Pro forma financial statement
Learn what a pro forma financial statement is, the main types, and how to build one for your Malaysian business.
November 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- A pro forma financial statement projects how your finances could look after a planned change, using your current figures and clear assumptions
- You can prepare a pro forma income statement, balance sheet or cash flow statement, and each one shows a different side of the same decision
- Good projections include every real cost, such as statutory employer contributions for new staff, and test more than one scenario
- Pro forma statements have no set preparation standard, so they work best alongside the actual accounts your company prepares each year
What is a pro forma financial statement?
A pro forma financial statement is a projection of your business’s future financial results. It combines your existing numbers with a set of assumptions to estimate the effect of a specific event or decision.
The term comes from Latin and means “for the sake of form” or “as a matter of form”. In finance, it describes figures built on assumptions or hypothetical scenarios rather than completed transactions.
The big difference between pro forma and historical statements is timing. Historical financial statements record what’s already happened, such as your actual revenue, expenses, assets and liabilities for a past period. A pro forma looks forward and answers one question: what would your finances look like if this change went ahead?
Say you’re thinking about opening a second location. A pro forma statement would project the extra costs and expected revenue of that expansion. You can then weigh the decision before you commit any money.
Why use pro forma financial statements
Pro forma financial statements give you a structured way to test your plans with numbers instead of guesswork. Here’s how small businesses put them to work.
Financial planning and forecasting
Pro forma statements help you map out your finances for the months or years ahead. Projecting revenue and cash flow lets you set realistic targets and plan for growth or a busy season.
Securing investment and funding
Banks and investors want evidence that your business can repay a loan or generate returns. A clear pro forma shows you’ve worked through the numbers behind your plan, which makes a loan application or investor pitch more convincing.
Strategic decision-making
Every major business decision has a financial side. Thinking of hiring, raising prices, opening a branch or entering a new market? A pro forma projection shows the likely effect on your bottom line first.
Mergers and acquisitions
If you’re thinking about buying or merging with another business, a pro forma statement is essential. It combines both businesses’ figures to show how the joint entity could perform. That helps you judge whether the deal makes financial sense.
Risk assessment
Pro forma statements let you test difficult scenarios as well as hopeful ones. Modelling a drop in sales or the loss of a key client shows you where the weak spots are. You can then plan a response early.
This kind of testing is a practical part of keeping your cash flow healthy, because you’ll spot possible shortfalls months before they arrive.
Benchmarking performance
Once your projections are in place, you can compare them with your actual results as the year unfolds. The comparison shows which assumptions held up and which need work, so each new forecast gets sharper.
Types of pro forma financial statements
Pro forma statements can be grouped by the job they do. Depending on your goal, a pro forma might be:
- a full-year projection that estimates results for the coming financial year
- a historical adjustment that shows a past period as if a change had already happened
- a combined-entity statement that models a merger or acquisition
- a risk or what-if analysis that tests how a shock would affect your finances
Whatever the purpose, you’ll typically build one or more of three core statements. Each one looks at a different part of your finances.
Pro forma income statement
A pro forma income statement projects your revenue and expenses for a future period. It estimates your profit or loss after planned changes, such as a new revenue stream or a price rise.
It’s especially handy when you want to know whether an idea will pay off. If you’re planning to launch a new service, for example, it shows whether the extra revenue is likely to cover the costs involved.
Pro forma balance sheet
A pro forma balance sheet projects your assets, liabilities and equity at a future date. It shows how an event, such as taking on debt or bringing in investors, would change your financial position.
Use it to see how a decision affects your net worth and your working capital. For an equipment purchase funded by a loan, the balance sheet would show the new asset alongside the matching liability.
Pro forma cash flow statement
A pro forma cash flow statement estimates the money moving in and out of your business over a future period. It projects operating, investing and financing cash flows, so you can check you’ll have enough cash to cover your bills.
For small businesses, the timing gap between money coming in and money going out can cause real strain. If you’re planning a period of heavy spending, this statement shows whether your reserves can carry it. A rolling cash flow forecast keeps that view current.
How to create a pro forma financial statement
You can build a pro forma financial statement with basic accounting knowledge and good records. Work through these steps to turn your current data and planned changes into a clear projection.
1. Gather your baseline numbers
Start with your latest income statement, balance sheet and cash flow statement. Review at least 12 months of data to spot trends in revenue and costs.
Check that your records are kept on a consistent cash or accrual basis, so your projections compare like with like. If your business is seasonal, make sure the baseline captures the busy and quiet months.
2. Identify major changes and document your assumptions
Choose the moves you want to model, such as a product launch, a new location, extra staff, a price change or a new loan. Note which parts of your finances each change will touch.
Write down every assumption behind your numbers, including growth rates, prices, start dates and payment terms. A written list makes your projection easier to explain to a lender and easier to revisit later.
3. Calculate the financial impact
Estimate the effect of each change in ringgit and note when it’s likely to happen. Replace vague notes like “more marketing” with an exact amount and the month you expect results.
Include direct costs and any rise in overhead costs, such as rent or software. Apply the adjustments to your baseline, then carry them through the income statement, balance sheet and cash flow statement so all three stay consistent.
4. Prepare multiple scenarios
Build a realistic case first, then a conservative and an optimistic version around it. Vary your key assumptions, such as sales growth and cost increases.
