What is a pro forma financial statement?

Published Wednesday 17 June 2026

Table of contents

• What is a pro forma financial statement?
• Why use pro forma financial statements
• Types of pro forma financial statements
• How to create a pro forma financial statement
• Pro forma vs budget
• Limitations of pro forma financial statements
• Pro forma financial statement example
• Simplify your financial reporting with Xero
• FAQs on pro forma financial statements

Key takeaways

• Pro forma financial statements are forward-looking projections that estimate your business's future financial performance based on assumptions about upcoming changes or events.
• There are 3 main types of pro forma statements: income statements, balance sheets, and cash flow statements. Each one gives you a different view of how a planned decision could affect your finances.
• Creating pro forma statements involves gathering your baseline financial data, identifying major changes, calculating their financial impact, and preparing multiple scenarios to account for uncertainty.
• While pro forma statements are valuable planning tools, they rely on assumptions and aren't governed by standardised accounting rules. Use them alongside your actual financial records for a complete picture.

What is a pro forma financial statement?

A pro forma financial statement is a projection of your business's future financial performance. It uses your existing financial data along with a set of assumptions to estimate what your numbers could look like after a specific event or decision.

The term "pro forma" comes from Latin, meaning "for the sake of form" or "as a matter of form." In a financial context, it refers to a method of presenting figures based on certain assumptions or hypothetical scenarios rather than completed transactions.

The key difference between pro forma and historical financial statements is timing. Historical financial statements record what's already happened. They show your actual revenue, expenses, assets, and liabilities for a period that's already passed. Pro forma statements, by contrast, look ahead. They answer the question: "What would our finances look like if this particular change took place?"

For example, if you're considering opening a second location, a pro forma statement would project the additional costs, expected revenue, and overall financial impact of that expansion. It gives you a structured way to evaluate the decision before committing resources.

Why use pro forma financial statements

Pro forma financial statements help you make informed decisions about your business's future. Rather than relying on guesswork, they give you a structured framework for evaluating what lies ahead.

Financial planning and forecasting

Pro forma statements let you map out your financial trajectory for the coming months or years. By projecting revenue, costs, and cash flow, you can set realistic targets and allocate resources more effectively. This is especially useful when you're planning for growth, seasonal changes, or new product launches.

Securing investment and funding

Lenders and investors want to see evidence that your business can generate returns. Pro forma statements demonstrate your financial expectations in a clear, structured format. Whether you're applying for a bank loan or pitching to investors, these projections show that you've thought carefully about the numbers behind your plans.

Strategic decision-making

Every significant business decision has financial consequences. Pro forma statements help you evaluate those consequences before you act. Thinking about hiring new staff, raising your prices, or entering a new market? A pro forma projection lets you see the potential impact on your bottom line first.

Mergers and acquisitions

If you're considering buying another business or merging with one, pro forma statements are essential. They allow you to combine the financial data of both businesses and project what the merged entity's finances would look like. This helps you assess whether the deal makes financial sense.

Risk assessment

Pro forma statements let you test different scenarios, including worst-case ones. By modelling what happens if sales drop, costs rise, or a key client leaves, you can identify vulnerabilities and build contingency plans. For more on keeping your finances resilient, see this guide on managing cash flow. This kind of forward thinking helps you stay prepared for the unexpected.

Benchmarking performance

Once you've created pro forma projections, you can compare them against your actual results over time. This comparison helps you understand where your assumptions were accurate and where they fell short. It's a practical way to refine your forecasting and improve your financial planning over time.

Types of pro forma financial statements

There are 3 main types of pro forma financial statements, each focusing on a different aspect of your finances. Together, they give you a comprehensive view of how a planned change could affect your business.

Pro forma income statement

A pro forma income statement projects your expected revenue and expenses over a future period. It estimates your projected profit or loss by factoring in anticipated changes like new revenue streams, cost increases, or shifts in pricing.

This type of statement is particularly useful when you're evaluating whether a specific initiative will be profitable. For instance, if you're planning to launch a new service, a pro forma income statement can help you estimate whether the additional revenue will outweigh the costs involved.

Pro forma balance sheet

A pro forma balance sheet projects your assets, liabilities, and equity at a future point in time. It shows how a planned event, such as taking on debt, purchasing equipment, or bringing in new investors, would change your overall financial position.

This is helpful when you need to understand how a decision affects your business's net worth and financial stability. For example, if you're considering a significant equipment purchase financed through a loan, the pro forma balance sheet would show both the new asset and the corresponding liability.

Pro forma cash flow statement

A pro forma cash flow statement estimates the money flowing in and out of your business over a future period. It projects your operating, investing, and financing cash flows to help you understand whether you'll have enough cash on hand to meet your obligations.

Cash flow projections are critical for small businesses, where timing gaps between income and expenses can create real problems. If you're planning a period of heavy investment, for instance, this statement helps you see whether your cash reserves can handle it. For more on projecting cash movement, see this guide on cash flow forecasting.

How to create a pro forma financial statement

Creating a pro forma financial statement doesn't require advanced accounting expertise. Follow these steps to build a solid projection based on your existing data and planned changes.

1. Gather your baseline numbers

Start with your most recent actual financial statements: your income statement, balance sheet, and cash flow statement. These provide the foundation for your projections. Review at least the past 12 months of data to identify trends in revenue, expenses, and cash flow patterns.

If your business is seasonal, make sure your baseline accounts for those fluctuations. The more accurate your starting data, the more reliable your projections will be.

