Guide to Creating a Pro Forma Analysis Using Your Financial Statements

Last Updated November 20, 2024

Knowing how to analyze performance to gauge overall success is one of the most critical practices for business owners.

However, a thorough business financial analysis involves more than crunching numbers over past periods and reviewing the data you’ve found. Equally important is specifically a pro forma analysis, where you project future financial data in order to reveal what your needs might be in the interim.

An effective pro forma analysis can be achieved through a variety of methods, but the most common is by creating pro forma financial statements.

With that said, continue reading to learn more about the following common questions from business owners when they’re getting ready to start their pro forma analysis.

• What Are the Specific Benefits of Creating Pro Forma Financial Statements?
• What Are the Different Pro Forma Financial Statements?
• What Do You Need to Create Each Pro Forma Financial Statement?
• What Are Some Limitations to a Pro Forma Analysis?

Once you’ve finished reading this article, you should have a good grasp of how to get started.

What Is a Pro Forma Analysis?

The pro forma meaning comes from Latin, where the phrase “pro forma” means “as a matter of form” or “for the sake of form.” With this definition in mind, a pro forma analysis in business refers to creating pro forma financial statements that project a company’s future expenses and revenue.

These projections draw from both the company’s historical data as well as hypothetical assumptions based on the outcomes of different events or business decisions. Business leaders often use the information from these statements to guide their decision-making processes.

Benefits of Performing an Analysis Using Pro Forma Financial Statements

The importance of creating pro forma financial statements to conduct a thorough pro forma analysis cannot be understated. At almost every stage of your business, these statements will play a valuable role in helping your company’s leadership make wise financial decisions.

1. Help Your Business Obtain Financing

Obtaining funding for your business isn’t always easy—but a well-prepared pro forma statement can help. By offering realistic assumptions about future income and expenses based on your current performance, you can present a more convincing case to potential lenders and investors.

2. Assess Mergers and Acquisitions

Pro forma accounting documents can also help businesses understand the potential impact a merger or acquisition would have on company finances.

In addition to predicting changes to income and expenses, pro forma statements are often used to help businesses identify redundancies or needed additions that would result from the merger or acquisition. This helps leaders assess whether these actions are financially viable, as well as what steps can be taken to ensure a more successful outcome.

3. Conduct a Risk Analysis

Pro forma financial statements can also help improve your business’s risk analysis by projecting outcomes based on potential events, such as slower-than-expected revenue growth. By understanding how such events could impact the business’s financial position, leaders can proactively plan for various scenarios that might otherwise put the company on shaky financial ground.

Risk analyses can also be performed when evaluating business decisions so leaders can better understand possible results from their actions.

What Are the Different Pro Forma Financial Statements?

There are several different methods to go about predicting outcomes for your business, though the most common is by creating a projection of your three major financial statements: a balance sheet, cash flow statement, and income statement—along with a business budget.

Pro Forma Balance Sheet

A pro forma balance sheet is meant to project your business’s future assets, liabilities, and owner’s equity at a certain point in time. It includes the same categories as your current balance sheet but is projected into the future rather than being based on current data.

The projections on your pro forma balance sheet are based on how you expect the overall financial picture of your company to change in the future based on possible events and your assumptions for what their impact would be.

What You Need to Make a Pro Forma Balance Sheet: To make a pro forma balance sheet, you should start by compiling your current and fixed assets. For fixed assets, be especially mindful of depreciation and planned purchases or disposals. You’ll also need to compile your current and long-term liabilities and calculate owner’s equity. Current data is an essential baseline for creating your pro forma balance sheet.

Pro Forma Cash Flow Statement

A pro forma cash flow statement is used to project what the company’s cash flow is expected to look like during a future reporting period. The goal of this document is to help the company plan for how future events or decisions will affect the flow of cash in and out of the business.

This forecast will need to account for all expected sales, as well as cash payments the business makes for its expenses, investments, and other liabilities. As with other pro forma statements, these numbers are based on hypothetical scenarios that you anticipate would influence your cash flow, such as inflation, a business acquisition, or the launch of a new product.

What You Need to Make a Pro Forma Cash Flow Statement: When creating your pro forma cash flow statement, you should use information from your current cash flow statement—namely, cash inflows and cash outflows, as well as your opening and ending balances—as a starting point. You should also calculate projected income and expenses associated with the scenario you are planning for. Combining current data and hypothetical outcomes will create a more accurate cash flow projection.

Pro Forma Income Statement

Also known as the pro forma profit and loss statement, this pro forma document predicts future revenue and expenses over a future period (such as a quarter or fiscal year). A detailed pro forma income statement analyzes projected sales, cost of goods sold, taxes, and other operating expenses so you can predict future net income.

By detailing the level of profitability that is expected for the business, the pro forma income statement can reveal the greatest areas for potential growth, as well as sources of financial risk.

What You Need to Make a Pro Forma Income Statement: To create a pro forma income statement, you must start by collecting information that is relevant to your current profit and loss statement. This includes business revenue associated with different goods or services, the cost of goods sold, and other operating expenses such as salaries, rent, utilities, taxes, and so forth. It does not include assets, liabilities, or equity.

