Pro forma financial statements: why they’re important to your business
So your business is advancing in leaps and bounds and you have been achieving excellent financial results for years. You have no problem proving to an investor or a potential lender that your business is doing well. But… you have great things in the works. Maybe you are selling part of the business or buying another. Now you need an accounting tool that will help you see how the numbers will change with this transition.
But generally accepted accounting principles (known as GAAP) only look at historical financial statements and do not help you predict the future.
Unless you have a crystal ball, pro forma financial statements can help you predict things like net income and gross profit in the future. Using these financial statements, you can plan for the future and reduce your risk, as well as attract investors or get approved for funding.
What are pro forma financial statements?
The pro forma financial statements primarily look to the future. Standard accounting statements like the balance sheet examine historical financial information, but pro forma documents are eager to help you forecast future income through different types of accounting statements. A company’s pro forma statement can include projected revenues, estimated expenses, and cash flows over three to five years.
Types of pro forma statements
- Full year pro forma projection
- History with pro forma acquisition projection
- Pro forma financing or investment projection
- Pro forma projection risk analysis
There is no single pro forma income statement. In fact, there are several pro forma financial statements, and you may want to use more than one to get a complete financial picture of your business.
Pro forma projection all year round
This pro forma projection includes a company’s annual results as well as forecasted income and expenses for the remainder of the year to provide a full picture of the year. This pro forma projection is useful for investors and lenders, who want reassurance about the profitability of your business.
History with Acquisition Pro Forma Projection
If you are considering acquiring another business, this is the pro forma statement for you. It combines the accounting results of your business with those of the business you want to acquire, subtracting acquisition costs and synergies, and therefore shows a sketch of how the acquisition will fit into your balance sheet.
Financing or Investment Pro Forma Projection
If you plan to seek funding from investors or take out a business loan, you may be asked for income projections. This statement deals specifically with how your business results will change if you receive a capital injection. You may want to create financial projections for different investment amounts to cover your bases.
Risk analysis Pro forma projection
Whenever you make an important financial decision, you need to know the best and worst case scenarios. This is where the pro forma risk analysis comes in handy. By creating pro forma reports for a variety of scenarios, you can see how a decision will impact your bottom line and make your decisions accordingly.
Three most important pro forma financial statements
In addition to the pro forma financial statements listed above, there are others that will be useful to you in your business, even if you are not considering a major change such as making investments or acquiring a company. other business.
- Pro forma income statements
- Pro forma balance sheets
- Pro forma cash flow statements
Pro forma income statements
Also known as the income statement, this accounting document presents sales transactions and expenses, as well as the cost of goods or services sold and projected net profit and profit.
Pro forma balance sheets
The pro forma balance sheet examines a forecast after a change, such as a financing or an acquisition. It includes assets and liabilities, as well as accounts receivable, cash and cash equivalents, accounts payable and inventories.
Pro forma cash flow statements
Another of the pro forma reports that you should know about is the cash flow statement. It examines the likely amount of cash flow in and out of the business over a future period, based on different scenarios.
Why create pro forma statements?
So, if you’re already using GAAP financial statements, why would you bother creating pro forma financial information? There are several situations where a pro forma income statement or other report can be useful.
That you are apply for an SBA loan or seek to attract investors, the people you want to work with want the confidence that your business is a good investment. It’s helpful to look back at historical financial statements, but if you anticipate big changes, the past may not be an accurate representation of what the future holds.
Lenders and investors want reasonable assurance that their investment will not only be paid back, but that they will receive a positive return. Pro forma financial information can help them assess this likelihood.
Planning for the future
While we may never know what the future holds, we can make educated predictions about what that might look like with pro forma income statements. By looking at a few worst-to-best scenarios, you can see what the impact of these changes might be and use that information to guide your decisions.
If you are considering acquiring another business or changing the direction your business is going, you will want to understand how this will impact your income. Creating a pro forma cash flow statement can help you determine how quickly you will become liquid after this transaction, and you can also determine how many additional liabilities it will create.
Nav’s final word: pro forma financial statements
Yes, creating pro forma financial statements takes more work, but it pays off by showing you exactly what your future net income, liabilities, and cash would be under certain circumstances.
Pro forma projections are not set in stone. Of course, the conditions will change, and this will impact your balance sheet. But these accounting tools can give you (and your investors) peace of mind knowing that a financial move is likely to pay off over time.
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