Seeing a range of outcomes helps you plan for each one. It also shows lenders and investors that you’ve thought about the risks.
5. Compare against actuals and update
Once the change is underway, check your projection against your real figures each month or quarter. Where the numbers differ, update your assumptions and roll the forecast forward.
This regular check is also a simple way to measure profitability as the decision plays out.
Pro forma financial statement example
This example shows how a pro forma income statement works for a small Malaysian business. The figures are illustrative.
Imagine you run a graphic design studio in Kuala Lumpur. Your annual revenue is RM480,000 and your total expenses are RM380,000, which leaves a net profit of RM100,000. You’re considering hiring a junior designer so you can take on more client work.
The designer’s salary is RM3,500 a month, and you’d also contribute to the Employees Provident Fund (EPF). For employees under 60, the employer EPF contribution is 13%, the rate for monthly wages of RM5,000 and below.
You’d pay employer contributions to the Social Security Organisation (SOCSO) and the Employment Insurance System (EIS) too. Check the current SOCSO and EIS contribution rates when you add them in.
With equipment added, the hire comes to roughly RM53,000 for the year. You estimate the extra capacity will bring in RM90,000 of additional client work.
Your pro forma income statement would then show:
- projected revenue of RM570,000, made up of your current RM480,000 plus RM90,000 of new work
- projected expenses of RM433,000, made up of your current RM380,000 plus RM53,000 for the hire
- projected net profit of RM137,000, which is RM37,000 more than today
Next, test a conservative case where the new designer brings in RM50,000 of extra work. Revenue would be RM530,000 and profit would fall to RM97,000, which is RM3,000 below your current level. Side by side, the two views show whether the hire is worth the risk.
Pro forma vs budget
Pro forma statements and budgets both look ahead, but they answer different questions. Knowing when to use each keeps your planning clear.
A budget is an operating plan that sets spending and revenue targets for a set period, usually a financial year. You use it to manage day-to-day spending and track performance against goals. It tends to stay fairly fixed once agreed.
A pro forma models your finances under specific hypothetical conditions. A budget asks how you should allocate resources this year, while a pro forma asks what would happen if you made one particular change. In practice, you’ll likely use both: the budget guides regular operations, and pro formas test big decisions first.
Pro forma statements vs pro forma invoices
The two terms sound alike, but they’re different documents. A pro forma invoice is a preliminary bill or quote you send before a sale is finalised. You might send one for customs clearance or to let a buyer arrange payment.
A pro forma invoice sets out the expected terms of a single sale, so it isn’t a financial statement. A pro forma financial statement projects the finances of your whole business and belongs with your planning documents.
Limitations of pro forma financial statements
Pro forma statements are useful planning tools, and they’re most reliable when you know their limits. Keep these points in mind before you base a decision on one.
Based on assumptions
Every pro forma rests on assumptions about the future, and some of them may turn out wrong. Markets shift and surprise costs appear, so your projection is only as good as the assumptions behind it.
No standardised rules
Statutory financial statements in Malaysia follow accounting standards approved by the Malaysian Accounting Standards Board (MASB). Private entities use the Malaysian Private Entities Reporting Standard (MPERS). Public companies use the Malaysian Financial Reporting Standards (MFRS) Framework, which is identical to International Financial Reporting Standards (IFRS).
Pro forma statements have no equivalent rulebook. Two businesses in similar situations could present very different projections, which makes direct comparisons hard.
Potential for bias
Without fixed rules, projections can drift towards optimism, especially when you’re excited about a new venture. Common mistakes include over-optimistic revenue, leaving out statutory costs like EPF and SOCSO, ignoring late customer payments and letting the forecast go stale.
Challenge each assumption and ask your accountant or another independent person to check your figures.
Best used alongside actuals
Pro forma statements are projections, so they work best next to your real financial records. Read them together with your historical statements for a balanced view of where your business stands and where it’s heading.
Build reliable projections with Xero
A pro forma projection is only as strong as the numbers it starts from. When your baseline is accurate and current, you can test decisions with confidence and plan ahead with fewer surprises.
Xero keeps your data organised in one place with automated bank reconciliation and customisable reports. Real-time cash flow tracking means your starting figures are always up to date. Sign up today and get one month free while you build your next forecast.
FAQs on pro forma financial statements
Here are quick answers to common questions about pro forma financial statements.
Is a pro forma the same as a profit and loss statement?
No. A profit and loss statement reports actual results for a past period, while a pro forma income statement projects results after a planned change.
Are pro forma financial statements required by law in Malaysia?
There’s no general legal requirement to prepare pro forma statements, but every company must prepare statutory financial statements under the Companies Act 2016. Under Practice Directive 10/2024 from the Companies Commission of Malaysia (SSM), a private company can skip the audit if it meets any two of three phased limits: for financial periods starting in 2026, revenue and total assets of up to RM2 million each and no more than 20 employees, rising to RM3 million and 30 employees from 2027.
How far ahead should a pro forma statement project?
Match the length to the decision: 12 months suits day-to-day decisions, while funding or expansion plans usually cover one to three years. Break the first year into months so you can track it closely.
Can you create a pro forma statement for a new business?
Yes. Without trading history, you’d base your assumptions on market research, supplier quotes, industry benchmarks and your expected startup costs.
How often should you update your pro forma statements?
Revisit them at least every quarter, and straight away after a big change such as a new contract or a new statutory contribution rate.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.