How to Create a Proforma

Creating proforma financial statements is your way of looking into the future. Instead of just reporting what happened, you're building a detailed forecast of what could happen, turning a set of well-reasoned assumptions into a powerful tool for making decisions. This guide will walk you through the process of building the three core proforma statements: the income statement, the balance sheet, and the statement of cash flows.

What Are Proforma Financial Statements?

In short, proforma financial statements are forward-looking projections. While historical financial statements tell the story of your company's past performance, proformas map out a potential future. They are built on a specific set of assumptions about sales growth, costs, and other key business drivers. Accountants and finance professionals build these models to answer "what-if" questions and guide strategic planning.

They are not just an academic exercise. Proformas are practical documents used for several crucial functions:

• Internal Planning and Budgeting: Modeling different scenarios (optimistic, pessimistic, base-case) helps leadership set realistic goals and allocate resources effectively.
• Securing Financing: Lenders and investors will always ask for proformas. They need to see that you have a viable plan for repayment and growth before committing capital.
• Business Valuations: When buying or selling a business, proformas are used to project future earnings and cash flows, which are central to determining the company's worth.
• Major Business Decisions: Thinking about a major equipment purchase, an acquisition, or launching a new product line? A proforma model quantifies the potential financial outcome of that decision.

Gathering Your Foundational Data

A reliable forecast always begins with a solid historical foundation. Before you can project the future, you need a clear and accurate picture of the present and the immediate past. A messy starting point will only lead to a confusing and unreliable model. Start by collecting the following documents:

• Historical Financial Statements: You'll want at least three years of audited or reviewed income statements, balance sheets, and cash flow statements. This historical data is your baseline.
• Detailed Revenue & Cost Data: Break down your sales by product line, customer segment, or region. Understand your cost of goods sold (COGS) and operating expenses (OpEx) at a granular level. For example, what percentage of your revenue goes toward direct materials? Is your sales team's compensation fixed or commission-based?
• Schedules and Agreements: Gather your fixed asset schedule with depreciation details, any loan amortization schedules, leases, and other key contracts. These documents contain known future expenses that must be included in your model.

Establishing Your Assumptions

This is where the real analytical work begins. Your assumptions are the engine of your proforma model, driving all the projections. Every assumption you make should be documented, defensible, and based on the best information available. A wild guess will undermine the entire model's credibility.

Here are some of the most common assumptions you'll need to define:

• Sales Growth Rate: This is arguably the most important assumption. Don't just pick a number. Base it on market research, industry trends, a detailed sales pipeline, planned marketing campaigns, or production capacity.
• Cost of Goods Sold (COGS): Will your COGS remain a fixed percentage of sales? Or do you expect economies of scale to kick in, reducing that percentage as you grow? Conversely, are your input costs expected to rise?
• Selling, General & Administrative (SG&A) Expenses: Analyze each major SG&A line item. Some costs, like rent, may be fixed. Others, like sales commissions, are variable and will grow with revenue. Plan for discrete cost "jumps," such as hiring new employees or moving to a larger office.
• Working Capital Requirements: How efficiently do you manage your operations? Define your assumptions for:
  • Days Sales Outstanding (DSO): How many days, on average, does it take to collect from customers?
  • Inventory Days: How long does inventory sit before it's sold?
  • Days Payable Outstanding (DPO): How long do you take to pay your suppliers?
• Capital Expenditures (CapEx): What investments in property, plant, and equipment will you need to make to support your projected growth?
• Financing: Are you planning to take on new debt or raise equity? Your model needs to account for the interest on new loans or the dilution from new shares.
• Effective Tax Rate: Based on your projected profitability and jurisdiction, what percentage of your pre-tax income will go toward taxes?

For your model to be clear and trustworthy, create a dedicated tab or section in your spreadsheet where every single one of these assumptions is listed. Anyone reviewing your work should be able to see exactly what drives your forecast.

Step-by-Step: Building the Proforma Income Statement

The income statement is usually the first financial statement you will build. It flows from top to bottom, starting with revenue and ending with net income. Let’s walk through a simplified example.

Assumption: Base year revenue is $1,000,000. Our growth rate assumption is 15%.

