Pro Forma Income Statement What Is It, Examples, Types

A pro forma cash flow statement is a financial report that shows projected cash flow generated from business operations. Correctly estimating expenses, revenue, and profit is imperative for financial planning and management. An accountant would design pro forma financial statements ahead of a planned business transaction.

Not GAAP compliant

This pro forma projection is useful to investors and lenders, who want reassurance that your business is slated for profitability. Extensive research and review of prior financial statements are necessary to arrive at the best assumptions. Unrealistic assumptions will lead to inaccurate and unreliable pro forma statements.

These things could vary from declining investment values and restructuring costs. Or perhaps adjustments made on the business balance sheet that fix a previous accounting error. A company’s pro forma financial statement may contain figures or calculations that are not in line with the UK GAAP. Pro forma financial statements can be prepared separately or in a set like general-purpose financials.

A pro forma financial accounting statement estimates a company’s financial future and aids management in decision-making. It may include projected revenues, assets, liabilities, expenses, and equity and can be used with other financial statements like income statements and balance sheets. A company plans to expand its operations by opening a new manufacturing facility. They prepare pro forma financial statements to estimate the impact on future revenue, expenses, and profitability, considering various factors such as initial investment, operating costs, and expected sales. This helps them align their growth strategy and make informed decisions on whether or not to proceed with the expansion.

Standard computes the three-year average for the income statement balances listed below. Pro forma statements are created using Excel or other financial software tools. On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment. That’s because they might derive their numbers using very different economic and financial assumptions and techniques. The template calculates Net Cash Flow by subtracting Total Cash Outflow from Total Cash Inflow for each period, then updates the Cash Balance accordingly. This is essential for monitoring liquidity and ensuring the business can sustain operations without running into cash shortages.

Investors, lenders, and other stakeholders rely on GAAP financial statements. A business valuation analysis should clearly state if pro forma financial statements are used. Standard Brands is a CPG company whose owner is building a pro forma income statement for 2025.

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Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now. Let us look at the various types of the pro forma income statement in business plan. Pro forma statements are always future-based, while actual statements are about what has already happened.

This is because sometimes pro forma figures vastly differ from statements generated within a UK GAAP framework. Pro forma is actually a Latin term, which translates to “as a matter of form” or “for the sake of form”. But when put in a business context, it is a method of calculating financial results using certain presumptions or projections. You may be looking to highlight certain aspects of your finances for potential investors.

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• Keep in mind, it is illegal to use pro forma financials to mislead investors.
• The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements.
• This enables businesses to evaluate the potential impact of new product launches, expansions, or other strategic decisions, making them essential tools for planning and decision-making.

This type of pro forma projection can help to show investors or partners what the company’s business finances could look like. A full-year pro forma projection takes into account all of a business’s financials for the fiscal year up until the present date. Pro forma statements heavily rely on assumptions, which can significantly impact the projected results. Small changes in these assumptions, such as sales growth rates or expense estimates, can lead to vastly different outcomes. Accountants and business management use each financial statement to analyze business performance and predict future performance in different ways.

Helps with decision-making and strategic financial planning

• It looks at the likely amount of cash flowing into and out of the business over a future period, based on different scenarios.
• Alternatively, we likely won’t sell a $100,000 service with a couple of Google ads – although it could be the first step.
• GAAP requirements are often omitted from pro forma statements because they result in more negative reporting.
• Pro forma financial statements are a common type of forecast that can be useful in these situations.

A pro forma invoice is a preliminary sales document that is issued to customers before the shipment of goods or delivery of services. It provides an overview of the transaction, including details such as the description and quantity of goods, their value, and other pertinent information required by customs officials. Management uses these reports regularly in the course of business and only occasionally issues them to outside investors and creditors. Rho is what is a proforma income statement a business banking platform that offers everything companies need to manage their cash and grow their businesses. It can help you manage bill pay, track vendor payments, and maintain cash flow.

For example, a one-off large expenditure on machinery and equipment can skew the financial results during the period when the equipment is acquired. If you’re ready to try this process independently, you’ll generally need to use spreadsheet software like Microsoft Excel to put the pro forma together. If you’re not familiar with spreadsheets, then it will be another learning curve to overcome. After all, we still need to pay salaries, rent, utilities, and any other required costs. To illustrate why this distinction matters, let’s imagine you and I start a business, and in the beginning, we expect sales to be relatively low; say one hundred units.

Alternatively, a cash flow statement tracks actual cash inflows and outflows rather than accounting-based revenue and expenses. If you are considering acquiring another company or pivoting the direction your business is headed, you’ll want to understand how that will impact your income. Creating a pro forma cash flow statement can help you determine how quickly you will become liquid after this transaction, and you can also determine how many more liabilities it will create. While actual financial statements show how a business has performed in the past, pro forma financial statements project how a business will perform using hypothetical scenarios. No one can accurately predict the revenues to be generated or the expenses to be incurred at the end of any given period down to the dollar. However, a realistic forecast is still possible — and this forms the foundation of pro forma financial statements.

For instance, a tech company might have shown pro forma profits by leaving out stock-based compensation expenses, even though these represent real costs to shareholders. Companies occasionally create pro forma versions of past financial statements that leave out unusual events to show what they think the picture would have looked like otherwise. For example, if a retailer had a one-time insurance payout from storm damage, it might present pro forma earnings without this payment to show its typical operating performance. By allowing publicly traded companies to adjust for one-time expenses or non-recurring events, it provides a clearer picture of ongoing performance in compliance with GAAP. By excluding anomalies, such as a legal settlement, these statements present a more accurate view of current and future financial health.

However, ongoing litigation might be a regularly occurring cost in some businesses, such as medical devices, and should be reported as a normal cost of doing business. Then estimate all of your costs and liabilities, such as loans, rent, payroll, taxes, etc. This statement would then be used as a model of what may happen in the future if they were to purchase the other business now or in the near future. Pro forma statements are used to present expected corporate results to outsiders. Pro formula financials are not calculated using the standard United Kingdom generally accepted accounting principles, or UK GAAP. In our Wal-Mart example, the company would receive a large amount of cash from the line of credit and the new sales.

These components come together to help you understand your business from both a finance and accounting perspective. While finance focuses on forward-looking projections, accounting relies on historical data—pro forma financial statements help bridge the gap between the two. Accounting software with advanced accounting capabilities, like QuickBooks, can help here. Business owners evaluate the financial accounting impact of adding a product line.

Where Might a Pro Forma Financial Statement Be Used?

Companies that provide large dollar amounts of stock-based compensation will incur expenses that must be recorded on the income statement. Management can assess the impact on revenues and expenses and decide which decision makes the most financial sense. Successful SMBs use financial tools to forecast business performance based on assumptions.