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Pro forma statements represent estimated or projected financial figures for a company’s business operations. The three most common pro forma financial statements are the income statement, balance sheet, and cash flow statement. Publicly held companies commonly issue pro forma statements to inform shareholders and other business stakeholders with management’s expectations regarding future business profits. These statements can also help internal business managers prepare reports and make financial decisions regarding business operations.
Pro forma is a Latin term meaning “for the sake of form.” Pro forma statements require business owners, directors and managers to spend time planning and estimating the potential profits from current or planned business operations. Many entrepreneurs and small business owners prepare these statements when writing their business plan. A business plan includes expected profits and other projected financial information to secure external financing from banks, lenders and investors. Business owners may use professional help, such as management consultants, business plan writers or public accounting firms, when preparing pro forma reports and statements.
The income statement is perhaps the most important of all pro forma statements. This statement contains projected sales revenue, discounts, returns, and allowances relating to various goods or services sold by the company. The next section of the pro forma income statement is the cost of goods sold. Cost of goods sold includes only the costs directly related to the inventoried or other items sold to consumers. The third and final section of the income statement contains the various expenditures relating to daily business operations.
A pro forma balance sheet contains the projected balances of assets, liabilities, and owner's equity or retained earnings owned or owed by the business. Assets and liabilities are commonly divided into two groups: current and non-current. Current assets include cash, inventories, accounts receivable, and other items expected to be used in less than one year. Current liabilities show all accounts payable and other short-term financial obligations due in one year. Current assets and liabilities are an important pro forma statements item, since these are expected to change frequently throughout the coming months.
Non-current assets include all items owned by the company that is not expected to be used within the next 12 months. Non-current liabilities are all long-term debt obligations, such as mortgages or financial loans, not due in the next 12 months. Owner's equity or retained earnings will reflect the expected economic value added from the company’s business operations.
The cash flow pro forma statement usually lists all expected future cash inflows and outflows from various business operations. Operations included on the cash flow statement include operational, financing, and investing. This information helps companies create budgets and other financial roadmaps for maintaining a positive cash flow throughout the business year.
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