Pro Forma Financial Statements: Definitions, Examples and How To Create One
In finance, you have your pro forma financial statements. Think of these as forecasted statements. They’re based on objective information, your presumptions and hypothetical scenarios.
What Is Pro Forma?
You develop pro forma financial statements when forecasting. This enables your stakeholders to look into the future and analyze different “what-if” scenarios (what may occur) in comparison to your standard, historical financial statements (what has occurred). Merriam-Webster defines pro forma as “made, or carried out as a formality, or based on financial assumptions or projections.”
In your pro forma financial statements, you may add anomalies (“What if a merger happens?”) or remove ones (“What if that recent major one-time expense which won’t reoccur hadn’t happened?”) that could misdirect your audience from understanding your company’s true financial outlook.
Since pro forma financial statements aren’t prepared using historical events, they aren’t compliant with generally accepted accounting principles (GAAP). This means you can’t use these when filing for taxes. And while they resemble standard financial statements, you must clearly label “pro forma” on them so your audience knows they’re looking at only projections—not real events.
Different Types of Pro Forma Financial Statements
These are the three most common pro forma financial statements: pro forma income statements, pro forma balance sheets and pro forma cash flow statements.
To Create a Pro Forma Income Statement, You Need:
Current revenue figures
Current expense figures
Key assumptions (company growth, competitor activity, fluctuations in the economy, etc.)
Budget documents: estimates of a business’s revenues and expenses to make plans
Earnings projections: estimates of a business’s future earnings
Key Takeaways
Pro forma income statements are projections of your standard financial statements.
The three most common pro forma financial statements: pro forma balance sheet, pro forma income statement and pro forma cash flow statement.
Pro forma income statements aren’t created using generally accepted accounting principles (GAAP) and aren’t reviewed by an independent governing body.
What Are the Limitations Of Pro Forma Statements
No Regulation: Because these aren’t reviewed by an independent governing body, they’re not as trusted as your standard financial statements.
Misleading Information: If you include presumptions and hypothetical scenarios that aren’t based on objective information, you risk misleading your audiences from your company’s true financial outlook, which is a crime punishable by law.
Importance of Pro Forma Statements
When developed from objective information through financial models, you can forecast different scenarios for your company. By looking into the future, you can anticipate problems, such as times when you need to borrow cash, or opportunities, such as demonstrating to potential investors how you’d use their investments.
