NR 533 Pro Formas Discussion

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NR 533 Pro Formas Discussion

NR 533 Pro Formas Discussion

 

 

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Debbie and her supervisor have moved to the topic of pro formas. Discuss the purpose of pro forma statements and how they may benefit Debbie.

dq 2

Week 5: Budgeting Process

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Describe the budgeting process and the role of the nurse leader.

What is Pro Forma?

Pro forma refers to a set of financial statements that incorporate assumptions or hypothetical conditions regarding past or future events. Pro forma statements are useful for presenting possible financial results, but must be viewed with caution if the underlying assumptions are not valid or not likely. They are typically targeted at potential or existing investors in a business.

For example, pro forma statements can be constructed that extend an entity’s financial statements through the end of its current fiscal year, containing assumptions regarding the final months of the year that have not yet occurred. Similarly, pro forma statements can include the results of a recent acquisition as though it had occurred earlier, as of the beginning of the year.

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.

These statements can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

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.

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 different scenarios.

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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 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 year.

2. Financing or investment pro forma projection

You may be courting investors or trying to convince your business partners of the value of financing your business. 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.

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 the acquisition earlier. You can use this scenario as a model of what may happen in the future if you buy the other business now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you anticipate challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Will your business be able to handle it? 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.

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