Pro forma Definition Financial Edge Training

They’re a way for you to test out situations you think may happen in the future to help you make business decisions. They create pro forma statements combining their own historical financial information with that of the acquisition target. This enables them to better understand the combined entity’s future financial performance and potential synergetic effects.

For this reason, investors must examine not only the pro forma earnings, but also GAAP earnings, and never mistake one for the other. GAAP enforces strict guidelines when companies report earnings, while proforma example pro forma figures are better thought of as hypothetical earnings. Now that we understand what a pro forma is and why they’re so uniquely insightful, let’s zoom in on how companies can use them.

Creating a pro forma cash flow statement

Before acquiring another business, investing in new equipment, or taking on new debt, businesses draft forward-looking pro forma financial statements to understand the effect. Unlike traditional financial statements that explain the past, pro forma documents usually look forward and rely on financial modeling and speculation. Despite their limitations, pro forma financial statements have a place in financial planning and forecasting. However, recognizing their limitations and staying cautious in the decision-making process is key to fully leverage their value while avoiding potential pitfalls.

The difference is that the financial forecast details the company’s expected results of operations as a single-point estimate or a range. The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses. Pro Forma financial statements are other forms of financial reports that organizations issue to present financial assumptions with past accounting and financial statement analysis results as their basis. These documents have three general types, including pro forma income statement, pro forma balance sheet, and pro forma cash flow statement. The most common pro forma financial statements are projected balance sheets, income statements, and cash flow statements. Together, the documents help you assess whether your business’s financial health improves, declines, or remains the same following the decision.

Q: Does Google Sheets have a pro forma template?

Accountants, management consultants, and entrepreneurs are the usual professionals who produce pro forma documents. On the other hand, management consultants utilize pro forma documents as tools that set the decision criteria in studying and acquiring financial assets. Meanwhile, entrepreneurs use these documents to attract potential investors or to appeal to other funding sources. The sample pro forma statements below may look different from the statements you create, depending on what your template looks like.

• Accountants, management consultants, and entrepreneurs are the usual professionals who produce pro forma documents.
• Our forecasts are just a method for us to populate the income statement with where we think the numbers might land.
• Start composing your pro forma by projecting your company’s overall sales and costs of goods sold (COGS).
• Comparison of pro forma and actual financial statements can help them to appraise whether these planned actions are in their best interest.
• We forecast that our sales will increase by 20% in each year of the forecast period.
• Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money.

Our pro forma cash flow statement predicts healthy cash flow throughout the three-year period. Alternatively, suppose that Gary Components creates a proforma invoice that includes the price of the computer monitors, the delivery date, and the payment terms. Now the buyer has room to negotiate with the seller to find mutually agreeable terms. Upon agreeing, Gary Components sends a proforma invoice as a document of good faith and starts manufacturing the computer monitors. Once the manufacturing is complete, the proforma invoice can be converted into a sales invoice using invoicing software or an accounting tool.