What Is a Pro Forma Balance Sheet?

Last Updated April 30, 2024

As a business owner, you’re constantly looking for opportunities to increase profit. One avenue to drive revenue is to expand—maybe a second location, improved production capabilities, or something else. Regardless of the situation, these decisions require a detailed analysis to accurately forecast the financial implications of the expansion.

A pro forma balance sheet is a tool that helps a business project its financial position and consider whether or not the decision is financially viable. It helps you understand how an expansion would affect the company’s liquidity and solvency, in addition to the return on investment.

Prior to learning how to make a pro forma balance sheet, it’s helpful to know what financial metrics you’ll be including in the document and how it can benefit your business. We’ll break it all down for you before also touching on other pro forma financial statements you shouldn’t forget about.

What Does Pro Forma Mean in Accounting?

Pro forma accounting refers to pro forma financial statements or projections prepared in advance of a proposed transaction, such as a merger, acquisition, project, or any other change in a company’s structure. These documents help decision-makers forecast future financial conditions and results. The term pro forma translates from Latin as “for the sake of form” or “as a matter of form,” emphasizing its speculative nature.

In practice, pro forma statements allow businesses to present expected financial outcomes—excluding unusual or nonrecurring transactions. This approach empowers stakeholders to focus on core results. It helps facilitate strategic planning and financial analysis with a clear view of potential growth and profitability.

What Is a Pro Forma Balance Sheet?

A pro forma balance sheet is a type of pro forma financial statement that projects a business’s assets, liabilities, and owner’s equity at a future point in time. Similar to a pro forma invoice, it is crafted based on assumptions and projections about future events, and it reflects how a company’s financial position is expected to evolve due to those events.

What Is a Pro Forma Balance Sheet Used for?

Unlike standard balance sheets that capture historical data, pro forma balance sheets focus on future financial health. Specifically, it can help assess the future financial impact of strategic decisions—such as expansions, acquisitions, or new product launches—allowing business owners to prepare accordingly. Through different scenario analyses, business owners can explore various outcomes based on different assumptions.

This forward-looking tool also supports funding requests by providing lenders and investors with a clear picture of a company’s expected financial position. It adds a level of credibility to business plans.

Further, a pro forma balance sheet helps in risk management. It allows companies to anticipate and prepare for financial challenges by adjusting strategies in advance.

Pro forma balance sheets are extremely useful tools for managers, investors, and financial institutions alike. By projecting future financial conditions, businesses can evaluate the feasibility of projects and the potential for financial growth or contraction.

What Is Included in a Pro Forma Balance Sheet?

A pro forma balance sheet includes three key components—assets, liabilities, and owner’s equity—projected into the future.

Assets are divided into current and fixed categories. Current assets—expected to be converted into cash within a year—include cash, accounts receivable, and inventory. Meanwhile, fixed assets are more permanent fixtures such as property, buildings, or equipment.

Liabilities also split into the current and long term. Current liabilities, due within a year, cover accounts payable, short-term loans, and other short-term obligations. On the other hand, long-term liabilities refer to financial commitments due beyond a year, such as bonds payable and long-term loans.

Owner’s equity represents the residual interest in the assets of the business after deducting liabilities. It includes retained earnings, stock, and additional paid-in capital. It reflects the owner’s claims on the business assets.

Together, these three elements offer a holistic view of a company’s projected financial standing at a specific future date. This information is based on current trends and expected changes in the business environment.

How to Make a Pro Forma Balance Sheet

Creating a pro forma balance sheet requires a systematic approach to forecast a company’s financial position at a future date. This process involves analyzing current financial data, considering your strategy, and making informed assumptions about the future. The goal is to estimate the values of assets, liabilities, and owner’s equity.

Compile Current and Fixed Assets

Begin by estimating the value of current assets—such as cash on hand, inventory, and accounts receivable—expected to be liquidated within the next year. Then, assess your fixed assets—such as property, equipment, and technology—taking into account depreciation and any planned acquisitions or disposals. Accurate projections of assets are vital for knowing the resources you have to support future business operations.

