How To Do A Pro Forma Statement

Company management should look at their pro forma financials to make sure their ratios comply with lenders’ guidelines. One tool that lenders use to evaluate the performance and financial health of a company is the calculation of financial ratios for various scenarios of revenues and expenses. Lenders use ratios to gauge a company’s liquidity, profit performance and debt-to-equity leverage. Keep in mind, expenses can be fixed or variable, and they are calculated as a percentage of sales. You can calculate a base percentage of sales by averaging sales over a certain time frame, and then use that percentage to estimate your projections. Acquiring another corporation or merging operations can be complicated.

When presenting these ideas to other partners, lenders or to a board of directors, pro forma projections can clarify things. Keep in mind, it is illegal to use pro forma financials to mislead investors. They have multiple uses for multiple scenarios, ranging from simple sales growth projections to more intricate M&A or investment purposes. Whatever you’re using them for, just make sure that you’re organized, detailed, and accurate throughout. Otherwise, you’re limiting the insights that you’re creating the pro formas for in the first place.

Pro Forma Profit Before Taxes

Any non-cash expenses, such as depreciation and amortization, should be added back to the amount. Since the preparation of the balance sheet depends on figures obtained from the income statement, the pro forma balance sheet is the next pro forma financial statement to be prepared. Basically a pro forma financial statements is a report prepared by the management on the basis of best estimates, assumptions and projections related to an activity or project. Such report pro forma statements example is developed to portray, project, analyze and/or plan future performance and events. This is a tool which is created exclusively for the use of management internally. Such report is not meant for investors and creditors unlike financial statements of the enterprise, but used internally by the management to plan future events. These models forecast the expected result of the proposed transaction, with emphasis placed on estimated net revenues, cash flows, and taxes.

First off, you’ll need to set a sales goal for the period you’re looking into. A typical budget worksheet should be carried through three years, so your lender can see how you expect to generate the cash to make your monthly loan payments. Business Case Guide Business Case GuideClear, practical, in-depth guide to principle-based case building, forecasting, and business case proof. For analysts, decision gross vs net makers, planners, managers, project leaders—all professionals aiming to master the art of “making the case” in real-world business today. Ken Boyd is a co-founder of AccountingEd.com and owns St. Louis Test Preparation (AccountingAccidentally.com). He provides blogs, videos, and speaking services on accounting and finance. Ken is the author of four Dummies books, including “Cost Accounting for Dummies.”

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Pro forma figures should be clearly labeled as such and the reason for any deviation from reported past figures clearly explained. A pro forma balance sheet, along with a pro forma income statement and a pro forma cash flow are the basic financial projections for a business.

Simulating competing plans can be quite useful in evaluating the financial effects of the different alternatives under consideration. Based on different sets of assumptions, these plans propose various scenarios of sales, production costs, profitability, and viability. Pro forma statements for each plan provide important information about future expectations, including sales and earnings forecasts, cash flows, balance sheets, proposed capitalization, and income statements. Pro forma financial statements incorporate hypothetical amounts, forecasts, or estimates, built into the data to give a “picture” of a company’s profits if certain nonrecurring items were excluded. These are often intended to be preliminary or illustrative financials that do not follow standard accounting practices. Basically, companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel accurately reflects the company’s true performance. As pro forma forecasts are hypothetical in nature, they can deviate from actual results, sometimes significantly.

If you’re considering a major decision, such as a business combination , or a new product launch, creating pro forma reports is important. Once the pro forma balance sheet is prepared, the pro forma cash flow statement can be prepared. Once the pro forma income statement is prepared, the figures are then taken to the pro forma balance sheet.

This won’t necessarily be the case in a real-world application. We’re going to use a percent of sales forecast to keep everything straightforward. Start with an income statement from your most recent fiscal year and identify which items you will adjust for the projection. In this case, think of pro forma statements like dipping your toe in the water before diving into a pool. If the water feels too cold – i.e., the pro forma projections aren’t favorable – it’s probably not a great idea to take a dip. But if the water is to your liking, then you might benefit from a nice swim. Bench gives you a dedicated bookkeeper supported by a team of knowledgeable small business experts.

• Basically, companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel accurately reflects the company’s true performance.
• Accountants produce these reports to analyze the possible future financial state of a company.
• You’re ready to start your small business and your’re working on a great business plan to take to a bank or other lender.
• A budget may also be considered a variation on pro forma financial statements, since it presents the projected results of an organization during a future period, based on certain assumptions.
• Management consultants use pro forma reports to help companies make financial decisions or acquire assets.

Examples of startup expenses include, enrollment fees, medical equipment, legal and accounting fees, marketing, supplies and insurance. To start creating a pro forma statement, begin with an income statement from the current year. Securities and Exchange Commission has guidelines to govern the preparation of pro forma financial statements for public companies. As you can see from our use case examples, there are several types of instances when pro forma statements can be used. Let’s suppose Blue Widget Corporation has introduced a new model widget. Sales are skyrocketing, putting a strain on the company’s cash flow.

