When it concerns making business decisions, a lot depends on numerical figures. To get a nod from primary stakeholders, win the favor of investors, and tactfully make decisions, business owners demonstrate financial ideas and opinions. Financial statements like cash flow, annual reports, income statements, and balance sheets reveal the performance of the business but lack a foresight of future financial performance; hence, this is where pro forma financial statements are useful. The article highlights what is a pro forma income statement? and the basics of such financial statements.
What is a Pro Forma Income Statement?
It is a financial statement that uses hypothetical data about future values over a period and predicts the performance of a business. It is known as financial projections or financial assumptions for future periods. The term Pro Forma indicates forecasts and includes multiple financial/income statements like:
· Cash flow
· Balance sheets
· Income statements
Business owners, creditors, investors, and other primary business decision-makers leverage the benefits of pro forma income statements and analyze the potential effect of business decisions and strategies.
How to Establish Pro Forma Financial Statement?
Apart from understanding what is a pro forma income statement, knowledge about creating a pro forma is essential.
Calculating Projected Business Revenue
Calculating the predicted business revenue is known as pro forma anticipating or forecasting. The process uses the actual market predictions. The company accountants and finance team analyzes and evaluates yearly revenue predictions, including asset accretion.
Predicting Costs and Liabilities
Costs include insurance, utilities, permits and licenses, employee payments, taxes, and materials. On the other hand, liabilities refer to the lines of credit and loans. Businesses should deal with practical assumptions.
Projecting Future Net Income
By utilizing revenue assumptions from the first two steps, businesses create the initial part of the pro forma financial statement. It is where organizations get hold of a future net income forecast.
Project Cash Flow Statements
It is the final part of the pro forma income statement that recognizes the net cash when there is a change in the business plan. Projecting cash flow statements differs from net income predictions. While estimating cash flow statements, specific expenses and revenues are identified before or after cash shift custody.
Types of Pro Forma Statements
Before incorporating a pro forma, business owners learn about what is a pro forma income statement, and its different forms.
Pro Forma Budget Statements
It predicts the inflow of anticipated revenues and capital outflow for a defined fiscal year. The budget statement relies on predictions about future revenues and expenditures. The pro forma budget statement also includes records of revenues and expenses. It also concerns the factors influencing the financial plans of an organization.
Pro Forma Income Statements
It facilitates the pro forma income calculation process to attract the maximum attention of potential business investors. When an organization reports its actual expenses and sales for the past fiscal year quarters, the projections also include the present quarter forecasts. The company presents a future prediction based on its experience with previous expenses and sales.
Pro Forma Earnings Anticipations
An organization presents a pro forma earning statement to notify the investors about its internal evaluation of the financial results of a potential business change. For instance, when an organization prepares for an M&A, it exhibits a pro forma earning statement and informs about the effects of such changes.
Pro Forma Managerial Statements
Accountants and financial experts prepare pro forma managerial accounting before a planned change in the structure of organizations. For example, it is beneficial during mergers, acquisitions, or new capital investments. The statement leverages the anticipated cash flows, taxes, and new revenues and decides based on anticipated costs and benefits.
One of the challenges for an organization is to predict sales assumptions leveraging practical forecasting. The pro forma financial statement helps to establish balance sheets, cash flow statements, and income statements that are vital for business strategies and plans. It renders a clear picture of the company’s financial circumstances. Businesses cannot always rely on the past data to analyze the future growth of organizations. Therefore, the pro forma income statement plays a pivotal role. To leverage the benefits of a pro forma statement, business owners must understand what is a pro forma income statement?.