A pro forma balance sheet is a projected standing of what your business will look like in the future. This report takes your current financial position and predicts what your company’s position will be. Similar to how a budget is useful for planning for the future, you use a pro forma balance sheet to plan and strategize about the future.
Pro Forma Balance Sheet Versus Budget
Your budget is loosely related to a pro forma balance sheet. Often, when you plan for the future, you prepare reports based on what your revenue and expenses will be. These financial accounts make up your budget – the internal report that calculates your future estimated net income. Although knowing your budgeted net income is important, it doesn’t translate to your entire financial operation. Consider that your annual budget does not factor in your bank balance, receivables, or payables. Instead, your net income ultimately flows towards your ownership stake reported on the balance sheet under the equity section. The pro forma balance sheet incorporates not only your net income but other financial aspects worthy of tracking.
Financial Aspects of Pro Forma Balance Sheet
Your pro forma balance sheet resembles your balance sheet that reports your actual financial position. It lists your total assets, liabilities, and equity balances. Often, a balance sheet that covers your operations reports two years of activity as of a specific date. One noticeable difference with your pro forma balance sheet is it may cover additional periods. It is not uncommon to see pro forma balance sheets comparing greater than four years of operations. This report lists the actual balance sheet balances expected on specific days in the future. While a normal balance sheet reports what is going on at a specific point in time, you have multiple points of time on a pro forma balance sheet.
Use of Pro Forma Balance Sheet
Your pro forma balance sheet is useful to internal and external parties. You use the pro forma balance sheet to make smarter long-term decisions primarily involving cash flow management. It is also a useful tool for you to manage what your debt will look like in the future. Outside parties find this report useful as well. Banks and other financial institutions may require multi-year forecasts and budgets regarding your financial position. Your pro forma balance sheet provides the required information your bank needs for issuing loans or securing a more favorable rate.
Preparing Pro Forma Balance Sheet
You start preparing a pro forma balance sheet by taking a look at your future operations. By preparing future plans and a budgeted income statement, translate the events that occur into the corresponding balance sheet accounts. If you budget $100,000 revenue, estimate what percent will be received in cash and what will be outstanding and booked as a receivable. For expenses, determine how they will be paid (cash or credit). Incorporate the required infrastructure you need to achieve your operating goals. This means if you need additional equipment, expect to report lower cash balances and higher property, plant, and equipment on your pro forma balance sheet.
When preparing for the future, you need to look beyond revenue and expenses. Help yourself make better decisions for the future by compiling a pro forma balance sheet to take a look at your financial position at certain dates in the future.