How to Write a Proforma

A proforma financial statement turns raw assumptions into a concrete projection of your company’s future. It’s the foundational document for securing a loan, planning an expansion, or just understanding where your business is headed. This guide will walk you through, step-by-step, how to create a complete set of proforma financial statements, from gathering your data to balancing the final numbers.

What Exactly Are Proforma Financial Statements?

Proforma financial statements are forward-looking reports that project your financial results for a future period. The term “proforma” means “as a matter of form,” indicating these statements are created for a specific purpose and are based on a set of hypothetical assumptions about what will happen. Unlike historical financial statements that report what has already occurred according to GAAP (Generally Accepted Accounting Principles), proformas are all about modeling potential outcomes.

Businesses use them for several key functions:

• Internal Planning and Budgeting: Test the financial impact of strategic decisions, like launching a new product or entering a new market.
• Securing Financing: Show lenders and investors a detailed projection of how their capital will be used and how the business will generate the cash flow to repay debt or provide a return.
• Business Valuations: A Discounted Cash Flow (DCF), a common valuation method, is built directly from proforma cash flow projections.
• Cash Flow Management: Anticipate future cash shortfalls or surpluses, allowing management to act proactively.

A complete proforma set typically includes a Proforma Income Statement, a Proforma Balance Sheet, and a Proforma Cash Flow Statement. These three documents work together to provide a holistic view of a company's projected financial health.

Gathering Your Data and Making Key Assumptions

The credibility of your proforma statements hangs entirely on the quality and reasonableness of your assumptions. This is where you connect your operational plan to your financial forecast. Sloppy assumptions will immediately be picked apart by any savvy investor or lender. Start by gathering historical data and then build your projections from there.

You’ll need to develop assumptions for these key areas:

• Sales Forecast: This is the most important assumption. Your sales forecast should be a realistic, bottoms-up build. Don't just pick a growth rate out of thin air. Base it on market research, your current sales pipeline, production capacity, and marketing initiatives. Break it down by month or quarter for the upcoming year.
• Cost of Goods Sold (COGS): Analyze historical COGS as a percentage of sales. If your material costs are changing or you're gaining efficiency, adjust your percentage accordingly.
• Operating Expenses (SG&A): Separate your expenses into fixed and variable costs.
  • Fixed costs (rent, base salaries, insurance) will remain relatively stable.
  • Variable costs (shipping, sales commissions) should be tied to your sales forecast as a percentage of revenue.
• Capital Expenditures (CapEx): List any significant purchases of assets like machinery, vehicles, or computer equipment that you plan to make.
• Financing: Document any new debt (loans) or equity investments you plan to secure. Include the terms, such as interest rate and repayment schedule.
• Working Capital: Formulate assumptions for how you'll manage accounts receivable, inventory, and accounts payable. You can base these on historical days outstanding (e.g., Accounts Receivable days, or "DSO").

Always document your assumptions on a separate tab in your spreadsheet. Anyone reviewing your work needs to understand the logic behind the numbers. For example, instead of just forecasting $50,000 in marketing costs, explain that it consists of $20,000 for a new employee's salary and $30,000 for online ad spending projected to acquire 1,000 new customers at $30 per customer.

How to Create a Proforma Income Statement

The Proforma Income Statement, or Profit & Loss (P&L), projects your profitability. It typically starts with your sales forecast and makes a series of deductions to arrive at your net income. Follow these steps:

1. Start with Sales Revenue: This is the top line of your income statement and comes directly from your sales forecast.
2. Calculate Cost of Goods Sold (COGS): Multiply your projected sales by your COGS assumption (e.g., if COGS is historically 40% of sales, apply that percentage to your forecasted revenue).
3. Find Your Gross Profit: Subtract COGS from your Sales Revenue. This shows how much profit you make on your core product or service before overhead.
4. Project Operating Expenses: List and sum all of your Selling, General, and Administrative (SG&A) expenses. This includes salaries, rent, utilities, marketing, and everything else needed to run the business.
5. Calculate Operating Income (EBIT): Subtract total Operating Expenses from your Gross Profit. This represents the profit from the business’s primary operations. It's often referred to as EBIT (Earnings Before Interest and Taxes).
6. Subtract Interest Expense: This comes from your financing assumptions. Calculate the interest on any existing and new debt.
7. Calculate Earnings Before Tax (EBT): Subtract Interest Expense from Operating Income.
8. Estimate Income Taxes: Apply your assumed tax rate to your EBT to find the provision for income tax.
9. Calculate Net Income: This is your bottom line: EBT minus Income Taxes. The net income figure is a crucial link, as it will flow directly into your Proforma Balance Sheet and Cash Flow Statement.

