Then estimate all of your costs and liabilities, such as loans, rent, payroll, taxes, etc. Backed by 24/7 customer support, Rho offers business checking accounts and enterprise-grade spend management – accounts payable, corporate cards, and expense management – with no monthly fees. Businesses that provide stock-based compensation have to record expenses for the value of the compensation over time. We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English. Get free guides, articles, tools and calculators to help you navigate the financial side of your business with pro forma example ease. Our team is ready to learn about your business and guide you to the right solution.

• The objective is to examine various alternatives and determine the best course for the business.
• Therefore, we again recommend checking out our Ultimate Guide to Pro Forma Financial Statements, where you’ll find even deeper insights and best practices.
• 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.
• Break down your expenses into fixed (rent, salaries) and variable (materials, utilities) categories.
• In the year ending December 31, 2003, Alphabet Inc (Google) released an unaudited pro forma condensed and consolidated income statement.
• If the seller allows the buyer to finance the purchase, loan payments increase the seller’s cash balance.
• A pro forma financial statement is a forward-looking projection of a company’s expected financial performance, typically based on assumptions and hypothetical scenarios.

Free Excel Template: Pro Forma Financial Statements

• In fact, business owners, investors, creditors, and other key decision-makers all use pro forma financial statements to measure the potential impact of business decisions.
• However, as the increased sales begin to kick in, the future looks promising, with a return to healthy cash flow levels and profitability.
• For her cash flow projections, she considers the timing of her investment and the gradual increase in sales.
• Further, if a company has a stable order backlog, the pro forma statement of cash flow is more accurate.
• On the other hand, pro forma statements are financial projections and forecasts.

Adding equity and liabilities together Insurance Accounting and seeing whether it matches our total assets. There are more accurate ways to forecast the debt balance, but they’ll require fancier equations, which just distracts from the core concepts we’re learning. All we need right now is an approximation, not tiger-woods-like precision, so we’ll use the simple interest method. As we just discussed, we’ll need to know three numbers before adding new debt to our balance sheet.

Content Differences between GAAP and Pro Forma

We can then multiply our percentage by future COGS to get the forecast for our balance sheet. When it comes to inventory, we could once again use the percentage of sales method, but we’re going to do something slightly different. We know Inventory gets used to produce the goods or services we’re selling, which means it’s a cost, and we can probably get a better forecast by using some percentage of costs instead. To create a forecast for receivables, all we need to do is multiply revenue by some percentage. This percentage represents the size of accounts receivable relative to revenues at a given point in time.

How to Create A Pro Forma Income Statement

It shows everything your company owns contra asset account (assets) and owes (liabilities), plus equity, at a specific point in time. This is done by taking the difference between revenue, or sales and expenses, or the costs involved in doing business. On a pro forma income statement, revenue is calculated based on events that could increase or decrease sales. When creating your pro forma income statement, it’s important to use realistic assumptions to estimate your revenue projections.

An increase in liabilities and equity generates a cash inflow

Startups often have to raise additional capital to fund business expansion, and investors need financial reporting to evaluate the company. These financial projections include cash inflows from additional capital, and cash outflows for interest payments (if funds are raised using debt). Pro forma is a Latin word meaning “as a matter of form” and refers to a set form or procedure performed in a particular manner.

This post discusses pro forma financial statements and the common assumptions used to create the reports. You’ll learn some of the best practices for generating the statements and how the financial documents can improve business planning and forecasting. Pro forma income statements usually project a minimum of three years, whereas regular income statements may just be the year prior or based upon a lender’s request.