1. Revenue (Sales): This is your top line. Using your growth rate assumption, you can project future revenue.
   Year 1 Projected Revenue = $1,000,000 * (1 + 0.15) = $1,150,000
2. Cost of Goods Sold (COGS): Calculate this based on your COGS assumption, often as a percentage of revenue.
   Assumption: COGS is 60% of Revenue.
   Year 1 Projected COGS = $1,150,000 * 0.60 = $690,000
3. Gross Profit: This is a simple subtraction.
   Gross Profit = Revenue - COGS = $1,150,000 - $690,000 = $460,000
4. Operating Expenses (SG&A): Project these based on your specific assumptions for each line item (e.g., salaries, rent, marketing).
   Assumption: SG&A is 25% of Revenue.
   Year 1 Projected SG&A = $1,150,000 * 0.25 = $287,500
5. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):
   EBITDA = Gross Profit - SG&A = $460,000 - $287,500 = $172,500
6. Depreciation & Amortization: This comes from your fixed asset schedule and your CapEx assumption. It's a non-cash expense.
   Assumption: D&A for Year 1 is $30,000.
7. EBIT (Earnings Before Interest and Taxes): also known as Operating Income.
   EBIT = EBITDA - D&A = $172,500 - $30,000 = $142,500
8. Interest Expense: Based on your existing debt and any planned new financing, from your loan amortization schedules.
   Assumption: Interest Expense for Year 1 is $12,000.
9. Earnings Before Tax (EBT):
   EBT = EBIT - Interest Expense = $142,500 - $12,000 = $130,500
10. Income Tax Expense: Apply your effective tax rate assumption.
    Assumption: Tax rate is 21%.
    Income Tax Expense = EBT * 0.21 = $130,500 * 0.21 = $27,405
11. Net Income: This is your bottom line. Net income is a key figure that will link to your balance sheet and statement of cash flows.
    Net Income = EBT - Income Tax Expense = $130,500 - $27,405 = $103,095

Step-by-Step: Building the Proforma Balance Sheet

The proforma balance sheet shows the financial position of the company at the end of the forecast period. It is built by taking a snapshot of the prior period's balance sheet and adjusting each account based on the results of the proforma income statement and your assumptions. Critically, it must always abide by the fundamental accounting equation: Assets = Liabilities + Equity.

Projecting Assets

• Accounts Receivable (AR): Driven by revenue and your DSO assumption.
  AR = (Projected Revenue / 365) * DSO Assumption
• Inventory: Driven by COGS and your inventory days assumption.
  Inventory = (Projected COGS / 365) * Inventory Days Assumption
• Property, Plant & Equipment (PP&E):
  Ending PP&E = Beginning PP&E + Capital Expenditures - Depreciation
• Cash: Cash is typically the last item you will calculate, as it's determined by the statement of cash flows. It often acts as the "plug" to make the balance sheet balance.

Projecting Liabilities & Equity

• Accounts Payable (AP): Driven by COGS and your DPO assumption.
  AP = (Projected COGS / 365) * DPO Assumption
• Debt (Short and Long-Term):
  Ending Debt = Beginning Debt + New Debt Raised - Principal Repayments
• Retained Earnings: This is a direct link from the income statement.
  Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Paid

Step-by-Step: The Proforma Cash Flow Statement

The statement of cash flows ties everything together. It links the accrual-based income statement to the balance sheet by explaining the change in the cash balance from the beginning to the end of the period. For a clean model, this statement should be used to calculate the ending cash balance, avoiding the less precise "plug" method on the balance sheet.

1. Cash Flow from Operations (CFO):
   • Start with Net Income.
   • Add back non-cash charges like Depreciation & Amortization.
   • Adjust for Changes in Working Capital (the changes in AR, Inventory, and AP that you projected for the balance sheet). An increase in an asset like AR is a use of cash, while an increase in a liability like AP is a source of cash.
2. Cash Flow from Investing (CFI): This is primarily your planned Capital Expenditures, which is a use (outflow) of cash.
3. Cash Flow from Financing (CFF): This section includes activities like raising new debt or equity (a source of cash) and repaying debt principal or paying dividends (a use of cash).

The sum of CFO, CFI, and CFF gives you the Net Change in Cash for the period. Add this to your beginning cash balance to get your ending cash balance. This ending cash figure should be the number you use on your proforma balance sheet. If everything is linked correctly, the balance sheet will now balance perfectly.

Tools like Microsoft Excel forecast sheets or dedicated financial modeling software can help automate some connections, but understanding the manual logic is essential for building a truly reliable and flexible model.

Final Thoughts

Building proforma statements is far more than an exercise in spreadsheet mechanics; it's a process of thinking critically about your business from all angles. This financial model translates your strategic plans, market understanding, and operational assumptions into a clear, unified financial picture that informs a better path forward.

These models require combining operational projections with sound tax logic—from future tax rates to the precise depreciation on new assets. When complex tax questions arise in your planning, you need reliable answers quickly. This is where Feather AI becomes exceptionally helpful, providing instant, citation-backed intelligence to ensure your assumptions are grounded in current tax code, letting you model key decisions with confidence.