“Pro forma,” in Latin, means “for the sake of form.” Pro forma financial statements are a way of forecasting a company’s financial results for a future period. You create them using historical financial statements and projected cash flow to determine how a company operates in different scenarios. 
Companies use pro forma projections to help plan for best-case scenarios or worst-case scenarios. For example, a company might want to see how their financial projections turn out if they were to receive a capital investment. Alternatively, a company’s business owners might want to do a risk analysis for a proposed transaction. According to accounting standards, it’s best practice to use a pro forma financial statement in conjunction with GAAP statements (generally accepted accounting principles statements).

You can provide decision makers with a pro forma <a href='https://masterclass.com/articles/how-to-read-and-understand-an-income-statement' target='_blank' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://masterclass.com/articles/how-to-read-and-understand-an-income-statement","linkCopy":"income statement","category":"automated-link"}' automatic='true'>income statement</a> for a proposed transaction or proposed line of credit from a bank. Lenders want to know the financial position for the companies they lend to, and the more financial documents they have, the better. The US [Securities and Exchange Commission](https://www.masterclass.com/articles/securities-and-exchange-commission) deems it illegal to mislead investors using fabricated pro forma results. 
There are many different types of pro forma projections, and you create each one by starting with your company’s current income statement. 

1. __Pro forma balance sheet__: Similar to a traditional balance sheet, this will show your accounts receivable, cash flow statements, and other financial information. You can then use that information to plan for the future by adjusting your business operations or business plan accordingly.
2. __Pro forma cash flow__: A pro forma cash flow statement shows you (and potential investors) your company’s inflow and outflows of cash over whatever time period you designate—for example, one year.
3. __Pro forma earnings__: The inverse of a pro forma total expenses projection, a pro forma earnings report can help you to determine the change in your revenue in the coming year. For example, you could run a scenario in which your company releases a new product that brings up the net income by three percent.
4. __Pro forma total expenses__: In this projection, you can estimate how your operating expenses will change in the next year. For example, if your cost of goods sold increases by five percent compared to the current year, you could determine if you have inflows of cash to compensate.
As the financial accounting is already done for you, you only have to do the financial modeling to create a pro forma statement. 

1. __Start by projecting your company’s revenue__. You can either make educated guesses or research the information with a public accountant. Make any pro forma adjustments as accurate as possible, so you get the best possible results. 
2. __Project the costs and depreciation of current assets__. Put liabilities in this portion as well. This step involves any and all expenses for each line item. 
3. __Determine what your cash flow could look like__. You can do this by adjusting your potential profitability, adjusting your statement of cash flows, or tweaking the valuation for your small business. 

The resulting document will show you how your company’s financial reports could look with the adjustments you made, whether it’s to the gross profit, inflows of cash, net revenues, restructuring costs, changes in total liabilities, cost of sales, or any other scenario you want to create for any fiscal year.
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Predicting your company’s financial future can prove difficult. Pro forma financial statements can enable you to make an educated guess by projecting your future financial results.

Predicting your company’s financial future can prove difficult. Pro forma financial statements can enable you to make an educated guess by projecting your future financial results. 

How to Create Pro Forma Financial Statements

“Pro forma,” in Latin, means “for the sake of form.” Pro forma financial statements are a way of forecasting a company’s financial results for a future period. You create them using historical financial statements and projected cash flow to determine how a company operates in different scenarios.

What Is a Pro Forma Financial Statement?

Companies use pro forma projections to help plan for best-case scenarios or worst-case scenarios. For example, a company might want to see how their financial projections turn out if they were to receive a capital investment. Alternatively, a company’s business owners might want to do a risk analysis for a proposed transaction. According to accounting standards, it’s best practice to use a pro forma financial statement in conjunction with GAAP statements (generally accepted accounting principles statements).You can provide decision makers with a pro forma <a href='https://masterclass.com/articles/how-to-read-and-understand-an-income-statement' target='_blank' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://masterclass.com/articles/how-to-read-and-understand-an-income-statement","linkCopy":"income statement","category":"automated-link"}' automatic='true'>income statement</a> for a proposed transaction or proposed line of credit from a bank. Lenders want to know the financial position for the companies they lend to, and the more financial documents they have, the better. The US <a href='https://www.masterclass.com/articles/securities-and-exchange-commission' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/securities-and-exchange-commission","linkCopy":"Securities and Exchange Commission","category":null}'>Securities and Exchange Commission</a> deems it illegal to mislead investors using fabricated pro forma results.

How to Use a Pro Forma Financial Statement

There are many different types of pro forma projections, and you create each one by starting with your company’s current income statement. <ol class="mc-m-4"><li class="mc-my-4"> 1. Pro forma balance sheet: Similar to a traditional balance sheet, this will show your accounts receivable, cash flow statements, and other financial information. You can then use that information to plan for the future by adjusting your business operations or business plan accordingly. </li><li class="mc-my-4"> 2. Pro forma cash flow: A pro forma cash flow statement shows you (and potential investors) your company’s inflow and outflows of cash over whatever time period you designate—for example, one year. </li><li class="mc-my-4"> 3. Pro forma earnings: The inverse of a pro forma total expenses projection, a pro forma earnings report can help you to determine the change in your revenue in the coming year. For example, you could run a scenario in which your company releases a new product that brings up the net income by three percent. </li><li class="mc-my-4"> 4. Pro forma total expenses: In this projection, you can estimate how your operating expenses will change in the next year. For example, if your cost of goods sold increases by five percent compared to the current year, you could determine if you have inflows of cash to compensate. </li></ol>

4 Types of Pro Forma Statements

As the financial accounting is already done for you, you only have to do the financial modeling to create a pro forma statement. <ol class="mc-m-4"><li class="mc-my-4"> 1. Start by projecting your company’s revenue. You can either make educated guesses or research the information with a public accountant. Make any pro forma adjustments as accurate as possible, so you get the best possible results. </li><li class="mc-my-4"> 2. Project the costs and depreciation of current assets. Put liabilities in this portion as well. This step involves any and all expenses for each line item. </li><li class="mc-my-4"> 3. Determine what your cash flow could look like. You can do this by adjusting your potential profitability, adjusting your statement of cash flows, or tweaking the valuation for your small business. </li></ol>The resulting document will show you how your company’s financial reports could look with the adjustments you made, whether it’s to the gross profit, inflows of cash, net revenues, restructuring costs, changes in total liabilities, cost of sales, or any other scenario you want to create for any fiscal year.

3 Steps to Creating a Pro Forma Statement

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Predicting your company’s financial future can prove difficult. Pro forma financial statements can enable you to make an educated guess by projecting your future financial results.

Predicting your company’s financial future can prove difficult. Pro forma financial statements can enable you to make an educated guess by projecting your future financial results. 
