According to the SEC, when required for public companies, pro forma income statements are required for the fiscal year, but not for interim periods. However, for all regular income statements presented in a filing, there must also be a pro forma statement. Pro forma income statements, also called pro forma profit and loss (pro forma P&L), are projections based on your past income statements. Regular income statements, sometimes called statement of financial performance, are exacting, in that they reflect the exact income figures your company had in past years. The pro forma income statements considers past data, but its projections reflect the addition or subtraction of events or things.

Pro forma EPS are calculated in the pro forma income statement, but the figure is also used in the pro forma balance sheet and the pro forma cash flow statement, when necessary. According to the SEC, when the dividends from stock exceed or are planned to exceed the current earnings, the EPS must be calculated. The SEC assumes that that proceeds from any additional shares will be used to fund dividends.

Pro Forma vs GAAP Financial Statements

They are most commonly used to show a company’s financial statements including the effects of a planned M&A deal, however, they can also be used in other scenarios. For example, management might anticipate closing a distribution deal with Wal-Mart in the next pro forma income statements examples six months that will lead to an additional $5M in sales. Management will start with the standard income statement and add the estimated $5M sales projection along with the corresponding expenses needed to produce and ship these goods to the distributor.

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. Like a pro forma income statement, a pro forma balance sheet would be created by building a balance sheet for a given date based on projected values. For example, create a pro forma https://www.bookstime.com/ balance sheet for 12 months in the future and populate the fields with projected asset values, liabilities, and equity in a year. A pro forma income statement starts like an ordinary income statement based on actual financials. But let’s say it’s important to see the impact of a 30% rise in costs (like energy price, rent, or property price).

Free Pro Forma Income Statement & P&L Template

Projections are a fundamental application of pro forma financial statements. These statements project the company financial performance based on future assumptions or theoretical events. The pro forma income statement, for instance, estimates future revenues and expenses, offering a preview of potential profitability. This is invaluable for setting realistic revenue targets, expense budgets, and gauging overall financial viability. Pro forma earnings per share (EPS) are calculated by dividing a firm’s net income (and any adjustments) by its weighted shares outstanding, plus any new shares issued due to an acquisition. This metric determines the financial outcomes of any acquisition or merger and tells the parent company whether the transaction will be accretive (good) or dilutive (bad) to the financial state of the company.

• If you take out the loan, you might share the pro forma financial statements with the lender to demonstrate your ability to repay the loan.
• For some companies, pro-forma earnings provide a much more accurate view of their financial performance and outlook because of the nature of their businesses.
• With the help of our easy-to-create automations and custom rules, proactively setting up all sorts of hypothetical scenarios will run all day, every day.
• Accountants prepare financial statements in the pro forma method ahead of a proposed transaction such as an acquisition, merger, a change in a company’s capital structure, or new capital investment.
• Your current equipment still works, but the cutting edge technology in newer machines can speed up production by 20%.
• If, for example, it is preparing to produce new goods, the financial statements can help forecast if producing the new goods will cause expenses to increase.

In mergers and acquisitions (M&A), pro forma financial statements are essential for evaluating the financial impact of combining two entities. These statements facilitate a side-by-side comparison of the financials of both companies before and after the merger or acquisition. Most businesses have limited resources, and pro forma reports can help you make better decisions with what you have. While pro forma financials are useful for management to evaluate the consequences of various alternatives, they can sometimes present more optimistic pictures of future results. GAAP requirements are often omitted from pro forma statements because they result in more negative reporting. To prepare your pro forma income statement, you’ll need to determine your estimated revenue projections.

The monday.com pro forma template for Excel

Fixed costs stay relatively constant – at least for a while – and are more important in the beginning because they’ll make up a higher percentage of overall costs. There are many different revenue drivers, but our chosen method for generating new business should be appropriate for the amount we charge customers. We don’t want to spend three months courting a new client to sell them a $20 product. Alternatively, we likely won’t sell a $100,000 service with a couple of Google ads – although it could be the first step. When we know how many units we need to sell, we may get a clearer picture of what else we need to do. For instance, we may now better understand how many customers we need, the number of leads we need from marketing, and maybe even the marketing budget required to achieve these numbers.

The trouble with this method is that it’s super manual — which is where monday.com’s Pro Forma Template comes to the rescue. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

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Standard financial statements are based on a company’s historical performance. In contrast, the purpose of pro forma financial statements is to look to the future or to analyze hypothetical scenarios of what could be. They do not include one-time items and do not conform to Generally Accepted Accounting Principles (GAAP). A pro forma income statement, along with a pro forma cash flow and a pro forma balance sheet, form the primary financial projections for a business.

• As we covered in the existing business section, variable costs increase (or decrease) as sales grow (or contract).
• In some cases, that’s created tremendous new opportunities organizations can leverage to chalk up some growth.
• Companies use their own discretion in calculating pro forma earnings, including or excluding items depending on what they feel reflects the company’s true performance or future performance.
• To illustrate why this distinction matters, let’s imagine you and I start a business, and in the beginning, we expect sales to be relatively low; say one hundred units.
• Businesses use pro forma statements for decision-making in planning and control, financial transactions, and external reporting to investors and creditors.

Say you’re a business owner contemplating a loan to invest in more efficient equipment. Your current equipment still works, but the cutting edge technology in newer machines can speed up production by 20%. Then estimate all of your costs and liabilities, such as loans, rent, payroll, taxes, etc. Pro Forma Income Statements are based on knowledge-based “assumptions” but not on facts or accurate calculations.

As an investor or a new business, you need to be careful while depending on the Pro Forma Income Statement. There are two types of Pro Forma Income Statements based on the competition and size of the market, the growth rate, etc. While he is suffering losses because of this section, the Pro Forma Income Statement shows the predicted health of his toy business after eliminating the toddler toys section, which looks quite profitable. After all, we still need to pay salaries, rent, utilities, and any other required costs.