With current data from your most recent profit and loss statement, you can then project future numbers based on current trends, while also incorporating assumptions based on how other actions could create new sources of revenue or expenses, or cause adjustments to current revenue and expense items.

Pro Forma Business Budget

An accurate budget analysis helps you understand the cost of doing business, with a focus on daily income and expenses. An annual operating budget is used to predict recurring expenditures and income for the coming year based on current business activities.

The pro forma business budget adapts the annual operating budget based on possible changes to the company. This could go beyond more obvious decisions like introducing a new product. For example, adjusting the business’s operating structure could also influence the budget. These projections help leaders understand if the company has a sufficient budget to enact certain changes.

What You Need to Make a Pro Forma Business Budget: A pro forma business budget should use your annual operating budget as a baseline, as it projects budgeting needs based on current conditions. With the data from your current operating budget, you can then make adjustments based on anticipated changes to income and expenses that would result from potential decisions.

Pro Forma Revenue Projections

Pro forma revenue projections estimate the future sales revenue of a company, typically based on either a monthly, quarterly, or yearly period. They help business leaders adapt their financial planning and budgeting as needed, as well as guide strategic decisions that could further improve revenue results.

Revenue projections can be a useful supplement along with your pro forma financial statements for your analysis.

What You Need to Make Pro Forma Revenue Projections: As with other pro forma documents, pro forma revenue projections should start with an analysis of past sales data across multiple periods to get an understanding of your sales trajectory. You can then forecast future revenue based on historical trends, expected customer acquisition and churn rates, or hypothetical scenarios like marketing initiatives, new product launches, price changes, and market conditions.

Limitations to Note When Creating Pro Forma Financial Statements

While developing pro forma financial statements can be very useful for future planning, these documents are not foolproof.

• Pro forma financial statements are based on assumptions. While they typically rely on historical trends and educated insights, the assumptions themselves could still be incorrect.
• Investors don’t always like pro forma documents. Pro forma financial statements don’t always comply with GAAP standards, and there is a history of publicly traded companies using pro forma statements to mislead their investors. Pro forma statements may not be ideal when presenting to current or potential investors.
• Data can change. Pro forma statements rely on current data. If changes to your business or industry aren’t accounted for after you make your pro forma statements, you could be relying on woefully outdated projections.

Additional Tips When Making Pro Forma Financial Statements

If you’d like to conduct a pro forma analysis, be sure to use the following practices:

• Have a clearly defined purpose. Pro forma financial statements are most useful with a set purpose (such as evaluating a merger), as this will influence the assumptions and data you rely on.
• Use as much credible data as possible. The more reliable data you can use (rather than hypothetical information), the more accurate your pro forma statements should be.
• Make realistic assumptions. When you need to use hypothetical inputs for your pro forma financial statement, try to keep assumptions in line with industry trends and your company’s own past performance.

In-Summary: Completing a Pro Forma Analysis by Making Pro Forma Financial Statements

By drawing from your own historical data and adjusting your current financial statements, learning how to do a pro forma analysis is relatively straightforward. With realistic hypotheticals, you can project the outcome of a variety of business decisions or even develop an invoice for estimating purposes. With this information, you will have additional data to help you make better decisions based on how they will impact your company’s bottom line.

Pro Forma Financial Statements FAQs

What does pro forma mean?

Pro forma is a Latin term that means “as a matter of form” or “for the sake of form.” A pro forma financial statement is used to calculate hypothetical financial outcomes that could result from a business decision. These statements draw from historical data and educated assumptions. Pro forma statements can also be used to create estimated invoices.

What is financial modeling?

Financial modeling involves building a mathematical model of how a particular event could impact a company’s expenses and income. These projections can be calculated in a spreadsheet and used to guide the company’s planning for different events or decisions.

What are the different types of pro forma financial statements?

Some of the most common pro forma statements are pro forma budget documents (also sometimes known as pro forma cash flow statements), pro forma company income statements, and pro forma earnings projections. These forms are most often used to help company management make decisions based on hypothetical outcomes. The forms can also be used to provide information to investors regarding the company’s projected results.

When are pro forma financial statements required?

Though not technically required, pro forma financial statements are most often prepared in advance of an acquisition, merger, or capital investment. By demonstrating the expected results of the potential action, company management can make an informed decision about whether to move forward with the action.

What is the difference between pro forma financial statements and GAAP statements?

Pro forma financial statements are used by businesses for planning and forecasting, especially in regard to hypothetical scenarios or decisions. GAAP statements, on the other hand, analyze past performance and help business leaders compare results across periods. GAAP statements have strict reporting guidelines, while pro forma reports do not.

What is the difference between pro forma and projection?

A projection is a way to show what the financial outcome for the business would be based on hypothetical assumptions—including assumptions that aren’t likely to occur. Pro forma is generally designed to evaluate the financial impact of a likely business decision, with outcomes more closely based on historical performance.

What is a pro forma invoice?

A pro forma invoice is an initial bill of sale or estimate sent to buyers before goods or services are delivered. It enables buyers to see what the final invoice will look like so they can approve the transaction, arrange credit, or obtain other necessary documents before moving forward with the purchase.