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Pro Forma Financial Statements (with Templates and Examples)

This article is Tax Professional approved Group

Pro forma definition

According to Merriam-Webster, “pro forma” means:

  1. Made or carried out in a perfunctory manner or as a formality

  2. Based on financial assumptions or projections

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”).

When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions.

There are three major pro forma statements:

Pro forma statements look like regular statements, except they’re based on what ifs, not real financial results. As in, “What if my business got a $50,000 loan next year?” Your pro forma statements for that scenario would show what your income, account balances, and cash flow would look like with a $50,000 loan.

Since pro forma statements deal with potential outcomes, they’re not considered GAAP (generally accepted accounting principles) compliant. This is because GAAP compliant reports must be based on historical information.

Pro forma statements don’t need to meet the strictest accounting standards, but must be clearly marked as “pro forma” and can’t be used for things like filing taxes. Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).

However, pro forma statements are still extremely useful. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

Different but related: you can send clients pro forma invoices to let them know how much their order would be if they placed it today.

Why create pro forma statements?

Creating pro forma statements for future scenarios can help you:

  • Get financed, by showing lenders or investors how you would use their money to sustainably grow your business.
  • Plan for the future, by considering best, worst, and most likely case scenarios in detail.
  • Anticipate changes that may affect your business as it grows, such as entering a new tax bracket.

For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Pro forma statements vs. budgets

It may be tempting to think of a pro forma statement as the same as a business budget. After all, you create both in anticipation of the future. And both help you plan how you’ll use your money. But budgets and pro forma statements are two distinct financial tools.

Think of it this way: A pro forma statement is a prediction, and a budget is a plan. Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions.

For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year. So, when you create next year’s budget, you can include that extra $7,000—maybe spending $4,000 over the course of the year to pay down the principal on a loan, while adding $3,000 to savings.

Types of pro forma statement

There are four main types of pro forma statements. 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.

1. Full-year pro forma projection

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year.

2. Financing or investment pro forma projection

You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position.

3. Historical with acquisition pro forma projection

This type of pro forma projection looks at the past financial statements of your business, plus the past financial statements of a business you want to buy. Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

Pro forma templates

To create a pro forma statement, you can use the same template you’d use for a normal financial statement. You may want to use Bench’s free templates:

How to create pro forma statements

The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

Creating a pro forma income statement

There are five steps to creating a pro forma income statement:

  1. Set a goal for sales in the period you’re looking at. Let’s say you want to increase your income by $18,000 over the course of one year.

  2. Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months.

  3. Plan how you’ll match your production schedule. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to you—trust your experience as a business owner.

  4. It’s time for the “loss” part of “Profit and Loss.” Calculate the cost of goods sold for each month in your projection. Then, deduct it from your sales. Deduct any other operating expenses you have, as well.

  5. Prepare your pro forma income statement using data you’ve compiled in the prior four steps.

One note: your pro forma statements will be much more accurate if your bookkeeping is up to date. That way, when you project future periods, you’re basing it off the reality of your business today.

How Bench can help

To predict the future, you first need to understand the past. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started. We may not be a crystal ball, but we’re the next best thing. Learn more.

Example pro forma income statement:

Rosalia’s Reliable Recordings

2021 (current) $ 2022 $ 2023 $
Sales Revenue 20,000 38,000 48,000
Cost of Sales (10,000) (19,000) (24,000)
Gross Profit 10,000 19,000 24,000
Operating Expenses
Rent 1,000 1,000 1,000
Web hosting 600 600 600
Advertising 3,000 4,000 5,000
Total Operating Expenses (4,600) (5,600) (6,600)
Operating Income 5,400 13,400 17,400
Net Income 5,400 13,400 17,400

Creating a pro forma cash flow statement

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.

Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. You’ll have to make plans to borrow money and pay it off.

On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment.

Example pro forma cash flow statement

Mickie’s Murakami Museum

2021 (current) $ 2022 $ 2023 $
OPENING BALANCE 16,000 17,000 19,000
CASH RECEIVED FROM
Donors 85,000 87,000 92,000
Souvenir Shop 1,000 900 800
Total Cash Received 86,000 87,900 92,800
CASH PAID FOR
Supplies 34,000 36,000 37,000
Rent 24,000 24,000 24,000
Income Tax 8,000 8,600 8,800
Total Cash Paid 66,000 68,600 69,800
Net Cash Flow Operations 20,000 19,300 23,000

Creating a pro forma balance sheet

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.”

The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Example pro forma balance sheet

Daily Dumpling Deliveries

2021 $ 2022 $ 2023 $
ASSETS
Current Assets
Checking Acct. 13,000 16,000 19,000
Savings Acct. 35,000 41,000 45,000
Accounts Receivable 4,000 2,000 2,000
Inventory 14,000 17,000 21,000
Total Current Assets 66,000 76,000 87,000
NON-CURRENT ASSETS
Production Equipment 14,000 14,000 14,000
Car 9,000 9,000 9,000
Total Non-Current Assets 23,000 23,000 23,000
Total Assets 89,000 99,000 110,000
LIABILITIES & EQUITY
Current Liabilities
Accounts Payable 10,000 9,000 11,000
Line of Credit 21,000 19,000 18,000
Total Current Liabilities 31,000 28,000 29,000
Non-current Liabilities
Loan 40,000 36,000 32,000
Total Liabilities 71,000 64,000 61,000
EQUITY
Owner’s Capital 35,000 35,000 35,000
Retained Earnings 45,000 56,000 65,000
Total Equity 80,000 91,000 100,000
Total Liabilities & Equity 151,000 155,000 161,000

Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. It’s time to create a small business budget.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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