How to Create a Proforma Balance Sheet

The Proforma Balance Sheet projects your assets, liabilities, and equity at the end of the forecast period. It provides a snapshot of your company's financial position. This is often the trickiest statement to build because it must adhere to the fundamental accounting equation: Assets = Liabilities + Owner's Equity.

1. Use the Prior Period's Balance Sheet: Your starting point is always your most recent historical balance sheet. You are projecting the changes from that starting point.
2. Project Assets:
   • Accounts Receivable (A/R): Project A/R as a percentage of your annual sales revenue, based on your Days Sales Outstanding (DSO) assumption. For example, if your DSO is 30 days, then your ending A/R balance is roughly (30/365) * Annual Sales.
   • Inventory: Project inventory based on your Days Inventory Outstanding (DIO) assumption and tie it to your forecasted COGS.
   • Property, Plant, and Equipment (PP&E): Take the starting PP&E amount, add your planned Capital Expenditures for the period, and subtract the period's depreciation expense (calculated from your income statement).
3. Project Liabilities and Equity:
   • Accounts Payable (A/P): Project A/P based on your Days Payable Outstanding (DPO) assumption tied to COGS.
   • Debt (Loans Payable): Start with the prior balance, add the principal from any new loans you plan to take, and subtract any principal repayments you plan to make.
   • Retained Earnings: This is the key link from the income statement. The formula is: Ending Retained Earnings = Beginning Retained Earnings + Net Income (from Proforma P&L) - Dividends Paid.
4. Balance the Sheet (The "Plug"): After projecting all other items, you need to sum Total Assets and Total Liabilities & Equity. They won't match yet. The difference is typically your final cash balance. The change required to make the two sides equal is your balancing item, often called the "plug." If liabilities and equity are greater than assets, you have a cash surplus. If assets are greater, you have a shortfall, indicating a need for more financing (like a draw on a line of credit) to close the gap.

How to Create a Proforma Cash Flow Statement

The Proforma Cash Flow Statement shows how changes in your income statement and balance sheet accounts affect cash. It reconciles your Net Income with your final cash balance and proves that all three statements are interconnected correctly.

1. Cash Flow from Operations (CFO):
   • Start with your projected Net Income.
   • Add back non-cash expenses, primarily Depreciation & Amortization.
   • Adjust for changes in Working Capital (subtract increases in A/R and Inventory, as they use cash; add increases in A/P, as it conserves cash).
2. Cash Flow from Investing (CFI):
   • This section is primarily driven by your Capital Expenditures. Purchasing assets is a cash outflow. If you were selling assets, it would be a cash inflow.
3. Cash Flow from Financing (CFF):
   • This reflects cash coming in from new debt or equity infusions (inflows) and cash going out for debt repayments or paying dividends (outflows).
4. Calculate Net Change in Cash: Sum the net cash from Operations, Investing, and Financing. This is the total increase or decrease in cash over the period.
5. Find the Ending Cash Balance: Add the Net Change in Cash to your Beginning Cash Balance (from the prior period's balance sheet). This final number should match the Cash account on your Proforma Balance Sheet. If it does, your model is balanced and complete.

Helpful Tools for Building Proforma Statements

While you can create proformas from scratch, a few tools can make the process much more efficient, especially if you have historical data available.

• Spreadsheet Software: Microsoft Excel and Google Sheets are the classic tools for financial modeling. Their flexibility is unmatched, allowing you to build a completely custom model that fits your business needs. Many free templates are available online to give you a structural head start.
• Accounting Software: Tools like QuickBooks Desktop and Online or Xero have built-in budgeting and forecasting features. These are great for projecting future performance based on your historical financial data already in the system, simplifying the data gathering stage.
• FP&A Software: For larger, more complex businesses, dedicated Financial Planning & Analysis (FP&A) platforms offer more advanced scenario modeling and collaboration features, but spreadsheets and accounting software are perfectly suitable for most small and mid-sized businesses.

Final Thoughts

Building a full set of proforma financial statements is a disciplined exercise that forces you to think critically about every part of your business operations. When done correctly, this provides an invaluable roadmap for making strategic decisions, articulating a compelling story to lenders, and guiding your company toward its financial goals.

The most robust financial models are built on well-researched assumptions, and that's especially true for complex areas like tax planning. If your proforma scenario involves changing your entity structure or expanding to new states with different tax nexus rules, you need answers grounded in real tax code. Our AI research assistant, Feather AI, provides instant, citation-backed answers on federal and state tax questions, allowing you to validate a critical component of your forecast with an authoritative source.