to identify potential risks and assess the impact of various risk factors on their finances. It helps in mitigating risks before they become problematic.
• These statements are crucial for attracting investment. They provide investors with a vision of future profitability and growth, helping them make informed decisions about where to allocate their funds.
• When applying for loans, pro forma financial statements can demonstrate to lenders your business’s potential for repaying the loan, thus increasing the chances of approval.
• They are essential for effective budgeting, helping businesses allocate resources efficiently and plan for future financial needs.
• Businesses can use pro forma statements to analyze the financial effectiveness of operational changes, such as cost reductions or changes in pricing strategies.
• These statements allow businesses to understand how external market changes, like consumer demand shifts or economic environment changes, could impact their financial future.

What are the three basic types of pro forma financial statements?

The three basic types of pro forma financial statements each serve a unique purpose in business planning and financial forecasting. Here’s a simple breakdown of what each statement represents and why they’re important:

• Pro Forma Income Statement – This provides a snapshot of how much money a business expects to make and spend over a certain period. It projects future revenues, cost of goods sold (COGS), and expenses to show potential profits or losses. The pro forma income statement helps businesses predict their financial health, making it easier to plan for growth or adjust strategies if necessary.
• Pro Forma Balance Sheet – Consider this as a future glance at a company’s financial standing at a specific time. It lists projected assets, liabilities, and shareholders’ equity, giving a comprehensive view of the company’s financial situation. This statement is crucial for assessing the company’s ability to meet its financial obligations, manage its debt, and grow its equity.
• Pro Forma Cash Flow Statement – This statement forecasts the cash inflows and outflows from operations, investing, and financing activities. It helps businesses anticipate their ability to generate cash and fund operations. And that is vital for maintaining liquidity and helping the business cover its short-term obligations and invest in future growth opportunities.

How to Choose the Right Scenarios for Pro Forma Statements

Start by determining why you’re creating the pro forma statement. Is it for business expansion, fundraising, or another reason? Your purpose will guide the types of scenarios you’ll want to consider. For instance, if you plan to expand your business, you must project how this expansion could impact your revenues and expenses.

It’s important to consider different scenarios to understand the potential outcomes of your plans. Typically, businesses look at optimistic, pessimistic, and moderate scenarios:

• Optimistic Scenarios: Show what happens if everything goes better than expected, such as higher sales or lower costs.
• Pessimistic Scenarios: Reflect on the outcomes if things don’t go as planned, helping you prepare for challenges.
• Moderate Scenarios: Given current data and trends, offer a middle-ground projection based on the most likely outcomes.

You must ensure that the scenarios you choose align with your long-term business goals and the trends in your industry. For example, if you want to capture a larger market share, your projections should account for the necessary increase in sales and market penetration efforts. Similarly, if your industry is facing a downturn, your pessimistic scenario should reflect the potential impact of that trend on your business.

How to create a pro forma financial statement?

Creating a pro forma financial statement involves projecting your business’s future finances based on assumptions about what will happen. Here’s a straightforward guide to crafting accurate and useful pro forma statements:

• Start with Historical Data – Your past financial performance provides a solid foundation. Use historical income statements, balance sheets, and cash flow statements as a starting point for making projections.
• Be Realistic – When forecasting revenues, expenses, and other financial metrics, it’s crucial to base your projections on realistic assumptions. Consider current market conditions, your business’s growth rate, and industry trends. Overly optimistic or pessimistic forecasts can lead to poor decision-making.
• Conduct Sensitivity Analysis – This involves changing one assumption at a time (e.g., sales volume, price, cost of materials) to see how it affects your financial outcomes. Sensitivity analysis helps identify which variables impact your business’s financial health most, allowing you to plan for different scenarios.
• Regular Updates – The business environment changes, so update your pro forma statements regularly. It could mean adjusting for new market conditions, changes in your business operations, or after reaching significant milestones. Keeping your projections current ensures they remain a useful tool for decision-making.
• Seek Professional Help – Crafting accurate pro forma statements can be difficult, especially if you’re unfamiliar with financial modeling. Consider hiring a financial advisor or accountant who can provide expertise and insights. They can help ensure your projections rely on sound financial principles and realistic assumptions.

FAQs

Here are some frequently asked questions about pro forma financials:

What are the financial methods used to create a pro forma operating budget?

Financial methods to create a pro forma operating budget often include historical trend analysis, zero-based budgeting, and activity-based budgeting. Historical trend analysis uses past financial performance to project future budgets. Zero-based budgeting starts from a “zero base”, with all expenses needing justification for inclusion.

Which is the simplest method to prepare a pro forma income statement?

The simplest method to prepare a pro forma income statement, considering what are pro forma financial statements, is the percentage of sales method. This approach assumes that most of the company’s expenses in the future will maintain a consistent relationship with sales.

What is the first step in preparing pro forma financial statements?

The first step in preparing pro forma financial statements is to gather and analyze historical financial data. It includes reviewing past income, balance sheets, and cash flow statements to understand trends, expense ratios, and revenue growth. This historical analysis forms the basis for making accurate projections.

What are the steps to form a pro forma balance sheet?

To form a pro forma balance sheet, start by forecasting future operations to estimate net income, then project changes in assets, liabilities, and equity. This process highlights what are pro forma financial statements: strategic tools for predicting financial status and making informed business decisions.

Make Informed Business Decisions With Eqvista!

Creating pro forma financial statements is a critical process for businesses planning for the future. These statements allow companies to forecast their financial performance under various scenarios, helping in decision-making, financial planning, and investment analysis.

If you want your business to streamline this process, Eqvista offers multiple services that can help. With tools for cap table management, share issuance, and financial modeling, Eqvista makes it easier for companies of all sizes to manage their equity and financial projections efficiently.

Our platform supports businesses in staying organized, making informed decisions, and sharing crucial financial information with stakeholders. Learn more about how Eqvista can assist your business in managing its financial future. Contact us now!