How to Write a Business Pro Forma

Creating a pro forma financial statement can seem intimidating, but it's really just a way to tell a story with numbers—a story about where your business is headed. These forward-looking projections are essential for securing loans, pitching investors, and making smarter internal decisions. This guide will walk you through the process of building the three core pro forma statements, step by step, turning your business plan into a concrete financial forecast.

What is a Pro Forma Financial Statement?

Unlike standard financial statements, which document historical performance, pro forma statements are forward-looking forecasts. They use a specific set of assumptions to project your company's future financial results. Think of them as a financial "what if" scenario. You’re not recording what happened; you’re building a model of what you expect to happen based on your sales goals, cost structure, and financing plans.

These projections are primarily used for:

• Acquiring Funding: Lenders and investors want to see your financial plan and assess the potential return and risk of their investment. A solid pro forma is non-negotiable for any serious funding request.
• Internal Planning and Budgeting: Pro formas help you set financial targets, anticipate cash shortfalls, and plan for growth. They provide a baseline to compare your actual performance against.
• Business Valuation: Projecting future cash flows is a cornerstone of determining how much a business is worth.
• Scenario Analysis: You can model different outcomes. What if a major client leaves? What if your material costs increase by 15%? Pro formas allow you to see the financial outcome of these possibilities.

There are three interconnected statements you'll need to create: the Pro Forma Income Statement, the Pro Forma Balance Sheet, and the Pro Forma Cash Flow Statement.

Before You Begin: Gathering Your Data and Assumptions

The quality of your pro forma depends entirely on the quality of your assumptions. This research and data-gathering phase is the most critical part of the process. Rushing it will produce an unreliable forecast. Before you open a spreadsheet, you need to define the key drivers of your business.

Key Inputs and Assumptions Needed:

• Sales Forecast: This is the engine of your entire model. Don't just pick a random growth number. Build a bottom-up forecast. For example: (number of customers per month) x (average purchase value) or (number of units sold) x (price per unit). If you're a subscription business, project your customer acquisition rate, churn rate, and pricing tiers. Be as detailed as you can for the first 12-24 months.
• Cost of Goods Sold (COGS) or Cost of Sales: For every dollar of revenue, how much does it cost you to produce the product or deliver the service? Express this as a percentage of revenue. This includes raw materials, direct labor, and manufacturing overhead.
• Operating Expenses (OpEx): List every recurring expense required to run the business. Separate them into two categories:
  • Fixed Costs: Rent, insurance, property taxes, and set salaries that don't change with sales volume.
  • Variable Costs: Sales commissions, hourly wages, and marketing spend that fluctuate with business activity.
• Capital Expenditures (CapEx): What major assets do you plan to purchase? This includes computers, machinery, vehicles, or office furniture. You will also need to estimate the useful life of these assets for depreciation purposes.
• Financing Plan: How will you fund the business? Will you take on a loan? If so, what is the principal, interest rate, and term? Are you seeking equity investment from owners or outside investors? The details will directly affect your interest expense and balance sheet.
• Working Capital Management: Define your policies for managing day-to-day cash.
  • Accounts Receivable (AR): On average, how many days will it take for your customers to pay you? This is your "Days Sales Outstanding" (DSO).
  • Accounts Payable (AP): On average, how many days will you take to pay your suppliers? This is your "Days Payables Outstanding" (DPO).

It's a best practice to keep all these assumptions in a separate, dedicated section or tab in your spreadsheet. This makes it easy for you (and anyone reviewing your model) to see the logic and to change assumptions to test different scenarios.

Step-by-Step: Creating Your Pro Forma Income Statement

The income statement, also known as the Profit & Loss (P&L), shows your company’s expected profitability over a period of time (e.g., a month, quarter, or year). This is where you calculate "the bottom line" or net income. You should create projections for the next 3-5 years, with the first year broken out monthly.

Step 1: Project Revenue. Transfer your detailed sales forecast to the top line of the income statement. This is your starting point.

Step 2: Calculate Cost of Goods Sold (COGS). Apply your COGS percentage assumption to your revenue projection. (Revenue x COGS %) = COGS.

Step 3: Determine Gross Profit. Your gross profit shows how much money is left over after accounting for the direct costs of your product or service. Gross Profit = Revenue - COGS.

Step 4: List and Subtract Operating Expenses. Detail all your SG&A (Selling, General & Administrative) expenses based on your assumptions. This includes salaries, rent, marketing, utilities, insurance, and professional fees. Sum them up to get Total Operating Expenses.

Step 5: Calculate EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a key metric for understanding the core operational profitability of the business, independent of financing and accounting decisions. EBITDA = Gross Profit - Total Operating Expenses.

Step 6: Subtract Depreciation & Amortization. Based on your capital expenditure plan, calculate the depreciation for each asset. For example, a $5,000 computer system with a 5-year straight-line depreciation would add $1,000 in annual depreciation expense.

Step 7: Arrive at Operating Income (EBIT). This is your Earnings Before Interest and Taxes. EBIT = EBITDA - Depreciation & Amortization.

