Pro-forma Financial Statement

Both common-size financial statements and ratio analysis can be used to prepare pro-forma financial statement.

Pro forma statements are based on specific assumptions on future business condition and firm performance., as an integral part of business planning and control. Financial managers use them in the decision-making process when constructing an annual budget, developing long-range plans, and choosing among capital expenditures.

Change in sales
· A common assumption that drive the changes in balance sheet and income statement.

Construct sales-drive pro-forma financial statements:
· Estimate sales driven relationship
· Estimate future tax rate, interest rate
· Forecast sales
· Estimate fixed operating costs and fixed financial costs
· Construct pro-forma statements

Estimate sales
· Use the average compound growth rate of sales over 5 or 10-year period
· Use regression analysis to estimate the relation between GDP growth and sales growth
· Incorporate economic cycles and seasonality of sales
· Incorporate specific events such as changes in regulation, new product development, etc.