How to Create a Pro Forma Cash Flow Statement

A pro forma cash flow statement is a powerful tool for looking into your company's financial future. Unlike a standard cash flow statement that records past events, a pro forma statement projects future cash inflows and outflows, helping you anticipate potential shortfalls or surpluses. This article will walk you through step-by-step how to build a detailed and accurate pro forma cash flow statement to guide your business decisions.

First, Understand What You're Building and Why

Think of the pro forma cash flow statement as a financial forecast focused exclusively on cash. Its primary purpose is to predict your company's cash position at a future point in time—typically over the next 12 months or even quarterly. This foresight is invaluable.

Businesses use them for several key reasons:

• Internal Planning: It helps you determine if you'll have enough cash to cover operating expenses, payroll, and debt payments. If a projected cash shortfall appears in month six, you have five months to arrange for a line of credit or adjust spending.
• Securing Financing: Lenders and investors will almost always demand pro forma financials. It shows them you've done your homework and demonstrates your ability to repay a loan or provide a return on their investment.
• Scenario Analysis: What happens if sales jump by 25%? What if a major client leaves? By creating best-case, worst-case, and base-case scenarios, a pro forma statement allows you to pressure-test your business model and plan for contingencies.
• Strategic Decisions: Before making a significant investment in new equipment or hiring a new team, a pro forma can model the cash impact and help you understand if the timing is right.

While often built in a spreadsheet using tools like Microsoft Excel or Google Sheets, the logic can be applied within planning modules of accounting software such as QuickBooks or Xero, which can help by providing clean historical data exports to start from.

Gathering the Inputs for Your Projection

Your forecast is only as good as the information you put into it. Before you begin building the statement, you need a solid foundation of data and well-reasoned assumptions. Here’s what to collect:

• Historical Financials: You’ll need your income statements, balance sheets, and cash flow statements from the last 2-3 years. This historical data provides your baseline and helps you calculate key percentages (like COGS as a percentage of sales) that will inform your projections.

• Sales Forecast: This is the single most important driver of your entire pro forma statement. It should be a realistic projection of future revenue, broken down by month or quarter. Base it on your sales pipeline, market trends, historical growth, and any new contracts.

• Expense Assumptions: You need to project your costs.

• Cost of Goods Sold (COGS): Often projected as a percentage of your sales forecast. For example, if your COGS has historically been 40% of revenue, you might use that baseline for your projection.

• Operating Expenses (SG&A): Some expenses, like rent, are fixed. Others, like sales commissions, are variable and can be tied to your revenue forecast. For others, like salaries, you'll need to account for planned hires.

• Explicit Plans for the Future: List any major financial events you know are coming.

• Capital Expenditures (CapEx): Are you planning to buy a new server, a delivery truck, or office furniture? You need an estimated cost and planned purchase date.

• Financing Activities: Note any plans to take out new loans, raise money from investors, pay down existing loan principals, or issue dividends to shareholders.

A Step-By-Step Guide to Constructing the Statement

The pro forma cash flow statement follows the same three-part structure as a historical one: Operations, Investing, and Financing. Here’s how to build each section.

Step 1: Project Cash Flow from Operations (CFO)

This is the most involved section, as it tracks the cash generated by your company’s core business activities. You start with a pro forma net income and then adjust for non-cash items and changes in working capital.

1A. Create a Pro Forma Income Statement to Find Net Income

To start, you need your projected net profit. Build a simple projected income statement for the period you're forecasting:

1. Start with your sales forecast.
2. Subtract your projected Cost of Goods Sold (COGS). Use a historical percentage of sales or any known changes in supplier costs.
3. Subtract your projected Operating Expenses. Include salaries, rent, marketing, utilities, etc.
4. Subtract scheduled depreciation and amortization. These are non-cash expenses from prior asset purchases.
5. Subtract projected interest expense based on your loan schedules.
6. Calculate your projected pre-tax income. Then, subtract an estimated income tax liability to arrive at your Projected Net Income.

1B. Adjust for Non-Cash Expenses

Your net income includes deductions for expenses you didn't actually pay for with cash during the period. You must add these back to get a truer picture of your cash position. The most common is depreciation and amortization.

