These specialized pro forma models help you prepare for specific scenarios, such as market downturns or expansions, allowing you to pivot when needed. They also provide valuable insights into the risks and opportunities tied to different financial strategies, helping you make informed decisions with greater confidence. Bea’s journey through pro forma analysis not only illuminated the path for her boutique’s expansion but also provided a blueprint for managing future growth. By approaching the process with diligence, realism, and a touch of optimism, she was able to make informed decisions that aligned with her vision for Bea’s Boutique. Just like Bea, you can apply these steps and lessons to navigate your business’s financial future with confidence. Speaking of equipment, let me share a little tale from my own vault of “oops” moments.

Step 1: Download and explore the template structure

• It helps businesses estimate their pro forma earnings by considering potential changes in sales, costs, and operational efficiency.
• Equity represents the residual interest in the assets of the business after deducting liabilities.
• Pro forma financial statements are like a time machine for your business.
• We can then take our total and add it to current liabilities for our total liabilities.
• You will still need to input your assets, liabilities, and equity investments into our balance sheet template.

You can use them to study how changes in the price of labor, materials, overhead, and the cost of goods affect the bottom line. Use these models to test the goals of a company’s plan, provide findings that may be understood, and offer better, more accurate data than other methods. New financial models use computer programs that has made this testing better, which enables quick calculation for real-time decision making. Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous. However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions. By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions.

HOW TO PREPARE PRO FORMA FINANCIAL STATEMENTS STEP BY STEP?

Accuracy and thoroughness are key throughout the process to ensure reliable and accurate projections. Pro forma financial statements help you plan your next big move, but creating them doesn’t have to take up all your time. With accounting tools like QuickBooks Online Advanced, you can simplify your financial forecasting and focus on growing your business. Whether you’re assessing a potential investment or preparing for expansion, accurate projections are key. Running a small business comes with plenty of uncertainties, especially when it comes to finances.

Compile Current and Fixed Assets

The projected balance sheet is generally more precise and is used for strategic planning, while the estimated balance sheet provides a rough approximation for immediate needs​. Projected balance sheets help businesses anticipate financial needs, manage cash flow, and plan for growth. They provide valuable insights for investors, lenders, and management. Pro forma balance sheets are an essential tool for strategic planning, budgeting, and financial management. Regular analysis of the balance sheet is crucial for financial planning, risk assessment, and overall financial management of the company.

• Since pro forma financial statements and financial projections are quite similar, they may be considered synonymous.
• Smart founders automate what they can and focus energy on what matters most – customers, product, and growth.
• Projections that estimate a company’s future financial performance based on hypothetical scenarios.
• A pro forma balance sheet projects the company’s financial position in the future, including assets, liabilities, and shareholders equity.

For current assets, such as cash, accounts receivable, and inventory, use projected sales and production levels. Adjust long-term assets, like property and equipment, for depreciation and anticipated investments. Next, project future sales and expenses based on market research, industry trends, and internal data. Consider factors like seasonality, economic conditions, and competitive landscape.

Modelling direct vs. indirect cash flow

The pro forma balance sheet shows your future financial position by projecting your assets, liabilities, and equity. Pro forma statements are forward-looking financial reports that show your projected revenue, expenses, cash flow, and balance sheet figures. Unlike historical financial statements, they allow you to model different business scenarios.

Always ensure that each transaction impacting an asset is balanced by a corresponding impact on a liability or equity account, maintaining balance in your balance sheet. Pro forma financial statements come in various forms, each serving a unique purpose in your business planning. This wasn’t just any oven; it was the heart of the bakery’s expansion plan, significantly impacting both assets and liabilities. The oversight led to a considerable underestimation of future liabilities (since the oven was to be financed) and, by extension, equity.

Longer-term assets include property, plant, and equipment, used in operations for over one year. 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. Next, companies must make financial assumptions about future revenues, expenses, and other variables.

It requires careful consideration of historical data, assumptions, and pro forma adjustments to create an accurate picture of the company’s future financial position. 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.

Now we can calculate the ending debt balance we’ll need for our pro forma balance sheet. The last thing we need to do is add up our current and fixed assets to get total assets, which is the line we need to match with total liabilities and equity. Pro forma total assets are determined by adding up the pro forma total current assets and the pro forma total long-term assets; in this case, it is $483,000. Assets represent what a company owns, providing future economic benefits. Common asset accounts include cash, accounts receivable (money owed by customers), and inventory (raw materials, work-in-progress, finished goods).

Projected income statement figures are also necessary, including sales forecasts, cost of goods sold (COGS), and operating expenses. These forecasts provide operational context for balance sheet account changes. Pro forma financial statements provide a forward-looking view of a company’s financial performance. They help in decision-making, risk analysis, attracting investors, and complying with regulatory requirements by offering projections based on hypothetical or anticipated changes.

Let’s go through a pro forma balance sheet using an example of a company called Bright Lawn. Accounts Receivable are projected based on the sales forecast and assumed collection period. For example, a 30-day collection period means accounts receivable would be approximately 30/365ths of projected annual sales. Inventory projections depend on projected cost of goods sold and assumed how to make pro forma balance sheet holding period.

These documents provide the foundation for making accurate pro forma adjustments based on historical performance. A projected balance sheet, or pro forma balance sheet, forecasts a company’s future financial position, detailing expected assets, liabilities, and equity. It differs from historical balance sheets by focusing on anticipated future performance based on assumptions and financial projections. A financial forecast may be used in lieu of pro forma financial statements. According to the SEC, this does not take the place of the pro forma balance sheet, but the pro forma income statement may be withheld.

Step 2: Market Research and Forecasting

What exactly is that accumulated depreciation account on your balance sheet? 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. Our intuitive software automates the busywork with powerful tools and features designed to help you simplify your financial management and make informed business decisions. Your pro-forma total assets is simply the sum total of the numbers from steps 1 and 2.

Vyde is a licensed accounting firm (CPA) based in Provo, Utah, and members of the AICPA. We provide professional accounting services to businesses and individuals, with a focus on small business bookkeeping and taxes. Use this Excel pro forma invoice template to create your own pro forma invoices. As a product researcher at Coefficient, Ashley taps into the power of data to create intuitive solutions that save users valuable time. By working closely with users, Ashley helps to uncover key insights that shape product features, enabling teams to streamline workflows and boost productivity. Her passion for data-driven research and optimizing user experiences fuels her work, ensuring the product delivers maximum efficiency and value.