How to Create a Pro Forma Cash Flow
Taylor suggested starting the process with actual data that has been audited (if you have an auditor), or at a minimum have been validated as accurate. The hypothetical scenarios in pro forma financials can help analysts predict risks early and prepare for them before making any concrete changes. Pro forma statements do not follow the generally accepted accounting principles (GAAP), because reports that comply with GAAP must rely on historical data and not anticipated cash flow. The information used in the pro forma cash flow document can also be impacted by the estimated days sales outstanding for receivables from customers, as well as the estimated days to pay suppliers. These figures should not vary much from historical averages, or else it is likely that the pro forma results will not be attainable.
There are many reasons why producing pro forma financial statements could be beneficial for your business. “A key element of pro forma financials is that they allow analysts to change one or more key variables and see how the financial statements appear if certain variables are more or less optimistic than the base case,” Johnson said. Pro forma cash flow information is useful for estimating when there may be cash shortages in the near future, so that management can prepare by obtaining additional debt or equity funding to offset the projected shortfall. Another alternative is to plan for expenditure reductions in order to avoid future cash usage. If excess cash is projected by the pro forma document, this information can also be used to plan the most appropriate investment strategy for the cash. Pro forma cash flow is the estimated amount of cash inflows and outflows expected in one or more future periods.
Pro forma financial statements based on business History
Pro-forma financials used in the pro-forma forecast will usually reflect the predicted state of the business after a large or important transaction has taken place. Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.
To improve the reliability of the document, it should be updated at regular intervals with the most recent information. Also, the document is more likely to be accurate if the company has a stable order backlog, and much less accurate if there is little insight into the sources of short-term sales. Expected cash receipts from outstanding invoices and cash payments for existing accounts payable are used to derive cash flows for the next few weeks. This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground.
For the effects of the business combination, only show the current and immediately preceding periods. Using pro forma templates can save you valuable time when creating your own pro forma income statements. 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 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. This pro forma statement can be part of a larger cash flow forecast used for decision making.
Statement of Cash Flows
Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.
The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business. Although pro forma statements can be an insightful way to explore hypothetical scenarios, it’s important to remember that they’re based on assumptions, not facts. As such, there’s always a possibility that the scenarios projected by your pro forma financial statements are going to be wildly inaccurate. Therefore, it’s https://online-accounting.net/ important to be cautious when evaluating these sorts of financial statements and use them alongside other financial documents to get a clearer picture of the business’s actual finances. 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. According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim periods.
Examples of long-term assets are tangible assets such as land, cars, and buildings. Before you can calculate total (long-term) assets, you need to calculate individual assets. For example, considering that the value of land is not depreciated over time, the value of land will be the same as the original purchase price. Buildings and vehicles, on the other hand, are subject to depreciation, so you need to calculate their value. You need to subtract this from the initial purchase price to calculate the asset value.
Pro forma financial statements – Income Statement
You can use this data from the proposed transaction as a guide to what your projected income statement would be in the future and restructure from there. Like a pro forma income statement, a pro forma balance sheet would be created by building a balance sheet for a given date based on projected values. For example, create a pro forma balance sheet for 12 months in the future and populate the fields with projected asset values, liabilities, and equity in a year. This projection looks backward (at one or more years) at another company’s financial statements.
For the purposes of calculating tax liability, however, the depreciation allowance is treated as a real expense. Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. Cash flow from operations includes cash inflows from customer payments, and cash outflow for material purchases and payroll costs. An investment projection would showcase what an influx of cash could potentially do to your business.
Learn how to analyze a statement of cash flows in CFI’s Financial Analysis Fundamentals course. Pro forma basic EPS reflecting the conversion of preferred stock into common stock at the IPO date should not be presented in financial statements issued subsequent to the IPO. Certain limited circumstances may warrant the use of an interest rate other than the current or committed rate. In some instances, the staff believes that the registrant should use the interest rates that were prevailing during the period covered by the pro forma information. Other transactions appropriate for inclusion in a pro forma presentation should be accumulated in a separate column. Otherwise, if consummation of more than one transaction has occurred or is probable, pro forma information may be presented on either a combined or separate basis.
