Pro forma Financial Statements
What are pro forma financials?
Pro forma financial statements, also referred to as financial forecasts or projections, are financial reports that forecast the future based on hypothetical scenarios. “Proforma financial statements leverage hypothetical data or assumptions about future values to project performance over a period that hasn’t yet occurred” (Miller, 2021).
What do proforma financial statements show?
They utilize assumptions to show what a business’s financial statements will look like over a certain period, provided the deductions are made while preparing them to hold. For example, a company’s proforma financials may include projected revenues, estimated expenses, or cash flow for 3-5 years. They could mean an income statement, cash flow statement, or balance sheet.
Proforma financials “can look forward of backward forward or backward, revealing financial information that standard financial statements simply cannot provide” (Durrenberger, 2020). Types of proforma statements include:
- Full-year pro forma projections include a company’s year-to-date results and expected results for the remainder of the year.
- Historical with acquisition: This is a backward-looking projection of a business’ results in one or more prior years and helps determine a prospective acquisition’s financial impact.
- Financing or investment: Companies seeking funding may use these to show potential investors how the company’s results will change once funding is received.
- Risk analysis: Businesses can use this approach to model a business’s best-case, worst-case, and most likely scenarios. They allow companies to see the financial impact of different decisions and how they can mitigate those risks.
What are proforma financial statements based on?
The format and calculations for creating pro forma financial statements do not differ meaningfully from regular financial reports. Instead, the main difference lies in the assumptions and adjustments made about the various inputs. Thus, proforma financial statements are based on hypothetical scenarios that utilize theoretical data and assumptions to project the most likely outcome for a business.
What are the strategic benefits of making financial projections on the pro forma statements?
There are many strategic benefits to producing pro forma financial statements. These include:
- Decision making: Proforma financial provides a way for businesses to test out situations they think may happen in the future, allowing them to make decisions from an informed perspective. They also help gauge the impact of financial decisions. For example, a company may use proforma financial statements to assess potential earnings from a proposed business change. This change may be an acquisition, merger, or debt refinancing.
- Business planning: Pro forma financials helps businesses look at side-by-side comparisons based on different assumptions. Thus, this helps them decide between proposals or potential strategies. In addition, they allow companies to anticipate change and plan for the future.
- Financial modeling: Pro forma financials provides data for building economic models that help test the assumptions and relationships of proposed plans. They help study the impact of variables such as the cost of labor and materials on the company to achieve goals.
- Attracting potential investors or lenders: Pro forma financials help businesses show potential lenders and investors the value of financing the business. They consider an injection of cash from an outside source. Further, they show how the money will sustainably grow the company and the repayment plan.
Check the following reference articles to learn more about the Pro forma Financial Statements.
- Durrenberger, J. C. (2020, February). What Are Pro Forma Financial Statements? Examples & How to Create Them. Embarkwithus.Com. (URL)
- Miller, K. (2021, October 28). What Are Pro Forma Financial Statements? | HBS Online. Business Insights – Blog. (URL)
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