Compile Current and Long-Term Liabilities

Next, detail current liabilities due within the upcoming year, including accounts payable, short-term debt, and other obligations. Project long-term liabilities as well, such as mortgages or bonds, that extend beyond one year. This step is how you assess the company’s forthcoming financial obligations.

Account for Owner’s Equity

Calculate the future state of owner’s equity by considering retained earnings, stock issuances or buybacks, and any changes in contributed capital. This figure represents the residual interest in the assets of the company after deducting liabilities. Estimating owner’s equity accurately is very important for a solid understanding of the value attributed to the owners or shareholders based on future financial predictions.

Analyzing Your Pro Forma Balance Sheet

A pro forma analysis means scrutinizing the projected financial data to evaluate your company’s anticipated financial health. It’s useful for identifying potential strengths and weaknesses before they materialize. That means you have an opportunity for proactive management and adjustments.

Other Pro Forma Financial Statements

Beyond the pro forma balance sheet, your business should also consider preparing projections for your other major financial statements. These provide a comprehensive view of your expected financial performance.

Pro Forma Cash Flow Statement

This cash flow statement projects how cash is expected to flow in and out of the business over a specific period. It helps companies anticipate their ability to generate cash and fund operations, investments, and financing activities. Forecasting cash receipts from sales and cash payments for expenses, investments, and debt offers insights into your company’s future liquidity and cash position.

Pro Forma Profit & Loss Statement

This document forecasts your company’s revenues, costs, and expenses over a particular period of time. It shows the expected profitability of the business and highlights areas of growth and potential risk. By analyzing projected sales, cost of goods sold, operating expenses, and taxes, the pro forma profit & loss statement means businesses can estimate future net income.

In-Summary: Pro Forma Balance Sheets

Reviewing your current financial standing and comparing with previous periods is a necessary component of performing a holistic financial analysis. However, a financial analysis is incomplete without putting in the time to project your business’s future footing.

By preparing a pro forma balance sheet, which includes compiling current and long-term assets, liabilities, and owner’s equity, you can gauge where you might be in a quarter or year’s time before comparing with your existing standing. You’ll be able to assess which factors might play into steering your business in the right or wrong direction and can give yourself an opportunity to mitigate those detrimental factors. Business owners who don’t perform pro forma analyses are missing out on the chance to do so.

Pro Forma Balance Sheet FAQs

What is the difference between a balance sheet and a pro forma balance sheet?

A balance sheet presents a company’s financial position at a specific point in time, reflecting actual assets, liabilities, and owner’s equity. In contrast, a pro forma balance sheet projects these elements into the future based on assumptions about the company’s operations, market conditions, and strategic decisions. While a balance sheet is historical, a pro forma balance sheet is speculative and forward-looking.

What is a consolidated pro forma balance sheet?

A consolidated pro forma balance sheet combines the financial positions of a parent company and its subsidiaries into a single document. It is adjusted as if certain transactions or events, like acquisitions or divestitures, have occurred. The consolidated pro forma balance sheet provides a comprehensive view of the expected financial condition of the entire corporate group.

How often should I make a pro forma balance sheet?

The frequency of creating a pro forma balance sheet is specific to your business. Consider your needs, the pace of change in your environment, and specific events triggering financial shifts. Generally, businesses prepare pro forma balance sheets annually as part of their budgeting process. However, you may do so more frequently for internal planning or in response to significant anticipated changes.

What are pro forma adjustments?

Pro forma adjustments are modifications made to historical financial information to reflect expected future changes or events that impact the company’s financial position. These adjustments can include expected sales increases from a new product launch, cost savings from restructuring, or the integration of acquisitions. Pro forma adjustments ensure that the pro forma financial statements accurately represent the company’s anticipated future state.