Pro forma financial statements

Pro forma financial statements

Author: Jon Grupp, CFA, ASA
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Read time:  3 minutes
Published date:  21 June 2023
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Updated date:  16 May 2024
A pro forma financial statement predicts the outcome of an investment or business deal. Learn what to include in your company's pro forma to get started.

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

What does pro forma mean?

Pro forma is a Latin-derived term meaning “for form,” and is used in business to mean that an action is done as a matter of form or to represent a standard document. 

What is a pro forma?

A pro forma is a set of financial statements that predicts the expected future performance of a company. A pro forma uses hypothetical data or other assumptions about a company’s future values, such as revenue and expenses, to forecast future financial performance, especially future growth. 

Why do you need a pro forma?

One of the most important uses of pro forma financial reporting is to aid decision-making and strategic financial planning and analysis (FP&A) efforts for your company. Also, during fundraising, investors will often ask to see financial projections to help them understand how your company leadership is making forecasts. Your financial projections and your assumptions underlying them will influence investors’ understanding of your company’s potential exit value, and— ultimately—their own ROI.

Pro forma financial statements: What’s included?

Pro forma financial statements often include several years of financial projections. Occasionally investors will ask for more or less, but we recommend starting with three years. 

At a minimum, most pro formas will follow the “three statement model,” which includes:

  1. P&L statement (net profit/loss)

  2. Balance sheet

  3. Statement of cash flows

P&L statement

A P&L provides an overview of your company’s revenue and expenses. A forecasted P&L 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.

Balance sheet

A 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.

Statement of cash flows

A 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 helps 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 metrics to include

Your startup may have other specific metrics it uses to track success or benchmark against your peers or industry. You’ll want to include those in your pro forma, too. Here are some examples of additional elements to include:

  • 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.

There are limitations to pro forma financial statements. Since these documents are based on assumptions, they shouldn’t be taken as fact. Rather, they can inform decisions by allowing your company to adjust hypothetical data based on historical trends and model the downstream impact on the future performance of the company.

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.

Build pro forma cap tables—fast.
Learn more

Jon Grupp is a Senior Valuation Technical Manager at Carta. Grupp is a CFA charterholder and Accredited Senior Appraiser (ASA).
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