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What is your balance sheet going to look like next year? The year after? What about three years from now? Do you care? Many times the answers to these questions are: not sure, no idea, don’t know and yes I care but I don’t have the information to properly answer these questions. It’s very typical for a small or medium sized business to not know what their financial statements are projected to look like over the coming year much less the next three years. Many times they will have a budget (that is usually inconsistent with their historical performance) but haven’t done the work to take the budget one step further and have it flow into an actual set of pro forma financial statements.
What are pro forma financial statements and why do they matter?
I found a few different definitions for the word “pro forma” and the one that from my experience seemed to aptly reflect what entrepreneurs and business owners think it is was:
“done or existing as something that is usual or required but that has little true meaning or importance”
I actually did laugh out loud when I found this because I agree that much of the information produced by finance people can be technically helpful but practically useless. This comes from the way in which financial information is presented. It’s often confusing, detailed and can be hard to follow. Pro forma financial statements can easily fall into this description especially if you find financial statements tough to understand in the first place.
Pro forma financial statements are basically a projection of what your balance sheet and income statement (or profit and loss statement) will look like in the future. Preparing pro forma financial statements gives you the opportunity to see your business as a whole based on your plans. By only reviewing your budget you won’t have a line of sight to what the value of your business will be in the future or what the changes in assets and liabilities will be. If your budget illustrates profit being made, how is the profit going to be spent? Taking time to prepare a pro forma balance sheet based off of your budget (which is basically a pro forma profit and loss statement) will let you see how the expected profits are going to be used by your business to hopefully increase its value. By looking at a set of pro forma financial statements you may make different business decisions based on the results that you are seeing. Do you need to purchase some assets for the business? Do you need to pay down some loans or other financial obligations? Do you want to reinvest the capital or take it out through a dividend? How do all of these decisions impact the bigger picture of what your business is ultimately trying to achieve?
Banks and investors will want to see the pro forma financial statements for your business before providing it with capital. This is because they have their own metrics they are looking for and ultimately want to see what impact their money will have in your business. Your pro forma profit and loss statement is important but it doesn’t present all of the information for your business. A banker or investor will want to know how the projected profit is going to be used by the business and a pro forma balance sheet would help them see the entire financial picture of your business and what it hopes to achieve.
If your business is looking to access money you will have to have pro forma financial statements available. Your finance or accounting team should be able to help you with this but if you are looking for someone to help you understand what the implications are to your business, get in touch with us. At mlenow.ca we we believe accessing money can help your business do more and reviewing your pro forma financial statements is something we can help you with to make sure they make sense and will be understood by potential bankers and investors.
I created mlenow.ca to help businesses looking for ideas, money and results. Our team gets up every day to help businesses that find themselves in this position. Let’s chat and connect if you (or someone you know) needs some help with their business.