A pro forma balance sheet projects a company’s assets, liabilities, and equity accounts and is used for business plans, loans, financial planning, and performance comparison. It follows the standard accounting equation and divides assets and liabilities into current and long-term categories.
Along with the income statement and statement of owner’s equity, the balance sheet is one of the three most common financial statements used by businesses. A pro forma balance sheet represents a future projection of a company’s assets, liabilities, and equity accounts. This type of balance sheet is mainly used when creating a business plan, when trying to acquire a business loan, or for financial planning purposes.
Pro forma balance sheets are often created and included in business plans when a new company is starting up or when a company is expanding. This plan outlines the financial projections that the owners of the business expect. When a new company is trying to get started, the company carefully predicts what the bottom line will look like in a year or two. This allows investors to see what the company expects in the future. Investors often look at the entire business plan when deciding whether to invest.
Banks and other lending institutions often require pro forma statements from companies applying for loans. This is because a pro forma balance sheet helps lenders determine a company’s ability to pay debts at future dates. When a company is considering a merger, a pro forma balance sheet is also commonly used.
Companies may create pro forma balance sheets for performance purposes. A pro forma balance sheet is created and then compared to the organization’s actual balance sheet as of the date indicated on the pro forma form. This process gives companies the opportunity to compare projected performance with actual results and offers the opportunity to improve profitability.
A balance sheet is established to follow a standard accounting equation: assets = liabilities + net worth. A pro forma balance sheet is designed in the same format as a typical balance sheet and contains the same three sections: assets, liabilities, and owner’s equity. It also divides assets into two subcategories: current and long-term.
Current assets are short-term assets. Any asset that can be converted to cash within one year is considered a current asset. Long-term assets contain larger items, including fixed assets, such as any property, plant, and equipment owned by the business. Liabilities on a pro forma balance sheet are also divided into short-term and long-term categories. Debts that will be paid off in less than a year are short-term, and debts that will be paid off in less than a year are considered long-term.
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