Playing the “what if” game can be dangerous, but sometimes it is a necessity. Pro forma financial statements enable businesses to perform at their best by preparing for the worst. Whether a company is going to market or introducing a new product, both the ideal and worst-case scenarios should be considered.
Developing pro forma financial statements does not equate to pessimism. Certainly, nobody wants the worst outcome to happen, but there can be bumps in the road. Through financial forecasting, businesses ensure they can handle unanticipated loses, slower project times, or financial losses in the event of failure.
Keep reading to learn more about the importance of forecasting financial statements for business and how to accurately develop financial forecasts.
What are pro forma financial statements? – Pro forma financial statements are financial reports that explore the potential impact of various scenarios on a business. As financial forecasts, these statements incorporate assumptions and financial projections to identify the outcome of future events.
The term “pro forma” means “for form” or “as a matter of form” in Latin. These financial statements are used to illustrate the potential financial state of a business following specific assumptions. These statements help determine the effect of decisions on the overall business.
Why do you need pro forma financial statements? – Such financial statements ensure each decision is well thought out and fully planned possible. It is easy to get swept up in a good idea, especially for passionate entrepreneurs. To develop forward looking financial statements, all expenses must be considered as well as the overall impact on the business.
Optimism is a great trait in entrepreneurs, but it can lead to unexpected losses and unanticipated consequences. Forecasting for both the ideal scenario and potential setbacks help businesses make the right decisions at the right time.
Reality Check – Business owners and entrepreneurs jump on ideas every day, growing their business in new and innovative ways. Often, it is easier to focus on the best potential outcome instead of considering possible challenges. However, using pro forma financial statements to calculate the worst-case scenario is the best way to identify potential problems, minimize risk, and ensure success.
Prepare for Setbacks – It is much easier to handle a setback when you prepared for it. Businesses that choose not to forecast their financial statements are easily caught off guard by unexpected challenges or losses. Identifying and itemizing the obstacles that are possible with a project or decision enables a business to prepare as much as possible. Instead of panicking in the face of difficulties, the company is more likely to weather the storm.
Reassure Stakeholders – For many stakeholders, pro forma financial statements are essential. With financial forecasting, you can demonstrate a company’s ability to absorb financial losses in the event of failure. Determining the impact of the worst case can reassure stakeholders and boost their confidence in you as a business owner. Such financial statements can also be crucial tools to raise capital for a new venture.
Minimize Risk – Are you really making the right decision? That thought often haunts business owners and entrepreneurs. People are depending on you for a salary and you likely have a lot of time and resources invested in your business. In addition to instilling confidence in your stakeholders, pro forma financial statements can boost your confidence in yourself.
By developing a financial forecast, you are considering possible outcomes and their impact on your business. If things do not go according to plan, you can determine ahead of time whether your business can handle the loss. Identifying the greatest risks to your business or project can also help you prepare strategies to overcome these obstacles.
How to Develop Financial Forecasts – Financial forecasts come in a variety of forms and can be used to meet the specific needs of a business. Creating a financial statement forecast typically involves examining the previous year’s relevant statements and considering how much they can or will change in the future. Forecasted financial statements can include:
- Income statement
- Gross profit
- Total expenses
- Profit before taxes
- Profit after taxes
What do pro forma financial statements include? – When developing a business plan, you should include three financial statements at the minimum. Forecasted statements are based on accounting statements, including profit or loss, balance sheet, and cash flow. It is also wise to include sales forecast and personnel plan tables.
Utilize Financial Forecasting Software – Financial consultants help business owners properly prepare pro forma financial statements without relying on their best guess. K-38 Consulting recently partnered with Jirav to deliver efficient financial modeling based in the cloud. By consolidating accounting, workforce, and operational data, Jirav enables companies to create more accurate budgets and forecasts. These financials can be packaged and delivered as custom reports to all necessary parties, including stakeholders.
By utilizing financial forecasting software like Jirav, businesses can visualize cash flows for 6, 12, and 60 months out. Budgeting can be accomplished using accurate projected numbers instead of stale data, and data integration keeps everything up to date. Companies do not have to wait around for complicated reports or inaccurate forecasts. Jirav provides quick and actionable financial forecasts, including pro forma financial statements, to help business owners make important decisions.
Grow Your Business with K-38 Consulting – Developing pro forma financial statements is not everyone’s cup of tea. Thankfully, you can rely on financial experts from K-38 Consulting to create pro forma financial statements for your business without hiring a full-time employee. With Big 4 background, consultants provide crucial financial expertise and services to start-up, middle market, and publicly traded companies.
Plan to be the best by preparing for the worst. Contact us today to learn how pro forma financial statements and financial forecasting from K-38 Consulting can set your business up for success.