Today, in this article we will talk about pro forma cash flow statement.
In fact, I included how to create that, example and benefits too.
So, without further ado, let’s start.
What is pro forma cash flow statement
Pro forma cash flow statement is projection of a company’s future cash flow statement within a specific time period.
It is almost similar to a normal cash flow statement. Which include inflow and outflow of cash of the company. But rather than including current incoming and outgoing cash, it projects future reference.
Because of this, this statement is based on objective and reliable company’s information to accurately predict future projection.
Pro forma statement do not have any definition but we can understand by typical statements and their examples.
But Question is why we need this. well it’s important when creating annual budgeting or investors to take the future decision.
It’s also helpful for startups to plan cash spending and credit lenders to define business to be growth in future.
Remember, pro forma cash flow statement is not enough to see the future performance, it also requires a pro forma balance sheet and pro forma income statement.
So, let’s go ahead.
Types of pro forma cash flow statement
Pro forma cash flow statement can be made from one days to several year, by this it categories in three types.
- short term
- medium term
- long term
So, start from first.
Short term statement
Short term strategy is created upto a month. Which can be daily weekly or monthly too. This type of cash flow statement is used to make a decision of budgeting for an expense or helpful to create a monthly cash flow plan.
Next one is…
Medium term statement
Medium term statement can be created in a time period of less than a year. It used to create a projection of cash flow within the financial year which is best for some businesses. It is helpful to estimate the profit of the future,which can suggest how to work for the whole year.
Long term statement
Long term pro forma cash flow statement include several years of projection. It is most important for management and investors, because depending on this they take long term decisions for the company’s future growth.
Also it can help for capital funding and Investment. This long term projection needs more data and objective to create a statement. Though it is less accurate compared to the previous term.
So, There are three types of projection statements to use to predict Business cash flow, now let’s understand how to create that.
How to create pro forma cash flow statement
It’s little different to create a pro forma statement from a normal statement, because in a typical cash flow statement we have receipt and transactions of all cash. Which can be helpful to create cash inflow and outflow sections.
But in the case of pro forma, we need to predict where the cash is coming and where it is going. In other words, understand future cash inflow and outflow using current cash flow data.
So, first of all remember both typical and pro forma have the same sections inflow and outflow which contain all of three activities.
Let’s understand by pro forma statement example.
Imagine a company named ekvira which manufactures table fans that want to create a pro forma cash flow statement and using these they just wanna know how much they will have cash on hand by the end of the next month.
For this we need to predict cash flow of where it will come and go.
Inflow: one of the main source of firm’s earnings have operations. So the ekvira company shipped $20,000 value’s fans to retailers. But note that this money will come only after shipping the product which takes almost a month. So that money is included in the February time period.
This is only one way to cash incoming to the company, maybe your firm has some different source such as issue stock, bonds etc.
outflow: cash is spent on various things such as goods, operating expenses and tax.
Ekvira company pays $10,000 when it buys raw material and other goods from suppliers. Some companies may be paid after some time or payout in some installment.
But in our case firms pay the cost of goods on the spot. Which includes January month.
Operating expense is also similar to that and it has almost $5,000 per month. After this consider the tax is payable on an annual or quarter time period. So, it can be ignored at this time.
Total cash outflow is $15,000.
Now time to calculate net change in cash position. For this substrate the value of cash outflow from inflow, so we will get a net change of $5,000.
This amount is positive means the company’s performance is good and able to spend money on other things. But if it gets negative cash flow then it needs to improve otherwise the business is going to shut down in the near future.
Apart from that, Ekvira had starting cash of $50,000. So now it will have $55,000 as a starting figure for next month.
Here is another example of a pro forma cash flow statement of Bob’s Rent-A-Bike. You can see it here.
Benefits of statement
Pro forma cash flow statements have many benefits. Because it can predict the future, that is helpful to business in many ways. First is…
Financial model
Pro forma statements show the source of money and where it is going. So it’s possible to consider these and create a financial model. It can show the what if scenarios of business decisions.
Example for what if we change the cost of goods or reduce expenses on some activities. Also if a company has some goals, this statement predicts which financial model will work more accurately.
Business planning
Ya, you heard right. Imagine what if you know your business future capacity, will it not be helpful to taking the best decision for your business.
Absolutely yes!
Cash flow and other pro forma statements help to take future planning. Such as what if scenarios which we talked about. But in this case, the management team considered different scenarios and compared them to each other.
It will give an idea to which will be best for the firm’s business. Example for if a company will get a good amount of positive cash flow, then it thought to spend money on current opportunities.
On the other hand, if a pro forma statement projects negative cash flow, the management team will prepare at an early stage to face that issue.
Conclusion
So, here is the information about the pro forma cash flow statement.
Now your turn, are you ready to create your statement.
Tell me your company’s name in the comment section.