Pro forma statements are estimated financial figures for a company’s business operations, including income statements, balance sheets, and cash flow statements. They inform shareholders and help managers make financial decisions. These statements require planning and estimating potential earnings, and are often used in business plans to secure financing. The income statement is the most important, while the balance sheet shows projected assets, liabilities, and equity. The cash flow statement lists expected cash inflows and outflows.
Pro forma statements represent estimated or projected financial figures for a company’s business operations. The three most common pro forma financial statements are the income statement, balance sheet, and statement of cash flows. Publicly traded companies commonly issue pro forma statements to inform shareholders and other business stakeholders of management’s expectations regarding future business earnings. These statements can also help internal business managers prepare reports and make financial decisions regarding business operations.
Pro forma is a Latin term meaning “for the sake of the form.” Pro forma statements require business owners, directors, and managers to spend time planning and estimating potential earnings from current or planned business operations. Many entrepreneurs and small business owners prepare these statements when writing their business plan. A business plan includes expected profits and other projected financial information to secure external financing from banks, lenders, and investors. Business owners can use professional help, such as management consultants, business plan writers, or public accounting firms, when preparing pro forma reports and statements.
The income statement is perhaps the most important of all pro forma statements. This statement contains projected sales revenue, discounts, returns, and allowances related to various goods or services sold by the company. The next section of the pro forma income statement is the cost of goods sold. Cost of goods sold includes only costs directly related to inventory or other items sold to consumers. The third and final section of the income statement contains the various expenses related to daily business operations.
A pro forma balance sheet contains projected balances of assets, liabilities, and owner’s equity or retained earnings owned or owed by the business. Assets and liabilities are commonly divided into two groups: current and non-current. Current assets include cash, inventories, accounts receivable, and other items that are expected to be used in less than one year. Current liabilities show all accounts payable and other short-term financial obligations due within one year. Current assets and liabilities are an important element of the pro forma statements, as they are expected to change frequently over the next few months.
Non-current assets include all items owned by the company that are not expected to be used in the next 12 months. Non-current liabilities are all long-term debt obligations, such as mortgages or financial loans, that do not mature in the next 12 months. Owner’s equity or retained earnings will reflect the expected economic value added from the company’s business operations.
The pro forma cash flow statement typically lists all expected future cash inflows and outflows from various business operations. Operations included in the statement of cash flows include operations, financing, and investing. This information helps businesses create budgets and other financial roadmaps to maintain positive cash flow throughout the business year.
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