About Proforma Financial Statements

Ralph Estes's Dictionary of Accounting defines proforma financial statements as "financial statements prepared on the basis of some assumed events and transactions that have not yet occurred." These are the projected results of company operations over a specified time period. Current or would-be accountants, business owners and entrepreneurs should understand their features and purpose.

  1. Function

    • Proforma financial statements serve two primary purposes and several ancillary functions. First, they are a critical component of business plans. Whether used for financing, investment or strategic purposes, business plans always contain financial projections of the predicted results of company operations. The second primary function is to serve as a "road map" and budget for future business activity.

    Types

    • There are three major types of proforma financial statements used in business plans. The proforma income statement projects the income and expenses the company will face. The second primary statement is the balance sheet, which displays the assets, liabilities and owners' or stockholders' equity (ownership) at one or more points in time. The last of the "Big Three" is the cash-flow statement. Also called a sources and uses of funds statement, this document projects all incoming cash (sales, investment and loans) and shows the use of these funds for expenses, purchasing assets and debt service.

    Considerations

    • You should have thoughtful reasons for the numbers you use to create a proforma financial statement. When you analyze the statements prepared by others, you should closely read the "narrative" that accompanies the numbers. The text explains the assumptions made by the creator and allows you to judge the wisdom of the calculations. If you are the creator, you must exhibit knowledge of the components influencing the projected financial results.

    Effects

    • Thoughtful consideration of a good narrative can enhance the believability of the projected financial results. The effects of a less complete narrative may deliver a negative response from readers. Well-prepared proforma financial statements can have a strong positive effect on readers, particularly investors and lenders. These effects can quickly become a negative if the other components of a business plan are sound, but the financial projections are weak or based on inaccurate assumptions.

    Benefits

    • Intelligently created proforma financial statements will, at a minimum, complement an otherwise well-designed business plan. Readers who are potential investors or lenders may decide to provide you the money you need based on the credibility of your projections. If you are the author, you will have an effective "road map" to success, particularly valuable if third-party readers agree with your premise, assumptions and calculations.

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