2. Identify major changes

Determine the specific events or decisions you want to model. These might include launching a new product, expanding to a new location, hiring additional staff, changing your pricing, or taking on new debt.

List each change clearly and note which financial areas it will affect. A new hire, for example, impacts your payroll expenses on the income statement and your cash outflows on the cash flow statement.

3. Calculate the financial impact

For each change you've identified, estimate its financial effect. Research costs, project additional revenue, and factor in timing. Be specific: rather than noting "increased marketing spend," estimate the exact amount and when you expect to see returns.

Apply these adjustments to your baseline numbers to create your projected figures. Make sure the changes flow through consistently across all 3 statement types where applicable.

4. Prepare multiple scenarios

Create at least 3 versions: an optimistic scenario, a realistic scenario, and a conservative scenario. Vary your key assumptions, such as revenue growth rate, cost increases, and customer acquisition timelines, across each version.

Having multiple scenarios helps you understand the range of possible outcomes and prepare for different situations. It also gives lenders and investors confidence that you've considered the risks involved.

Pro forma vs budget

Pro forma statements and budgets are both forward-looking financial tools, but they serve different purposes and work in different ways.

A budget is an operational plan that sets spending and revenue targets for a defined period, usually a financial year. It's a tool for managing day-to-day finances: tracking income against expenses, controlling costs, and measuring performance against set goals. Budgets tend to be relatively fixed once approved, though they may be reviewed periodically.

A pro forma statement is a projection tool. It's designed to model what your finances would look like under specific hypothetical conditions. While a budget asks "how should you allocate your resources this year?", a pro forma asks "what would happen to your finances if you made this particular change?"

In practice, you'll likely use both. Your budget guides your regular financial operations, while pro forma statements help you evaluate major decisions before you commit to them. They're complementary tools, not alternatives.

Limitations of pro forma financial statements

Pro forma financial statements are useful planning tools, but they come with limitations you should understand before relying on them.

Based on assumptions

Every pro forma statement is built on assumptions about the future, and those assumptions may not prove correct. Market conditions can shift, customer behaviour can change, and unexpected costs can arise. The accuracy of your projections depends entirely on the quality of the assumptions behind them.

No standardised rules

Unlike statutory financial statements, which follow established accounting standards such as UK GAAP or IFRS, pro forma statements don't have standardised preparation rules. This means 2 businesses could present very different pro forma statements for similar situations, making direct comparisons difficult.

Potential for bias

Because there are no fixed rules governing pro forma statements, there's a risk that projections can be overly optimistic or selectively presented. This can happen unintentionally when you're enthusiastic about a new venture, or deliberately when trying to make a business case look more attractive. Review your assumptions critically and consider having someone independent check your figures.

Best used alongside actuals

Pro forma statements should never replace your actual financial records. They're projections, not facts. Use them in conjunction with your historical financial statements and management accounts to get a balanced view of your financial position. Comparing your pro forma projections against actual results over time is one of the best ways to improve the accuracy of future forecasts.

Pro forma financial statement example

This practical example shows how a pro forma income statement works for a small business.

Imagine you run a graphic design studio in Manchester. Your current annual revenue is £120,000, with total expenses of £95,000, giving you a net profit of £25,000. You're considering hiring a junior designer to take on more client work.

To build your pro forma income statement, you'd start with those baseline figures. The junior designer's salary and associated costs (National Insurance, pension contributions, equipment) come to roughly £32,000 per year. You estimate that with the extra capacity, you could take on £45,000 in additional client work over the year.

Your pro forma income statement would then project annual revenue of £165,000 (your current £120,000 plus £45,000 in new work). Projected expenses would be £127,000 (your current £95,000 plus £32,000 for the new hire). This gives you a projected net profit of £38,000, an increase of £13,000 over your current position.

You'd also want to create conservative and optimistic versions. In a conservative scenario, the new designer only brings in £30,000 of additional revenue, reducing your projected profit to £23,000 (slightly below your current level). This kind of scenario planning helps you understand the risk and decide whether the hire is worthwhile.

Simplify your financial reporting with Xero

Having reliable, up-to-date financial data is the foundation of any good pro forma projection. Without accurate baseline numbers, even the most carefully constructed forecast won't give you the insights you need.

Xero's cloud accounting software keeps your financial data organised and accessible in one place. With automated bank reconciliation, customisable reports, and real-time cash flow tracking, you can access the up-to-date baseline figures you need to build meaningful projections. Get one month free.

FAQs on pro forma financial statements

Here are some frequently asked questions about pro forma financial statements.

What is the difference between pro forma and management accounts?

Management accounts report on your actual financial performance over a recent period, while pro forma statements project future performance based on assumptions. You'd typically use management accounts to review how your business is doing now, and pro forma statements to evaluate how it could perform under a specific scenario.

Are pro forma financial statements required by law?

No, pro forma financial statements aren't a legal requirement for most small businesses in the UK. However, they may be requested by lenders, investors, or potential business partners as part of a funding application or due diligence process.

How far ahead should a pro forma statement project?

Most pro forma statements cover 1 to 3 years, depending on the purpose. Shorter projections tend to be more accurate, while longer ones are useful for strategic planning but carry more uncertainty.

Can you create a pro forma statement for a new business?

Yes, startups regularly use pro forma statements to project their expected financial performance. Instead of historical data, you'd base your assumptions on market research, industry benchmarks, and your business plan's revenue and cost estimates.

How often should you update your pro forma statements?

Review and update your pro forma statements whenever there's a significant change in your business circumstances or assumptions. At minimum, revisit them quarterly so your projections stay aligned with your actual performance and current market conditions.