What is Pro Forma?
Pro forma Pro forma, a Latin term meaning “for the sake of form” or “as a matter of form,” is a method of calculating financial performance using presumptions or projections.
What is an official statement?
Financial statements that are pro forma refer to financial statements based on hypothetical scenarios that use financial forecasts or assumptions.
They are beneficial tools that business owners, investors, creditors, or other decision-makers can utilize to study different future variations based on specific financial assumptions. This could provide a picture of how the company will be able to perform in the coming years.
What’s the point of a pro forma statement?
Many reasons are making Pro forma statements of financials may benefit your company.
1. They’re a very useful tool to plan your business since they permit you to do side-by-side analyses that are based on various financial assumptions to aid you in deciding between two possible strategies. It’s an exercise in A/B testing in strategic planning.
2. Pro forms of statements can be used to forecast the effects of financial decisions that affect your business. For instance, if contemplating restructuring the debt or your company is about to be placed in an entirely different tax bracket, it is possible to make use of pro-forms of financial statements to evaluate the impact this decision has on your company and help you make plans for the future in the years ahead.
3. Pro forma financial statements may be a significant factor in obtaining financing for your company. If you are seeking funding, you’ll need to make a pro forma financial statement outlining how you’ll utilize the money you invest to develop your business sustainably. In most cases pro forma statements (or at least some type of projections for financial finance) are a requirement for investment.
Creating a pro forma financial statement
Once you’ve learned something about pro statements, let’s look at how to improve these in greater detail. There are three primary kinds of pro statements: pro forms of income statements, pro forma cash flow statements, and pro form balance sheets. This is a step-by-step procedure for creating each of these statements:
To prepare an appropriate statement of income
In the beginning, you’ll need to determine a goal for sales for the time period you’re considering.
The next step is to create an production plan which will help you attain this goal and create a map of it for the time frame.
The next step is to determine how you’ll meet this production timetable, whether increasing sales by a certain amount each month or slowly increasing the sales amount.
In this case you’ll have to calculate your COGS (cost of products sold) and subtract it – and any other operating expenses from the sales.
You can then create your pro forma income statement with the information you gathered from the earlier steps.
To prepare an exemplary balance sheet:
In the first place, you must move the retained earnings from the pro forma income statement over to your balance sheet.
Then, you should identify any adjustments to your assets or liabilities which may differ based on the sales variance you’ve included in your forecast.
Add the owner’s equity, assets, and total liabilities to finish a pro forma financial statement.
To prepare an initial Cash flow report:
Include your cash-on-hand and cash receipts (i.e., the sale, loan, or the interest earned).
In the next step, write down your cash flow outgoing, including the costs of sales, wages, and other expenses.
After that, you should add up the operating costs of your business and other expenses such as cash disbursements and income taxes.
Then, calculate the total cash flow, the net cash change, and the cash position at the end to create your complete Pro forma statement of cash flows.
The process you employ to prepare the pro forma statement does not differ significantly from the method used to create standard financial documents. The most significant difference is the adjustments and not the calculations.
What is the difference between PRO Forma and GAAP Finances?
Companies don’t any universal rules to follow in making the pro forma results. That’s why investors need to know the difference between pro forma and traditional earnings that are reported in accordance with generally accepted accounting standards (GAAP). GAAP is a strict set of rules for when it comes to reporting earnings, however pro forma numbers are best considered to be “hypothetical” earnings, computed by the importance of specific events or circumstances. Therefore, investors should scrutinize not only the pro forma earnings but as well GAAP earnings and do not make the mistake of comparing one to the other.