Summary:
Pro forma financial statement are based on assumptions to develop financial projections
Pro forma financial statements are a useful tool for analyzing potential future outcomes
Pro Forma Models have a variety of applications from start up business to real estate investing
It is important to clearly show that pro forma financial statements are pro forma to ensure readers are informed
Definition:
Pro forma financial statements are based on assumptions to develop financial projections. Pro forma financial statements differ from typical financial statements, which are based on actual past performance.
Pro Forma Statements Purpose:
Pro forma financial statements are a useful tool for analyzing potential future outcomes to make better business decisions. Common examples of scenarios analyzed through the use of Pro Forma Models include:
Can a business qualify for a loan?
What happens if revenues increase by 10% next year?
What will happen to gross margins if we cannot pass inflation on to consumers?
What will be the impact on net income if we increase staffing levels?
Common Pro Forma Models:
Pro Forma Models apply to a variety of financial statement, with the most common being:
Income statement
Balance sheet
Statement of cash flows
Examples of common Pro Forma Models are provided below:
Start Up Pro Forma Financial Projection: Utilize assumptions to develop a 3 statement model for expected future financial results of a start up business. This type of Pro Forma Model is more challenging and subjective to develop as there are no historic financial results to serve as a base. Pro forma statements generated from this type of model will typically undergo more scrutiny from investors and lenders as the projections are fully based on projections. This type of Pro Forma Model is a necessity for any start up business and will form a key piece of the business plan.
Annual Pro Forma Financial Projection: Utilize existing annual historic financial results to develop forward looking pro forma financial statements on an annual basis. This type of pro forma is useful for communicating expected operating results to management and investors.
Monthly Pro Forma Financial Projection: Utilize existing monthly historical financial results to develop forward looking pro forma financial statements on a monthly basis. This type of pro forma is useful for communicating expected operating results to management/investors and is a useful tool for business operators as it is more granular and sets expectations on a monthly basis.
Investment Pro Forma: This type of Pro Forma Model is used to analyze an investment, which could range from a real estate investment, stock investment, capital equipment investment, or a request for funding from an investor/lender. The goal of this Pro Forma Model is to project investment performance with hopes of showing a return that will satisfy investor metrics.
Scenario Analysis: This method of pro forma financial modeling involves analyzing possible scenarios that could occur in the future and predicting the potential outcomes and impact on the business. The pro forma modeling process will show the change in value of a business or cash flow after various scenarios occur.
Disclaimer:
Pro forma financial statements present like regular financial statements, but are not GAAP (generally accepted accounting principles) compliant. To be GAAP compliant, financial statements must be based on actual historic financial results. Due to this, it is important to clearly mark pro forma financial statements as "pro forma" to ensure a business is not being misrepresented to investors, financial institutions, and regulatory bodies.
Pro Forma Models:
Pro Forma Models has a variety of institutional-quality pre-built financial models and is available for custom pro forma financial modeling engagements. Examples of some top selling models include:
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