Pro forma financial statements

Typically, companies use financial statements like balance sheets, income statements, and cash flow statements to understand performance over a specific period of time. While these can provide insight into your company’s historical financial health, pro forma financial statements focus on your company’s future. 

What is a pro forma?

Pro forma financial statements are a set of reports that predict a company’s future performance. A pro forma uses hypothetical data and other assumptions about a company, such as projected revenue and expenses, to forecast its expected financial performance and growth. 

While historical financial statements report actual past performance, pro forma financial statements focus on “what if” scenarios. This helps founders, company executives, and investors evaluate the potential downstream impact of business decisions, market shifts, and proposed transactions.

Pro forma financial statements are commonly used to support decision-making and strategic planning efforts, including financial forecasting, budgeting, mergers and acquisitions, risk analysis, and capital investment. During a funding round, potential investors often use a company’s financial projections—and the underlying assumptions—to assess its potential exit value and their return on investment (ROI).

While pro forma financial statements are valuable for financial planning and analysis (FP&A), they should be interpreted with caution due to their speculative nature. 

What does pro forma mean?

Pro forma is a Latin-derived term meaning “for form.” In the business world, it refers to a standard document or an action done as a matter of form.

What is included in a pro forma?

For public companies, Regulation S-X Article 11 from the Securities and Exchange Commission (SEC) outlines when and how pro forma financial statements should be presented in filings, along with guidance on pro forma preparation. Private companies and small businesses are not subject to SEC rules regarding pro forma statements, but should still provide reasonable accuracy and transparency to maintain credibility with key stakeholders—such as current and potential investors.

Pro forma financial statements often include several years of financial projections. Investors may ask for more or less, but we recommend starting with three years. At a minimum, most pro formas follow the “three statement model,” which includes:

1. Pro forma income statement

2. Pro forma balance sheet

3. Pro forma cash flow statement

Pro forma income statement

A pro forma income statement provides an overview of your company’s revenue and expenses. A forecasted income statement helps evaluate the financial impact of various decisions such as pricing strategies, cost control measures, expansion plans, and investment opportunities. By assessing your company’s projected profitability, you can align decisions with other objectives and financial constraints.

Pro forma balance sheet

A pro forma balance sheet gives a snapshot of your company’s overall financial position and details assets, liabilities, and shareholders’ equity. A forecasted balance sheet is an essential tool for financial planning that helps anticipate future asset and liability levels. Balance sheets allow you to plan for capital expenditures, debt repayments, and working capital needs. They also provide insights into your company’s projected financial resources and obligations.

Pro forma cash flow statement

A pro forma cash flow statement provides insights into your company’s cash inflows and outflows during a specific period. It categorizes cash flows into operating activities, investing activities, and financing activities. Forecasting the statement of cash flows can provide visibility into the timing and magnitude of expected cash inflows and outflows. It also helps you estimate cash requirements; identify potential funding gaps; and plan for capital expenditures, debt repayments, or dividend distributions.

Additional pro forma financial information to include

Your startup may use other metrics to track success or benchmark against competitors. Here are some examples of additional elements you might want to include in your pro forma financial statements:

• Key performance indicators (KPIs): This can include customer satisfaction ratings, profit margin, customer acquisition cost, number of customers, or website traffic. 

• Churn: Account for customer turnover in your pro forma to get ahead of investor questions.

• Ratio analysis: This helps assess your company’s profitability, liquidity, financial leverage, and operation efficiency. 

• Comparative analysis: You can evaluate your relative performance and identify areas of competitive advantage or weakness by comparing your company’s financial ratios or key performance metrics with industry averages or top competitors.

Deal pro forma

A deal pro forma, also known as a “pro forma cap table,” is not the same document as the pro forma financial statements described above. Rather, a deal pro forma is a model of a company’s cap table through an equity financing round and can be used during a fundraising event or other deal, such as an M&A transaction or restructuring. 

Carta customers can take advantage of Deal Pro Forma, a tool that automatically generates a deal pro forma using your company’s cap table.