Pro Forma Definition, Uses in Income Statements and Letters of Intent

A pro forma invoice is a preliminary bill of sale sent to a buyer in advance of a shipment or delivery of goods. The invoice will typically describe the purchased items and other important information, such as the shipping weight and transport charges. Pro forma results may contain adjustments to GAAP numbers in order to highlight important aspects of the company’s operating performance.

Purchasing a building with cash is an example of an operating activity; the company has a cash outflow for the purchase. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. bookkeeping for startups Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

Types of Pro forma Financial Statements

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year. In financial accounting, a pro forma earnings report excludes unusual or nonrecurring transactions. Basically, it is a fancy word for “future” or “projected.” Sometimes, however, it is used to restate financial books in an unofficial way. If you don’t have a finance background or you know nothing about forecasting, you may simply waste your time trying to build your own pro forma financials.

Costs of goods sold are the costs a business incurs to purchase the product they are selling. Doggie Dogs does not make hot dogs or buns, they purchase them from a supplier. Other expenses include selling, general and administrative costs, utilities, and insurance. Shareholders are investors who have purchased stock, or a percentage of the company.

What is a startup pro forma?

As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly. The statements are presented to the company’s management to help it make a decision on a proposed action based on its potential benefits and costs. These are models that forecast the expected result of the proposed transaction.

Each type of pro forma financial statement will be further discussed in detail; such as the pro forma cash flow statement, pro forma income statement, and pro forma balance sheet. To ensure that financial statements are reporting accurate information for public use, they have to follow generally accepted accounting principles, or GAAP. GAAP are strict guidelines that all businesses must adhere to in the United States when preparing their financial statements. Companies face heavy fines, sometimes in the millions, and even federal jail time for not following GAAP. A business is allowed to exaggerate and embellish their financial reporting because the pro forma statement is trying to predict what happens in the future. Potential and current investors use this information to decide where to spend their money.

Linking the Three Pro Forma Financial Statements

This pro forma statement can be part of a larger cash flow forecast used for decision making. The pro forma income statement is a crucial financial tool that can be used to assess the viability of your business. It shows a company’s expected revenue and expenses over a period of time and can help you to identify potential problems early on. Pro forma financial statements are a type of statement that provides estimates or financial projections for a company.

However, we’re lobbing another caveat your way – take our walk-throughs with a grain of salt since they’re only a glimpse into the basic pro forma process. It’s helpful for FP&A to provide business leaders with side-by-side comparisons based on different assumptions, better informing the entire decision-making process. If, for instance, management is deciding between two separate proposals or business plans, they can use pro forma statements for each scenario and see which might serve their goals and vision best. It’s a tool that business owners, decision-makers, stakeholders, investors, creditors, and others use to examine hypothetical conditions.

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. Another advantage of pro forma financial statements is that they can help management plan for potential scenarios and make better, more informed decisions. For example, if a company is considering making an acquisition, management can use pro forma financial statements to assess the potential impact of the acquisition on the company’s future financial performance. The same goes for other strategic decisions such as expanding into new markets or launching new products. The main advantage of pro forma financial statements is that they provide a more comprehensive view of a company’s future financial performance than traditional financial statements.

• There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements.
• To take a gander at what’s coming down the pike, adjust accordingly, and knock business decision after business decision out of the park.
• ●  investing activities such as movements in capital assets including building, equipment, land, business acquisitions, etc.
• Pro forma statements are helpful during periods of rapid growth or change.
• A business is allowed to exaggerate and embellish their financial reporting because the pro forma statement is trying to predict what happens in the future.

Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding. In the case of estimated cash overages, the company can produce a plan for investment. Arguably, the statement of cash flow is the most important of the pro forma documents.

The Budget Tracking Template is another way to get a clear picture of the organization’s spending and forecast how those expenses will impact the bottom line. With permission controls, external stakeholders only can view the template, letting the accounting team change any numbers to avoid accidents. Want a more interactive experience than using an Excel spreadsheet, something you can easily update in real-time across multiple team members? Then, benefit from all the other supercharged features a Work OS (operating system) brings.