They must also ensure they label all pro forma information as such, to avoid confusion with historical information, and list the specific assumptions and uncertainties about them they are making. Pro forma analyses are meant to paint a better picture of what is happening with the company, irrespective of one-time events, but considering the specific industry’s standards. In some respects, this type of analysis is a more accurate depiction of the company’s financial health and outlook. Further, organizations may want to develop their pro forma financial statements while they are doing an annual review of their business plan. In this section of the business plan, we will provide pro forma statements for our company’s sales, expenses, capital expenditures, funding requirements, and cash flow. These statements will demonstrate the viability of our business and its potential for long-term success.

A pro forma invoice is simply a description of an impending transaction, based on an order placed by the buyer. It confirms certain details and makes it clear that others are yet to be confirmed. A firm may use a pro forma invoice if the terms of the sales contract specify that full payment is not due until the buyer receives certain goods.

Financial Modeling Based on Pro Forma Projections

The only “cost” we typically include here are returns and chargebacks directly attributed to our revenue. The intention of this document is to blend a forecasting tool with a simple financial management tool proforma example without creating a lot of complexity. All we’re focused on here is determining whether the business is operationally profitable and that we’re capturing all of our future revenue and future expenses.

Using this combination, the projections shows how they would have done together. This type of projection could be shorter term (from the beginning of the current fiscal year). Use this free template to create your own historical with acquisition pro forma documents.

FAQs about the pro forma statements

Unlike an official invoice, a pro forma invoice is simply used to prevent misunderstandings about the specifics of a transaction, such as the amount due. It is usually issued at the time an order is placed, so that the buyer can clarify any questions about the price or date of delivery. A pro forma invoice is used by a seller to communicate to a buyer the expected costs, fees, and date of delivery for an order. This transparency can help the manufacturer avoid any misunderstandings when the order is delivered.

Pro forma statements and budgets are both financial tools that can be used to track the progress of a business. For example, sales might be presented as 15% higher (best case), 5% higher (expected), 20% lower (worst case). If material costs increase sharply, or there is a shortage of labor, the cost of sales will increase. Going back to our Wal-Mart example, let’s assume the company can’t support that many purchase orders and has to draw a line of credit in order to fund it. Now the projected sale has not only put more income on the bottom line, it has also put more debt on the balance sheet. Estimating and projecting the balance sheet is also a common practice because investors and creditors want to use the balance sheet to analyze debt ratios, liquidity levels, and overall leverage of the company.

Is adherence to GAAP required for pro forma financial statements?

They have articles governing the preparation of pro forma financial statements for public companies. These are Regulation S-X Article 11, and Regulation S-X 8-05 for smaller companies from 17 CFR 210. Additionally, the SEC may require that pro forma financial statements be submitted when a company is filing for an initial public offering (IPO). This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO. The pro forma financial statements, including pro forma earnings per share calculated, must be submitted.

• Pro forma statements don’t need to meet the strictest accounting standards, but must be clearly marked as “pro forma” and can’t be used for things like filing taxes.
• Over the past couple of years, supply chains have been totally redrawn, and businesses have been forced to evolve how and where they do business.
• Creating a pro forma statement in Excel from scratch is pretty straightforward.
• Just try to digest a small piece at a time and we promise with a little bit of effort you’ll be building out your first financial projections in no time.
• Often, the difference between a past balance sheet and a pro forma balance sheet is that the pro forma balance sheet reports additional periods, sometimes even interim figures.

A pro forma balance sheet is a comparison of a business’ assets and liabilities. The pro forma part of the balance sheet is a projection that looks ahead, assuming certain things will occur. Pro forma balance sheets are difficult to compile, but banks generally ask for them and they are important for showing your potential financial picture. They can show the projection of what money will be tied up in receivables, equipment, and inventory.

Understanding Limitations in Decision Making

Let’s take a look at each report in the set and why management would choose to create a pro-forma version. Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant. This is because GAAP compliant reports must be based on historical information. Here’s a historical example of a pro forma income statement, courtesy of Tesla Inc.’s (TSLA) unaudited pro forma condensed and consolidated income statement for the year ended Dec. 31, 2016. The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

• In this case, pro forma statements are like dipping your toe into the water before diving into the pool.
• However, to comply with professional auditing standards, the documents can be audited at the request of the company or a third party.
• This enables them to better understand the combined entity’s future financial performance and potential synergetic effects.
• The SEC also requires the pro forma balance sheet, pro forma income statement(s), and explanatory notes that provide adjustment justifications and pertinent detail.