Developing Pro Forma Statements

The financial statements you learned about in earlier chapters provide historical information. To keep your business on track, though, you must consider the future. Future-oriented financial statements are called pro formas, and they are based solely on your expectations of what is likely to happen over the upcoming period. Pro formas can help you predict cash flows and profitability in future periods, so you can plan ahead for any anticipated crunches.

If you prepared a complete business plan before starting your company, you've probably already worked with pro forma financial statements.

Once your company has been around for a while, you'll have a better feel for the numbers and can develop prospective statements that will come very close to what will really happen.

To develop your pro formas, start with your existing financial statements, for as many periods as you have them. These historical reports provide a jumping-off point for future performance. Horizontal analyses can also be especially helpful in creating pro formas, since they show you trends already in progress. For example, if sales have grown by an average of 2 percent over the past few periods, you can reasonably project that same growth rate over the next few periods.

Some items are even more predictable. For example, if you have an outstanding business loan, you know how much of that will be paid down in the upcoming months and how much interest expense will be generated. Fixed expenses can be laid out in a similar manner; if you expect any increases (for instance, if your landlord has told you that the rent will go up by $100 per month), account for them in your pro forma statements. Remember to figure in any planned asset purchases and new loans that may arise as a result of those purchases.

Once you've gotten the numbers started, you can start filling in the pro formas, which look just like your regular financial statements. The only true exception is in the heading: you must label prospective financial statements clearly, especially when someone outside the business will be looking at them. Just as with the standard historical variety, a complete set of pro forma financial statements includes a statement of profit and loss, a balance sheet, and a statement of cash flows.

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