When it comes to making business decisions, so much relies on numbers. To get sign-off from key stakeholders, win investors, and strategically plan, you need to demonstrate your ideas make financial sense.
Some financial statements, like balance sheets and income statements, provide a snapshot of a business’s past performance, but they often don't help with future planning. For this reason, professionals often use forecasts and financial projections to plan and answer important “what if” questions. Pro forma financial statements are a common type of forecast that can be useful in these situations.
Here’s a closer look at what pro forma financial statements are, how they’re created, and why they’re a key aspect of financial decision-making.
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A pro forma financial statement uses hypothetical data or assumptions about future values to project performance and financial position over a period that hasn’t yet occurred.
In the online course Financial Accounting, pro forma financial statements are defined as “financial statements forecasted for future periods. They may also be referred to as a financial forecast or financial projection.”
The course notes these projections can be used “as a depiction of what the financial statements for the business will look like over a certain period of time, if the assumptions made when preparing them hold true.”
Since the term “pro forma” refers to projections or forecasts, it can apply to a variety of financial statements, including:
Whether you’re trying to interpret historical financial statements or create pro forma financial reports, these projections can guide important business decisions. 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.
How Are Pro Forma Financial Statements Used?
Traditionally, financial analysis is used to better understand a company’s performance over a specified period. While this provides insight into a company’s historical health, creating pro forma financial statements focuses on its future, forecasted results. For this reason, these reports can be leveraged in several ways, including analyzing risk, projecting investments, and showing expected results before the end of a reporting period.
Financial forecasting is a core concept every company needs to predict performance using condensed balance sheets and various margin ratios. Several variables, such as global economics, industry, local market, and firm-level factors, must all be considered to predict sales forecasts accurately, as taught in the online course Strategic Financial Analysis.
One of the most important uses of pro forma reports is related to decision-making and strategic planning efforts. For example, you might create pro forma financial statements to reflect the outcomes of three investment scenarios for your business. Doing so can allow you to conduct a side-by-side comparison of possible outcomes to determine which is favorable and guide your planning process.
Creating Pro Forma Financial Statements
Keep in mind that the general process of creating pro forma financial statements isn’t significantly different from that of creating traditional statements. The difference lies in the assumptions and adjustments made about various inputs, while the format and calculations remain the same.
There are, however, specific methods used for these forecasts. The percent of a sales forecasting method, for example, involves determining future expected sales and finding trends across accounts in statements. This is typically used when creating pro formas internally.
Other individual line items can also be easily forecasted, such as the cost of goods sold, since it can be assumed it will proportionally grow with sales. Line items like income tax expense, on the other hand, typically don’t change directly with sales. Stable businesses can generally estimate income tax expense as a percentage of income before taxes.
The basic steps for creating a pro forma financial statement can be summarized to:
- Establish baseline numbers with your organization's current financial statements
- Identify major changes affecting your company's future financials
- Calculate the financial impact by making adjustments
- Prepare for multiple scenarios
All in all, the process of preparing a pro forma balance sheet is much the same as preparing a normal balance sheet. The same holds true for the process of preparing income statements and cash flow statements. It differs when you begin forecasting various line items and calculating how those projections impact your bottom line.
Pro forma adjustments must also be considered when preparing these financial projections. For example, changes in operating expenses, anticipated revenue growth, and modifications in capital structure may all need to be reflected in the pro forma cash flow statements to ensure an accurate forecast.
Beyond the Numbers
The true value of pro forma statements goes beyond the numbers they show. These reports provide key stakeholders, investors, and creditors the foresight needed to make decisions and strategically plan. Managers and individual contributors can also benefit from creating pro forma statements, enabling them to understand different factors impacting business units.
Remember: There are limitations to pro forma financial statements. Since these documents are based on assumptions, they shouldn’t be taken as fact. Rather, they can inform decisions using hypothetical data based on historical trends.
Taking an online course like Financial Accounting or Strategic Financial Analysis can help you understand how to create and interpret different kinds of financial statements to drive strategic decision-making. Each course provides real-world, case-based examples and interactive exercises to reinforce and accelerate your learning. so you can find meaning in them.
Do you want to learn more about what's behind the numbers on financial statements and leverage them to make strategic investment decisions? Explore Financial Accounting and Strategic Financial Analysis. Not sure which course is right for you? Download our free flowchart to find your fit.
This post was updated on March 26, 2025. It was originally published on October 28, 2021.
