Types of Pro Forma Financial Statements

“Pro forma” comes from the Latin meaning “for form.” Essentially, pro forma financial statements are created as simulations in the form of actual financial documents. These are not real income statements and balance sheets but rather documents that resemble what a company’s financial state would look like based on different factors. 

If you’re already nervous about creating actual financial statements, the idea of creating simulated ones might seem absurd. However, there are multiple reasons to create pro forma documents—and knowing how to do this can significantly benefit your business. Learn more about pro forma financial statements and how they can help your company.

What Are Examples of Pro Forma Financial Statements?

Pro forma statements can exist in the form of any financial document related to your business. The key is to identify them as simulations and not accurate representations of your current finances. Most people create pro forma income statements, balance sheets, and cash flow statements when they’re evaluating their potential future prospects. 

A pro forma statement is significantly different from a budget. A budget is a plan or set of goals for your business to follow—for example, you might set a budget for your marketing spend over the next year. This is what you plan to spend each month to promote your business. 

A pro forma statement works as a prediction or a forecast of what your finances will look like based on your budget. Using the same marketing example, if you have a $12,000 annual market budget at a 5:1 ROI, then you can expect to bring in $60,000 in sales. What would your cash flow and income statements look like with that revenue? How much would you have to spend in COGS to fulfill those orders?

Pro forma statements can help you to make decisions about the future. Using the example above, you may decide to invest in new equipment to help with production expectations based on the marketing campaign you are about to start.

You may even create multiple sets of pro forma statements based on different scenarios to better understand what your future finances could look like. These are meant to provide clarity on where your business is heading.  

Why Is a Pro Forma Statement Important to a Business?

There are multiple ways pro forma statements can help businesses. The first benefit is guiding owners to understand where they will be in the coming months based on current trends. 

For example, when the COVID-19 pandemic shut down restaurants, owners could map out their potential balance sheets if they had to stay closed for a month, 3 months, or even 6 months. Similarly, they could adjust these statements based on when states started re-opening and allowing diners at limited capacity. 

With these statements, business owners can determine if they can afford to keep going at the same rate or if they need to make changes to improve their financial futures. 

Pro forma statements can provide clarity for your internal use, but they can also help you lobby for external resources. These statements are often reviewed by investors and lenders who are considering working with businesses.

If you wanted to win over an investor, you would showcase how their money could help you grow your business with the right tools and resources. If you operate as a nonprofit, you can show grant administrators how their support can change your financial standing. 

You will incorporate budgeting and forecasting into your pro forma statements, so these documents will be especially important to the investors, creditors, board members, and company executives tasked with making strategic decisions for your company.

What Are the Main Steps to Develop Pro Forma Statements?

With most financial statements, you start with the raw data and work forward to get your final numbers. However, with pro forma documents, it helps to work backward. Start with a big-picture target that you want to hit, and then factor in all of the smaller milestones and costs that would contribute to this goal. Here are 4 key steps to making these statements.   

• Choose a time period you want to forecast for—this typically ranges from 6–12 months.
• Set a clear goal: this could be a target sales number, an ROI goal, or a gross margin target. 
• Fill in the other factors that would help you reach your target. For example, how many more units would you have to sell to hit a target sales goal? How would you increase your marketing budget?
• Identify the costs associated with these growth goals. These include the increased spending on materials, extra payroll costs, and other factors that pull from your profits. 

In business, you can’t forecast growth and profits without understanding the costs associated with them. If you want to create useful pro forma statements, you need to be realistic about what your financial future will look like. 

Create Better Statements With Lendio’s Software  

If you are just starting out with statement creation, familiarize yourself with your existing profit and loss (P&L) documents and balance sheets. With the Lendio app, you can easily document your income sources and expenses to get a clear picture of your business. Once you have a financial history to analyze, you can take steps to create reliable pro forma documents that count.