Types Of Pro Forma Statements

So, by subtracting common stock from total owners’ equity, retained earnings can be determined. It can also be used to project the overall financial soundness of the company. For example, a pro forma balance sheet can help quickly pinpoint a high debt-to-equity ratio, a number that a banker might look to use to measure the creditworthiness of a business. Form the above discussion, it is now easier to understand that pro forma financial statements can also be termed as ‘what if’ financial statements. This address the future position and status of business on the basis of event so envisaged and projected. Pro forma statements are an integral part of business planning and control. Managers use them in the decision-making process when constructing an annual budget, developing long-range plans, and choosing among capital expenditures.

The value will depend on the particular specialty and circumstance. The introduction should be short – no more than 2-3 sentences – just enough to remind the reader why this particular physician/position is important. This is an opportunity for you to evaluate if every cost is necessary, and what you can cut. BIWS Real Estate & REIT Modeling gives you a crash course with case studies on real estate developments, acquisitions, pre-sold condos, REIT valuation and M&A/LBO modeling, and more. Excellent series of in depth inputs on real estate investments. It’s rarely worth doing granular analysis for 50 tenants because rental income will not be “lumpy” at that level.

However, such an expense is included in GAAP, as the Company has spent the amount and decreased its net profit. Learn how to create a one page business plan – the most important document for starting your business. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs.

A few other, more advanced items on the real estate pro-forma include Loss to Lease and Percentage Rent. A property might have $200K in capital costs one year, then $0 the next year, then $800K, then $300K, and then $200K. Leasing Commissions are payments made to commercial real estate brokerage and leasing companies to find new tenants and to get existing tenants to renew their leases .

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However, financial projections can be built from nothing for a startup company, using specific industry-specific assumptions. By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions. In other words, pro forma financial statements start from real financial data. In various instances, lenders and investors require small business owners or entrepreneurs to provide pro forma financial statements. In these cases, pro forma statements act as proof of cash flow in lieu of tax returns. For the indirect method of pro forma cash flow statement preparation, the net profit before taxation figure should be taken from the pro forma income statement.

Also, total liabilities added to total owners’ equity must equal total liabilities plus owners’ equity. So, you can determine total owners’ equity by subtracting total liabilities from total liabilities and owners’ equity. Adding the balance of the partners’ capital to contributed capital in the combined company rather than to retained earnings for partnerships acquired unearned revenue through the pooling of interests. A change in the business entity resulting from the acquisition or disposition of an asset or investment, and/or the pooling of interests of two or more existing businesses. Operating earnings are the profit earned after subtracting from revenues only those expenses that are directly associated with operating the business.

Pro Forma Financial Statements: Essential What If Modeling Tools

As you follow the steps below and gather more information, you may have to circle back to your original assumptions and modify them as needed. There are various software solutions for real estate, the most famous one being ARGUS. But the problem is that all these solutions are less ubiquitous than Excel; everyone knows and uses spreadsheets, but only small percentages of people use one specific software product. So, we tend to stick with Excel for most pro-formas, except for very complex ones with multiple lease breaks and potential renewals for each tenant in the holding period, where ARGUS does a better job.

Variable Vs Fixed Costs

For example, if you deduct the Reserve Allocations, as we do, then NOI partially reflects capital costs. If the Reserves cannot cover everything in one year, the remaining required funding will come out of the property’s cash flow for that year. When capital costs are owed, the owners draw on the Reserves to pay for them. In the example directly above, the owners might estimate $1.5 million in capital costs over 5 years.

Calculating a pro forma requires your existing income statement, so if you don’t have an income statement, you have bigger problems than creating a pro forma. It’s hard to organize your future finances if your current finances aren’t in order. If you’re looking to learn about pro forma income statements, then you’ve come to the right place. There are other stable variables that aren’t influenced by sales on the income statement, including operating expenses, depreciation and amortization, and interest expense. The COGS figure does directly vary with sales; if it does not, something is wrong with your numbers.

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But it cannot tell you whether or not you’ll earn an out-sized return on a property acquisition or development. If we were modeling a taxable entity, such as a C corporation that owned properties, then we might worry about income taxes and Depreciation in the pro-forma. If you form a partnership to acquire apartment buildings, each partner will pay taxes individually, but the partnership as a whole will not pay corporate-level taxes.

When a company changes an accounting method, it uses pro forma financial statements to report the cumulative effect of the change for the period during which the change occurred. Essentially, a pro forma financial statement can exclude anything a company believes obscures the accuracy of its financial outlook and can be a useful piece of information to help assess a company’s future prospects. According to the SEC, for public companies, a pro forma balance sheet should have the same dates, plus one year from the last submitted balance sheet. If interim period balance sheets were submitted, the company should pick up from where they left off. If it is an annual period, the document should also align with the company’s filed GAAP-approved financial statements. This is a projection of a company’s year-to-date results, to which are added expected results for the remainder of the year, to arrive at a set of full-year pro forma financial statements. This approach is useful for projecting expected results both internally to management, and externally to investors and creditors.

Author: Anna Johansson