Step 8: Subtract Interest Expense. If you plan to take on debt, calculate the interest you'll pay based on the loan's terms. This comes directly from your financing assumptions.

Step 9: Calculate Pre-Tax Income. Also known as Earnings Before Tax (EBT). EBT = EBIT - Interest Expense.

Step 10: Calculate and Subtract Income Tax. Apply an estimated effective tax rate to your pre-tax income to figure out your provision for income taxes. This can be complex, so using a blended federal and state statutory rate is often sufficient for initial projections.

Step 11: Calculate Net Income. This is the final line on your income statement and shows your predicted profit after all expenses have been paid. Net Income = Pre-Tax Income - Income Tax Expense.

Next Up: Building Your Pro Forma Balance Sheet

While the income statement shows performance over time, the balance sheet is a snapshot of your company's financial position at a single point in time (e.g., as of December 31, 2025). It is governed by the fundamental accounting equation: Assets = Liabilities + Equity. Your pro forma balance sheet must always balance.

You’ll build this statement for the end of each projected period (month, quarter, or year).

Projecting Assets

• Cash: The cash amount will ultimately be determined by your cash flow statement. Start with a placeholder and come back to this after the next step.
• Accounts Receivable: This is tied to your sales and collection policy. If you have a 30-day collection period (your DSO), your Accounts Receivable at the end of a month will be roughly equal to that month's sales.
• Inventory: This depends on how much product you need to keep on hand to meet sales projections. You may want to hold, for example, 45 days' worth of COGS as inventory.
• Fixed Assets (PP&E): This is calculated period-over-period. Ending PP&E = Beginning PP&E + Capital Expenditures - Accumulated Depreciation. The CapEx and depreciation figures flow from your other assumptions and your income statement.

Projecting Liabilities & Equity

• Accounts Payable: Similar to AR, this is tied to your costs and payment policy. If you take 45 days to pay your suppliers (your DPO), your AP balance will be roughly equal to the last 1.5 months of COGS or relevant operating expenses.
• Debt: This balance is also calculated period over period. Ending Debt = Beginning Debt + New Debt Raised - Principal Repayments Made.
• Owner's Equity: Equity connects the income statement to the balance sheet.
  • Paid-In Capital: The running total of cash invested into the business by its owners.
  • Retained Earnings: This is a crucial link. Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Paid. The Net Income figure comes directly from your pro forma income statement.

Bringing It All Together: The Pro Forma Cash Flow Statement

The cash flow statement is often considered the most important of the three because profit does not equal cash. You can be profitable on paper but run out of cash and go out of business. This statement bridges the gap between the income statement and balance sheet by showing exactly where your cash is coming from and where it’s going.

It's broken into three sections:

1. Cash Flow from Operations (CFO): This starts with Net Income and adjusts for non-cash items and changes in working capital.
   • Start with Net Income (from the income statement).
   • Add back Depreciation & Amortization (since this is a non-cash expense).
   • Adjust for Changes in Working Capital (found by comparing the beginning and ending balance sheets for each period). An increase in an asset like Accounts Receivable uses cash, while an increase in a liability like Accounts Payable generates cash.
2. Cash Flow from Investing (CFI): This section primarily tracks cash used for capital expenditures. If you buy new equipment, it’s a cash outflow here.
3. Cash Flow from Financing (CFF): This shows cash from an equity investment or from new debt (inflows), and cash used for repaying debt or paying dividends (outflows).

Finally, you calculate the Net Change in Cash for the period (CFO + CFI + CFF). Add this to your beginning cash balance to get your Ending Cash Balance. This final figure must match the cash figure on your pro forma balance sheet for the same period. If they match, your model is working correctly!

Best Practices and Final Tips

• Be Conservative: It's tempting to create a "hockey stick" projection where sales explode. Investors and lenders know better. Base your projections on realistic market assessments. It's far better to under-promise and over-deliver.
• Use Scenarios: Build a base case, an optimistic case (best-case), and a pessimistic case (worst-case). This demonstrates that you’ve thought about potential risks and opportunities.
• Stay Organized: Good spreadsheet hygiene is key. Keep your assumptions, calculations, and final statements clearly separated and labeled. Use formulas to link your statements together; never hard-code a number that is calculated elsewhere in the model. Financial tools like QuickBooks can provide a strong historical data foundation for your first-period assumptions.
• Check Your Work: The number one check is ensuring the balance sheet always balances. The second is making sure your ending cash on the cash flow statement ties to the cash on your balance sheet.

Final Thoughts

Building a full set of pro forma financials is a detailed exercise that forces you to think through every component of your business strategy. It moves your plan from an idea to a quantifiable, defensible financial narrative that stakeholders can understand and evaluate.

As you build models and analyze different scenarios, you’ll inevitably face complex questions about tax implications—especially around depreciation, tax credits, and the impact of different business structures. Instead of pausing your forecast to spend hours deciphering tax codes, you can get instant clarity. Our product, Feather AI, provides citation-backed answers to your tax questions in seconds, ensuring your assumptions are grounded in accurate, auditable information without breaking your workflow.