This pro forma balance sheet can also be used for corporate retail or wholesale businesses. Evaluating liquidity, solvency, financial stability, growth opportunities, ratios, and conducting sensitivity analysis allows you to interpret the projected financial position and make informed decisions. Regular monitoring and comparison of actual results to projections enable adjustments and improvements in future pro forma balance sheets.
Step 5: Creating the Balance Sheet
We used local population data and identified coffee consumption trends to project potential sales growth. By considering factors like the increase in remote workers seeking café spots and the popularity of seasonal beverages, we crafted a realistic revenue projection. Subtract your COGS from your projected revenues to find your gross margin. This figure is like the pot of gold at the end of the rainbow, showing you what’s left after covering the direct costs of your products or services.
Top Picks for Ecommerce Accounting Software
Pro forma financial statements provide a hypothetical look at how a company would perform based on a set of credible assumptions about one or more transactions it is contemplating. This enables businesses to evaluate the potential impact of new product launches, expansions, or other strategic decisions, making them essential tools for planning and decision-making. Pro forma financial statements help you plan your next big move, but creating them doesn’t have to take up all your time.
Overall, a pro forma balance sheet serves as a valuable tool for financial planning and analysis. It provides a glimpse into the potential financial outcomes for your business based on different assumptions and projections. By utilizing this financial statement, you can navigate uncertainties, mitigate risks, and make informed decisions to drive your business towards long-term success.
To forecast these earnings, we take the most recent value for retained earnings and add the net profit for the current month. Luckily, we already have the existing debt balance, as it’s the most recent value reported by the balance sheet. The potentially tricky thing, in this case, is if we need to deal with existing depreciation. The easiest way to handle depreciation is to look at the income statement for prior periods, which is where depreciation lives.
Think of it as the financial crystal ball that allows businesses to anticipate outcomes, plan for various futures, and make decisions today that will set them up for success tomorrow. Investors and lenders use pro forma cash flow statements to evaluate a company’s financial viability before committing funds. These projections provide insight into how a business plans to use capital and generate returns, helping stakeholders assess risk and potential profitability.
- While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.
- Cash flow projections are a crucial tool for business owners, allowing them to proactively avoid cash shortages and enhancing their capacity to navigate unforeseen financial challenges.
- While GAAP statements are required for public companies, pro forma financials are not.
- This document is especially valuable for organizations aiming to improve their financial strategy and ensure long-term sustainability.
This step wraps up the explanation of our first section, and the only thing left is to add it all together for our total current assets. The costs for inventory are often found in the Cost of Goods Sold (COGS) section of the income statement, which we’ll use for our forecast. This projected cash flow allows you to see whether you’ll have excess money to spend on things such as paying off loans or saving for an upcoming investment.
Crafting Your Pro Forma Balance Sheet
Create multiple scenarios to explore the impact of different financial outcomes, such as best-case, worst-case, and expected-case projections. Regularly revising financial forecasts ensures they remain relevant as business conditions evolve. As a pro tip, you’ll always want to ensure that your bookkeeping is up to date, including your gross profit and your net cash flow, as it allows you to come up with more accurate data. For example, let’s say your business has an income this year of $100,000.
This clarity is critical for stakeholders, as it mitigates the negative perceptions caused by temporary financial setbacks. Pro forma statements can help boost investor confidence by showing you can generate healthy cash flow and pay down debt. The same goes for banks—pro forma statements are often required to secure bank loans for major expansions or new businesses.
Example pro forma income statement:
Creating a pro forma balance sheet is an essential task for any business, whether you’re starting a new venture or analyzing the financial health of an existing company. A pro forma balance sheet is a projected financial statement that provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time. The simplest method to prepare a pro forma income statement, considering what are pro forma financial statements, is the percentage of sales method. This approach assumes that most of the company’s expenses in the future will maintain a consistent relationship with sales. By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets.
Pro forma balance sheets are commonly used in several business scenarios. Startups often rely on them to attract investors and secure funding by demonstrating the expected financial growth and profitability of their venture. Established companies may use pro forma balance sheets when considering expanding how to build a pro forma into new markets, acquiring other businesses, or making significant capital investments.
Also, continuously compare your forecasts with actual performance to refine your methods. In this article, we’ve covered step-by-step procedures to make a pro forma balance sheet in Excel. Additionally, If you have any questions, comments, or recommendations, kindly leave them in the comment section below. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory.
- They’re a way for you to test out situations you think may happen in the future to help you make business decisions.
- You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.
- Moreover, the assumed values will be in blue font color; therefore, you will easily know which values to change as per your requirements.
Cultivate Clients Named to Inc. ‘5000 Fastest-Growing Companies’
The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include. This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year.
Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes. For example, if your cash flow statement predicts a cash surplus, you might decide it’s the perfect time to invest in that new piece of equipment.
Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios. Imagine your pro forma statements as a detailed map of the terrain ahead. Just as a hiker uses a map to decide whether to cross a river at its narrowest point or take a bridge, you use your pro forma financial statement to navigate through business decisions. This document is like the hydration strategy for your marathon; it tracks the flow of cash in and the cash disbursements out of your business.
We can now add everything up to get total equity, which leaves us with one final task. Adding equity and liabilities together and seeing whether it matches our total assets. If we want to be even more “scientific,” we would find something else from the income statement that is a closer reflection of the current liability in question. If we don’t need to purchase any assets, then we can forecast the same asset values into the future.
It’s a crucial indicator of your business’s financial health and efficiency. Another context you might see “pro forma” is in reference to pro forma invoices. Instead, it’s a bill of sale that records the goods being sold and their estimated price, often used in international transactions. Sensitivity analysis also allows for users to modify assumptions, helping them to understand how the business responds to changes such as price, cost, and volume. Additionally, different model scenarios can be used to evaluate the impact of other variables such as inflation, taxation, and the cost of capital on the business performance. Based on a pro forma’s assumptions, users have the ability to model different scenarios which are used to evaluate the performance of a business under varying economic conditions.