How to Create a Pro Forma Balance Sheet

To gain a better understanding of the business’s performance and determine the necessary steps for achieving desired results, businesses use various financial statements. There are several other types of templates that could be helpful for a business other than the ones already presented here. There are many different periods that could be covered, as well as the different purposes for the pro forma financial statements.

• Invoice document featuring all categories necessary for handling a complete document for your clients.
• 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.
• Embarking on the journey to create a pro forma balance sheet can feel a bit like setting up a sophisticated piece of furniture with an array of parts spread before you.
• You might be wondering how a pro forma balance sheet differs from a budget, as it’s likely tempting to think about the two as the same thing.
• This is also true of companies that change tax status from a private, nontaxable company to a taxable C-corporation to file for an IPO.

A financial forecast may be used in lieu of pro forma financial statements. According to the SEC, this does not take the place of the pro forma balance sheet, but the pro forma income statement may be withheld. The difference is that the financial forecast details the company’s expected results of operations as a single-point estimate or a range. The legal liability of the company may increase upon submitting forecasts instead of pro forma income statements, but the practice may be more relevant for certain businesses. It’s impossible to predict the future performance of your company, but a pro forma income statement is an asset that can help.

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If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. Now we can calculate the ending debt balance we’ll need for our pro forma balance sheet. The last thing we need to do is add up our current and fixed assets to get total assets, which is the line we need to match with total liabilities and equity.

Receivables describe the current cash balance customers owe the company. We’ll start at the top of the balance sheet with Current Assets and work our way down section-by-section, ending with Shareholder’s Equity. We’re about to walk through a simple step-by-step process for creating a Pro Forma Balance Sheet.

The company’s management is responsible for the documents’ overall validity. Be advised that issuing pro forma financial statements to the public can be problematic, especially since the pro forma statements and the GAAP statements can vary so widely. Investors should be cautious when evaluating these types of statements because they present a considerably more favorable picture of the business.

It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position. Pro forma financial statements are forecasted financial statements of a business based on certain presumptions or projections. The pro forma financial statements should all be prepared in conjunction with each other. Pro forma financial statements can be used to estimate future sales and budgets. These can be used as a planning tool to set standards for the future operations and activities of the business.

Pro forma vs. GAAP financial statements

• Once standards are established, these financial statements can be used to monitor and control actual performance according to the set standards.
• An excellent place to start is by Googling typical percentages for your industry.
• To ensure a seamless experience, we’ve prepared a step-by-step video guide, eliminating any confusion in creating your balance sheet.
• Minimalistic template featuring all the essential categories for this kind of document.
• Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money.

In conclusion, mastering the creation of a pro forma balance sheet is a valuable skill for business owners, investors, and financial professionals alike. It empowers you to make data-driven decisions, plan for the future, and optimize the financial health and growth of your business. You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income how to create a pro forma balance sheet statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time.

Pro Forma Statements of Cash Flow

Luckily, we already have the existing debt balance, as it’s the most recent value reported by the balance sheet. 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. We’ll need to take a few additional steps if we plan to purchase some new assets. If we don’t need to purchase any assets, then we can forecast the same asset values into the future. In the case of our restaurant, we’ll assume the current level of kitchen equipment is sufficient for now. 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.

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This easy-to-use tool collects your data through simple questions and automatically generates your balance sheet. To ensure a seamless experience, we’ve prepared a step-by-step video guide, eliminating any confusion in creating your balance sheet. 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.

Creating a pro forma balance sheet

Everything will be speculated, so it might not reflect the final result, but the more organized and complete your template gets, the more precise it will be. When calculating pro forma earnings, you’ll usually not use the traditional methods and steps. The accuracy of pro forma projections depends on the quality of your assumptions. While they offer valuable insights, projections are estimates, so it’s important to account for potential variability.

It’s similar to knowing when to water your garden and when to add fertilizer or pesticide. Some plants need constant attention (fixed costs), while others may only need seasonal care (variable costs). When I first ventured into the realm of business budgeting for my startup, I felt like a novice treasure hunter without a map. My quest for data led me down various paths, from scouring through forgotten files on my computer to diving deep into the depths of online research databases. Ensure you understand your objectives and what information you need to know to get closer to these goals.

We had to quickly adjust our “gardening strategy,” securing a short-term loan to cover the gap. It was a lesson in the importance of balancing our financial ecosystem carefully. These come from sales, returns on investments, loans, and any other sources that inject cash into your business. Are there certain times of the year when you make the lion’s share of your sales? Factor in new product launches or seasonal promotions you’re planning. Also, consider the payment terms you’ve negotiated with clients – not all income might be as prompt as we’d wish.

Pro Forma’s contain running balances for the assets, liabilities, and equity we wish to have in the future. Regular analysis of the balance sheet is crucial for financial planning, risk assessment, and overall financial management of the company. 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.

Accurate and thorough calculation of liabilities ensures that your balance sheet accurately reflects your financial position and aids in making informed decisions for the future. Unlike a regular balance sheet, which reflects the actual financial position of a company, a pro forma balance sheet helps you forecast and plan for future financial scenarios. By projecting different assumptions and inputting estimated values, you can gain insights into how changes in revenue, expenses, and investments will impact your financial position. The pro forma income statement is prepared first, followed by the pro forma balance sheet and finally, the pro forma cash flow statement. A balance sheet forecast is another term used for a projected balance sheet.

It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position. It may be tempting to think of a pro forma statement as the same as a business budget. But budgets and pro forma statements are two distinct financial tools.

With Cultivate Advisors, we can help you navigate your pro forma expenses and leverage them to benefit your business. Whether you need help with your pro forma gross profit or you’re looking for information on an investment pro forma projection, we are here to help! In accounting, pro forma total expenses are usually used in a financial forecast that can help with financial modeling. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory.

Strategic business applications of pro forma balance sheets are extensive. They are crucial in forecasting future financial health, supporting investment decisions, and aiding in risk assessment. Businesses use them for planning expansions, mergers, or acquisitions, offering a clear vision of potential financial outcomes and facilitating informed strategic decisions. For cases in which your company is specifically seeking funding, you want to show your potential investors how the company’s financial results will change with their investment. There may be several sets of these pro forma documents, each based on different potential investment amounts, or just one based on what you think you need. For this projection, you need to determine where in your company the investments would be parlayed.