One thing that every business owner requires is predictive analysis for the future of their company.
Based on these projections, you make business decisions considering the profit margin. However, now and then, entrepreneurs may dwell on the “what-ifs” based on their company’s financial statements.
For example, you want to make an acquisition or take out a loan in the coming months. But you do not know the results that will accompany these hypothetical situations.
That is where a pro forma comes in. This Latin term translates to “as a matter of form.”
Ideally, pro forma financials indicate a “hypothetical scenario” based on your company’s financial journey. With it, you can analyze the impact of certain decisions to plan and control them better.
This blog will talk about the benefits of pro forma and how you can use it to transform projections into profits.
Why Should You Generate a Pro Forma Statement?
A pro forma statement includes hypothetical estimates of your company’s finance. To give you a profit analysis, these are converted into data in an illustrative manner. Moreover, it does not follow the standard accounting processes.
Companies use these pro forma financial statements to calculate their earnings and generate future performance.
If you want your company to operate seamlessly, you must plan and budget accordingly. However, generic financial-tracking documents do not focus on the future but give you an insight into your company’s history. It also shows the current economic stature but does not predict future risks or income opportunities.
In today’s competitive market, it has become essential for business owners to assess their company’s financial journey. Besides, pro forma financials have benefits like:
- Secures a future financing plan for your organization.
- Assesses potential asset management or merger opportunities.
- Analyzes the impact of risks based on certain decisions and predicts a planned approach that will affect your company’s economy.
- Helps with strategic business planning and secure funding if necessary.
- Attracts the investors as pro forma analysis convinces them about net income possibilities.
Doing this will help you look into various iterations of your company’s future events based on financial assumptions. Therefore, it will give you an idea of how well your business will perform based on a decision.
Will It Work for Start-Ups?
As mentioned, pro forma analysis showcases certain predictive information based on financial assumptions. However, start-ups might not have a solid financial modeling history to analyze that.
That is why companies like CFOshare have services that focus on helping start-ups. They assist them with special preparations or assumptions for their pro forma analysis. Indeed, a skilled analyst can build an accurate, complete, and precise report.
According to Alison Daley, CFOshare delivered a specialized and customized pro forma statement that was simple to use. These companies also suggest that creating an accurate and dependable start-up statement for the first time requires a professional’s insight.
Regardless, you can use pro forma statements to make financial decisions, regardless of company type or size.
Use Cases of a Pro Forma Analysis: What Does It Allow You to Do?
When you create pro forma statements, you allow the management team to access various possibilities. Here are some unique plans that a pro forma analysis ensures:
- Develop budget projections and sales revenue to determine future expenses
- Use the data to generate cash flow projections and compare balance sheets
- Undergo a ratio analysis that helps generate profit-loss projections
- Review department processes and analyze their impact on profit
- Propose capitalization solutions for sales, profitability, and production costs
With these use cases, you can quickly identify the best course of action for your company’s finances. In short, each pro forma analysis will offer insight into future expectations that helps choose an alternative plan.
Types of Pro Forma Statements
There are various types of pro forma statements in the market:
- Budget documents: Inflow of predicted revenues compared to the funds’ outflow.
- Earning projections: Gives insight into internal assessments of a change to investors.
- Income statements: Utilizes calculation methods to bring in potential investors based on earning projections.
- Financial accounting: A report excluding any non-recurring or unusual transaction.
You should choose the one that best suits your company’s future requirements. For example, if you are looking for funding, then generate a pro forma income statement.
Besides, did you know that these statements do not comply with the Generally Accepted Accounting Principles or GAAP? It is mainly because pro forma focuses on anticipated revenue and historical data, which differs from GAAP.
The Bottom Line
With that, you know the importance of pro forma analysis for any business. The statements created will allow you to plan and control your business’s future. Moreover, it aids the decision-making process and brings in potential investment opportunities.
Various pro forma statements include financial accounting, earning projections, and more. Indeed, it is a way to convert projections into profits through predictive analysis.