Join over 140,000 fellow entrepreneurs who receive expert advice for their small business finances
The expenses required to support the revenue noted in the order backlog are translated into cash payments for the same period of time. In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan. Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product’s selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.
- These should be pro forma statements of the registrant, rather than of the property, giving effect to the acquisition.
- Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements.
- A pro forma statement doesn’t use generally accepted accounting principles (GAAP) and typically excludes one-time expenses that aren’t part of standard operating expenses, such as any restructuring costs following a merger.
- Companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel reflects the company’s true performance or future performance.
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. The pro forma financial statements, including pro forma earnings per share calculated, must be submitted. Finally, if substantial changes to the firm’s capitalization (the sum of their stock, debt, and retained earnings) are assumed to change substantially after the offering’s close date, pro forma documents must reflect that. Used to show company results to investors, pro forma financial statements are often combined with generally accepted accounting principles (GAAP) adjusted statements. Pro forma financial statements are not computed using GAAP and are often called non-GAAP. GAAP-adjusted statements are uniform financial statements guided by rules of the Financial Accounting Standard Board (FASB).
Income Statement Templates for Business Plan
For publicly-held companies, the SEC requires an introductory paragraph showing the proposed transactions, the company, the period covered, and what the pro forma information describes. The SEC also requires the pro forma balance sheet, pro forma income statement(s), and explanatory notes that provide adjustment justifications and pertinent detail. The pro forma financial information should be presented in columns and show the condensed historical amounts, the pro forma adjustments, and the pro forma amounts. GAAP-conforming financial statements must be included with pro forma submissions.
Pro forma financials offer businesses ways to make realistic assumptions about future growth rates and costs. According to Johnson, this is useful when you’re seeking outside capital (either debt or equity) to grow. “Potential capital suppliers will carefully examine pro forma financial statements (and the critical assumptions used in creating them) before committing capital to the firm,” Johnson said. Many of the items listed what is payroll accounting above are part of the GAAP, but not included in pro forma reporting, making it rife for possible deception. This discrepancy is part of the reason the distinction between pro forma and GAAP financial statements is important. Not all these things should be left off, but the decisions of what is left off should be well thought out and explained to potential investors, so they have a clear indication of what they are viewing.
- Taxable net income on Line (9) is calculated as the net operating revenue or EBIDTA, less the allowable tax deduction for depreciation.
- This can give a view of how well the business is likely to perform in the future.
- 3310.4Alternative measures of performance or liquidity and the effect of pro forma adjustments thereon, provided the requirements of S-K 10(e) are met.
- The P&L and cash flow statements for U.S. companies, at least those that are publicly traded, are laid out in a mandatory quarterly filing to the Securities and Exchange Commission called the Form 10K.
Examples of such costs are accounts payable, wages paid, credit payments, mortgage payments, etc. Returning to the example of the proforma balance sheet, such financial statements should include the amount that the start-up should pay for the month for example the cost paid to consultants, marketing agents, team members, workers, etc. After the values of all these liabilities have been recorded, they must be added together to calculate the final value of the total liabilities. Both pro forma financial statements and budgets are an anticipation of the future and can decide you intend to spend your money. Budgets are formulated based on pro forma financial statements to plan based on expectations. Pro forma financial statements provide insights into the company’s historical health and focus on the company’s future.
By contrast, pro forma financial statements are based on current financial statements and change based on events and assumptions. In other words, pro forma financial statements start from real financial data. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast. As the name suggests, this pro forma projection considers the previous financial statements of your company in addition to the past financial statements of a company that you are hoping to purchase. It combines these numbers to showcase what your financials would have looked like in the case that you combined businesses earlier.