What Are Pro Forma Financial Statements?

Every business needs to plan for the future. Pro forma financial statements are designed to help forecast future expenses and revenues. Notably, they can help determine future prospects and visualize long-term financial outcomes. These documents may be used to facilitate major business decisions as well as inform investors about the financial health of a business.
Below, we will explore the most common variations of pro forma financial statements and how they are created—along with some tips for securing your company’s financial future.

Types of Pro Forma Financial Statements

Pro forma documents— from the Latin “as a matter of form”—can cover a vast array of business documents. Most notably, pro forma financial statements fall under four categories:

• Income statements 
• Earning projections
• Budgetary documents
• Managerial accounting

Pro Forma Income Statements

Income is the financial figure that refers to all capital earned from sales of products or services.

Pro forma income statements are focused on calculating income to paint a financial picture of a company. Typically, they will follow quarterly earning reports, offering investors metrics such as:

• Projected income – Quarterly earning statements report income and expenses of the previous quarter, but pro forma statements project expectations for the current quarter.
• Comparative analysis – From one quarter to the next, investors and executives rely on pro forma statements to compare expected growth versus current trends. 

Pro forma income statements are based on previous evidence and accounting information to ensure accurate projections for the current and upcoming months.

Pro Forma Earning Projections

Not to be confused with income statements, earning projections typically account for a potential change in a business. While other pro forma documents are interested in projecting company finances with the expectation of business continuing as usual, pro forma earning projections are a useful tool when undergoing a corporate shift.

Pro forma earnings projections may be utilized in the following scenarios:

• Mergers – When two companies elect to combine forces to create a new entity, financial projections are crucial to determining the future success of the venture. During a merger, pro forma earning projections can be a useful tool for attracting new investors, while encouraging current investors about the viability of this new entity.
• Acquisitions – Similar to mergers, acquisitions occur when one business entity takes over another, transferring over both assets and projects. Pro forma earnings projections remain crucial for shareholders and top-level executives looking to ensure the financial health of an acquisition.
• Business pivots — If your business is looking to expand offerings or change markets entirely, a pro forma earning projection can allow you to predict financial growth in the short term.

Additionally, some businesses may benefit from pro forma earning projections when changing their corporate structure or reevaluating their executive teams. Anything that could lead to a massive business change should take the projected financial consequences into consideration.

Pro Forma Budgetary Documents

How does a financial team create a budget for the fiscal year?

Pro forma budgetary documents offer a distinctive advantage for accountants planning for business spending in the long and short term.

Pro forma budgetary documents should plan for both:

• Future expenses – Using recent expense figures and accounting for cost discrepancies, a pro forma budgetary document should be able to determine future expenses. This calculation may involve a number of changing factors, from an expanding team to material cost increases.
• Future revenues – How much will your business earn in the upcoming year? Based on previous years as well as relevant project information, a financial team may be able to accurately estimate a business’s future revenues.

After creating projections for these two figures, your accounting team will need to determine a workable budget that aligns with future business expectations. Not only does a budget need to fit into the overall financial plan; it needs to account for every potential expenditure for the upcoming year.

Pro Forma Managerial Accounting

While many pro forma financial statements are crafted for shareholders, pro forma managerial documents are designed to inform executive-level team members. Before any major action is taken at a company-wide level, pro forma managerial accounting can provide relevant information on future taxation, cash flows, and other accounting data.

Pro forma managerial accounting documents attend to:

• Proposed actions – What are the future business plans, and how can they be evaluated from a financial perspective? Executives require evidence to back up a business proposal in order to ensure the health and security of a business.
• Cost/benefit analysis – Business expansion also comes with expenses. Often the most financially practical option is not immediately obvious without adequate projections.

When documenting pro forma managerial accounting, it is important to ascertain what figures executives are most interested in, as well as what documentation is most relevant to an upcoming business decision.

How Are Pro Forma Financial Statements Created?

While pro forma financial statements deal with estimates and projections, they still require rigorous accounting procedures. Often, these statements are created with specialized financial software or utilizing complex spreadsheets that factor in key figures, including:

• Cashflows
• Assets
• Liabilities
• Lines of credit
• Net income

Financial professionals use an accounting system to prioritize accuracy in these projections. Individual businesses may allow for variations of operations for creating pro forma documents. 

Notably, all documents shared with shareholders must reflect current and accurate financial data so as to not mislead investors.