When trying to make and forecast business decisions, a lot rides on numbers. To get approvals from investors and banks, or even just plan out your future, you need to demonstrate that your business ideas make financial sense.
Standard financial statements such as, balance sheets and profit and loss statements, provide a historical snapshot of your business’s performance, but how do you use these to provide foresight towards planning the future? All those “what if” financial questions can be forecasted on pro forma financial statement.
A pro forma financial statement (“pro forma”) uses hypothetical data or assumptions about future values to project performance over future periods of time. In short, they are financial projections. Business owners, banks, investors and other decision makers all use pro forma to calculate the impact of future business decisions.
While analyzing financial statements is important to understanding your company’s performance and business health, pro forma focuses on future risk, investments, and future results before the end of a reporting period. You might create a pro forma financial statement if you’re comparing various investment scenarios. Doing comparisons of the possible outcomes to determine which is most beneficial, and how to plan that process.
The process of creating a pro forma financial statement is similar to that of creating traditional financial statements. However, you can modify the statements to help with sales forecasting, tax estimation, and any other financial metrics you may wish to see. Since a pro forma is based on assumptions, they shouldn’t be taken as fact. Rather, use them to inform decisions using hypothetical and estimated data based on historical trends.