Pro Forma Cash Flow StatementDefined with Examples & More

Written By:
Adiste Mae

Reviewed By:
FundsNet Staff

A Pro Forma Cash Flow Statement is a budgeting technique that is very helpful for companies in projecting their cash inflows and outflows.

It also is a beneficial tool for comparing which budgeting method is more efficient in a given situation.

This article will discuss its uses, advantages, and differences from other accounting reports in the next sections below.

What is a Pro Forma Cash Flow Statement?

Pro Forma Cash Flow Statement projects a company’s future cash inflow and outflows. Its primary difference from the Cash Flow Statement is the timing of reporting.

The cash flow statement provides a report of the movement of cash inflows and outflows over a specified period of time.

It is also possible to create other pro forma financial reports such as a Pro Forma Income Statement and Pro Forma Balance Sheet to validate the financial information provided by the Pro Forma Cash Flow Statement.

At times, the Cash Flow Statement will show a negative cash balance which will provide the management an indication that it may need to raise funds internally or externally to augment the cash deficit.

When the cash balance is positive, it means the company has excess cash funds which can be used to pay off debts, or for investment opportunities.

Types of Pro Forma Cash Flow Strategies

The creation of pro forma cash flow statements can be prepared for different periods.

The various time frames are the following:

• Short-term statements. This statement applies to daily, weekly, or monthly reports. To execute this report, the company needs current inflows like its outstanding invoices and current outflow transactions like accounts payable. This method is the most accurate because it only considers the short-term financial information provided.
• Medium-term statements. The time frame considered in this statement is less than a year which is helpful in revenue and profit estimation for one accounting year. Usually, the information needed to create this type of report is estimated unbilled revenues.
• Long-term statements. This type of pro forma cash flow statement is applicable for projections made for more than a year. It is beneficial for long-term business transactions like capital investing, etc.

The budgeted revenues and expenses are the basis of preparation for this type of report.

However, this report will show less accuracy due to its longer timeframe consideration.

Benefits of Pro Forma Cash Flow Statements

There are many benefits to preparing Pro Forma Cash Flow Statements and it includes the following:

Supports Financial Modeling

A Pro forma cash flow statement helps in modeling accounting-related transactions.

By evaluating all earnings and expenses, the company may determine what could be the implication of future decisions for the business.

It may also allow possible comparison between different related costs, and income that could help in structuring a better financial modeling technique.

What affects the behavior of sales, production, and overhead costs is the proper recognition of variable costs.

The related computation may give the company relevant information on the level of impact of these costs.

Other advantages of using pro forma cash flow are assessment of the business strategy towards its goal, determination of the company’s future valuation, and if all the modeling techniques are achieved within the proposed period.

Supports Business Planning

Pro forma cash flow or cash flow statements are important factors in business planning.

It helps the company assess which strategy is better and achievable.

Companies may also use it to project and compare different possible scenarios that will be helpful in the planning stage.

It is not only a business planning tool but also a risk management tool.

As such, the company may avoid risky decisions that may impact the company negatively.

It may also provide room for other opportunities such as investments and a guide to budgeting techniques.

Whenever the cash projection falls short, the company may opt to implement a cost-minimization method as a precautionary measure.

Whenever there is excess cash, they may utilize it by putting it towards long-term investment.

In the budgeting aspect, the company may assess the budgeting method to use depending on the severity of cases, positive or negative.

Supports a More Accurate Financial Reporting

The preparation of Pro Forma Cash Flow Statements is aligned with the Generally Accepted Accounting Principles (GAAP).

For example, as the GAAP states, one-time expense that has a material effect on financial reports must be recognized.

As such, through the pro forma cash flow, the company may use an alternative and not incur such expenses so that the cash balance will result in a positive cash flow.

Supports Financing or Investment Opportunities

A pro forma cash flow statement is very helpful as a projection or budgeting technique.

Through this, determining the cash flow status is possible.

The company may enter into capital investments if it projects excess cash over its future business expenditures.

If it needs additional capital funding, it may do so by raising funds internally by issuing shares to the public, or externally through borrowing from financial institutions like banks, lenders, union credits, etc.

To entice more investors and lenders, they must provide accurate reporting, high profitability rates, and a positive cash flow.

The company must always consider the conservatism theory for more accurate projections, and not mislead any investors or lenders.

Differences Between Pro Forma Statements and Financial Statements

In the preparation of Pro Forma Cash Flow Statements and Cash Flow Statements, the guidelines set by the Generally Accepted Accounting Principles (GAAP) must be followed.

Although they follow the same guidelines, there are still differences in the preparation such as the following:

Guidelines

GAAP must be strictly followed by public companies when they report their financial statements to the Securities and Exchange Commission (SEC).

Pro Forma Cash Flow Statements are only projections and as such, they can make adjustments to the report that does not necessarily adhere to GAAP.

Timeframe

Financial Statements that are prepared under GAAP are prepared on a quarterly or semi-annual basis which can last between a few months to a year.

Pro-forma statements are prepared for different timeframes: short-term, medium-term, or long-term.

One-time Events

Non-recurring events that have a material effect on the business are required under GAAP to be recorded in the financial reports.

In the preparation of the pro forma cash flow statement, these events are not required to be included but may be added as a supplement to the statement to show an accurate or true picture of the company’s financials.

Accuracy

Pro Forma Cash Flow Statements may not present an accurate report of the company’s financials because it may exclude information that can be material and mislead investors and stakeholders.

To demonstrate a company’s integrity toward potential investors, they must always strive to present an honest and reliable financial report.

As such, when providing the GAAP financial statements, the pro forma statements are also presented as a supplement report to provide additional information on the company’s overall financial health.