Pro forma statements represent estimated or projected financial figures for a company's operations. The three most common pro forma financial statements are the income statement, balance sheet, and cash flow statement. Public companies typically issue pro forma statements to inform shareholders and other business stakeholders of management's expectations for future business profits. These statements can also help internal business managers prepare reports and make financial decisions related to business operations.
Pro forma is a Latin term meaning "for the sake of form". Pro forma statements require business owners, directors, and managers to spend time planning and estimating potential profits from current or planned business operations. Many entrepreneurs and small business owners create these statements when writing their business plan. A business plan includes expected profits and other projected financial information to secure external financing from banks, lenders, and investors. Business owners can seek professional help in preparing pro forma reports and statements, e.g. B. Business consultants, business plan writers, or accounting firms.
The income statement is perhaps the most important of all pro forma statements. This statement includes projected sales revenue, rebates, returns, and allowances related to various goods or services sold by the business. The next section of the pro forma income statement is cost of goods sold. Cost of goods sold includes only those costs directly related to items in stock or other items sold to consumers. The third and final section of the income statement includes the various expenses associated with the day-to-day operations of the business.
A pro forma balance sheet includes projected balances of assets, liabilities, and equity or retained earnings owned or owed by the entity. Assets and liabilities are generally classified into two groups: current and noncurrent. Current assets comprise cash, inventories, receivables and other items expected to be consumed in less than one year. Current liabilities show all accounts payable and other current financial obligations that are due in one year. Current assets and liabilities are an important line item on the pro forma statement because they are expected to change frequently in the coming months.
Long-term assets include all items of the business that are not expected to be consumed within the next 12 months. Long-term liabilities are any long-term debt, such as mortgages or financial loans, that are not due in the next 12 months. Equity or retained earnings will reflect the expected economic value added from the company's operations.
The cash flow pro forma statement usually lists all expected future cash inflows and outflows from various business operations. Operations included in the statement of cash flows include operating, financing, and investing activities. This information helps organizations create budgets and other financial roadmaps to maintain positive cash flow throughout the fiscal year.