1C. Project Changes in Net Working Capital

Working capital shows how your day-to-day operational accounts affect cash. For each of these balance sheet items, you need to project the change from the beginning to the end of the period.

• Accounts Receivable (A/R): When sales grow, your A/R usually grows too. An increase in A/R means you've made sales but haven't collected the cash yet, so it represents a decrease in your cash flow. Project future A/R based on your sales forecast and your historical Days Sales Outstanding (DSO) metric.
• Inventory: To support higher sales, you'll likely need to hold more inventory. An increase in inventory is a use of cash, so it represents a decrease in your cash flow.
• Accounts Payable (A/P): When you buy more raw materials or supplies on credit, your A/P increases. An increase in A/P is like getting short-term financing from your suppliers, so it's considered an increase to your cash flow.

Once you start with Projected Net Income, add back depreciation, and adjust for the calculated changes in working capital, you have your Total Projected Cash Flow from Operations.

Step 2: Project Cash Flow from Investing (CFI)

This section is usually more straightforward. It deals with cash spent on or received from the sale of long-term assets. Refer to your list of planned financial activities.

• Capital Expenditures (CapEx): If you plan to purchase a new piece of machinery for $50,000 in Quarter 3, that line item will show a cash outflow of (-$50,000) for that period.
• Asset Sales: If you plan to sell an old vehicle for $10,000 in January, you'll record a cash inflow of $10,000 for that period.

Summing these up gives your Total Projected Cash Flow from Investing. For many smaller businesses with no plans for major asset purchases or sales, this figure might simply be zero.

Step 3: Project Cash Flow from Financing (CFF)

This final section tracks the flow of cash between a company and its owners and creditors. Once again, this comes from your list of known future transactions.

• New Debt: If you plan to take out a $100,000 bank loan, list that as a cash inflow.
• Debt Repayments: Note the principal portion of your loan payments for the period. Interest payments were already counted on the income statement. This is a cash outflow.
• Equity Issuance: Money received from selling company stock is a cash inflow.
• Dividends or Distributions: Cash paid out to shareholders is a cash outflow.

Add these projected inflows and outflows together to get your Total Projected Cash Flow from Financing.

Putting It All Together and Interpreting the Results

Now, you can put the pieces of the puzzle together for your forecast period (e.g., for January):

Sum of projected cash flows in the period = (Cash from Operations) + (Cash from Investing) + (Cash from Financing)

This sum gives you your Net Change in Cash for that period. The final calculation is:

Ending Cash Balance = Beginning Cash Balance + Net Change in Cash

Your "Beginning Cash Balance" is simply the actual cash you had at the end of the previous period (e.g., what was in your bank account on December 31st). The ending cash balance for January becomes the beginning balance for February, and so on.

This final number—the Projected Ending Cash Balance—tells you whether you're building a cash reserve or heading toward a deficit. A negative number is an early warning signal that measures need to be taken, giving you the time to make better decisions.

Best Practices and Pitfalls to Avoid

• Be honest with the assumptions. The pro forma is only useful if it’s based in reality. Being overly optimistic in your forecast will set you up for unpleasant surprises.
• Document everything. Clearly outline every assumption you made (e.g., “We assume COGS will be 42% of sales based on new pricing”). This makes it easier when someone questions your numbers and helps you fine-tune the forecast later on.
• Create multiple scenarios. Create best-case, worst-case, and realistic models. The true value lies in this range, as it allows you to plan for all possible results.
• Review and update regularly. As your business environment changes, your pro forma statement can quickly become outdated. Review it monthly or quarterly to adapt to new information and keep it updated and relevant.
• Don’t forget irregular payments. Payments are often made quarterly. Ensure these are accounted for in your cash flow projections.

Final Thoughts

Putting together a pro forma cash flow statement requires attention to detail and a clear-eyed view of your business's future. It turns vague financial worries or hopes into concrete numbers, providing an essential roadmap for navigating future challenges and opportunities by helping you make critical decisions with confidence.

This forecasting process often brings up important financial and tax questions. For instance, determining the proper depreciation schedule for new assets or the tax implications of different financing choices requires precise answers. This is where a reliable resource can save you immense time, allowing you to build more accurate models. Professional guidance helps ensure your financial projections are not just predictive, but defensible.