How to Create a Proforma in 4 Steps

Barry Shereck
Imperial Group CFO

What is a proforma?

In accounting and finance, you often hear the term “proforma”. What does that mean?

Proforma refers to any transaction or financial statement that looks to the future in a sense “as if” it occurred. In many United States Securities and Exchange filings, proforma statements are statements giving effect to the proposed transaction, or merger, that require showing to readers the before and after (giving effect to the proposed transaction).

Why do banks, investors, and board of directors ask for a proforma?

Banks will often ask for a proforma to assess the likelihood that a borrower can repay a loan. Investors require this from early-stage private companies to assess the degree of reality incorporated before investing in a business.

There are steps that you need to prepare a projection of anticipated financial results for a business. For our purposes, we will look at proforma financial statements that are often required to present to a bank, investors, or a board of directors. Proformas can be an operating budget that looks forward to the next year or a projection of your best guess of the likely financial results of a business. This proforma is the one that we will focus on.

Step 1: Predict Future Revenue

The first step is to predict anticipated revenue, by month or quarter, over the period required, usually three or five years. You can rely on economic data, a unique model of likely revenue, a percentage increase over time, or whatever is the likely best predictor of future revenue that can be supported by the forecaster.

Once revenue is projected it is also necessary to project all the costs associated with the services or the products being sold. This may require a projection of factory labor and overhead required to produce the products being sold or the services being provided, including depreciation of any equipment used in production, etc.

Step 2: Project Expenses

The next step is to project all the anticipated overhead expenses necessary to achieve the projected revenue. This would include any sales expenses, such as salesperson salaries, benefits and expenses, sales commissions, and all other direct sales expenses. Marketing expenses, including website expenses, advertising, and similar expenses are also included. If costs are incurred in developing new products or services, the business must create a projection of the R&D expenses likely to be incurred. Then, there are the usual expenses of running the business such as rent, management salaries, benefits and expenses, depreciation of any office equipment, insurance, and all other expenses that can be considered as general and administrative expenses that do not fall into any of the above categories.

Step 3: Project the Balance Sheet

Once this projected income statement is prepared, the next step is to project the balance sheet. Starting with the current balance sheet, or a clean slate if there isn’t one available, project the likely balances for each major balance sheet account. Accounts such as receivable, prepaid expenses (for insurance and such), office equipment, production equipment, any other fixed assets used in the business such as a building if it is owned, accounts payable, accrued expenses (amounts that are incurred but will be settled or paid in the future), and ownership capital accounts for whatever capital structure is being used.

Step 4: Prepare Cash Flow Statements

Once you have prepared balance sheets, the next step is to prepare the cash flow statements that will inform the projector as to any shortages of cash. This is a critical outcome that enables the owner and third parties to assess the likelihood of requiring additional capital and create a plan to acquire it.

While this process can seem like a difficult hurdle to overcome to an owner, we at Imperial Advisory have a team of CFOs with over 150 years of collective experience preparing complex forecasts and proformas. We are ready to support you and your team as you prepare these projected financial statements, whether they are for a bank, a board of directors, or potential investors.