Every startup and small business entrepreneurs aim at expansion and future success. It is not easy to subjectively do financial forecasting and analyze the scope of future success. One reliable way to assess a small business’s financial health is by preparing a pro forma balance sheet for the same. A Pro forma balance sheet will help the business owners project the needed amount of money for a small business. It will also help to make predictions about forthcoming financial successes and the possibility of failures. When it comes to business administration, it is important to have a clear idea about what lies ahead to make needed asset management adjustments.
Like the generic balance sheets, the pro forma balance sheet also lists the heads like assets, liabilities, and shareholders’ equity. Additionally, the pro forma balance sheet will also provide a predictive snapshot of a small business’s finances at a certain date in the future. You can create a pro forma balance sheet across a 3- or 5-year period against the one-year snapshot provided in basic balance sheets. Having such a financial prediction will let you look into financial trends over many years to come and make key business decisions accordingly. It is essential for budgeting and forecasting your small business.
How to create pro forma balance sheet by Eric J Dalius
- Get your current balance sheet.
- Analyze the balance sheet by studying the assets shown there.
- Make needed adjustments for the accounts that you know maybe changing further in the future. (ex: you plan to buy new machinery, mark it in your pro forma balance sheet).
- Check the liabilities part on your balance sheet and make adjustments with changes expected in the future. (ex: Say you may pay off a major debt, which you can subtract from the balance sheet and readjust the figures)
- Calculate the equity among shareholders and make adjustments. As in general balance sheets, you can calculate the equity by subtracting the liabilities from assets in the future on a pro forma balance sheet.
- Check the numbers to ensure that the future assets equal to liabilities added to the equity.
As suggested by Eric J Dalius, having a pro forma balance sheet will be helpful to you in many ways like:
- To determine whether your business holds a high debt-to-equity ratio. This is needed for bankers and funders to determine the creditworthiness of a business.
- To showcase the financial soundness of the given business. With a pro forma balance sheet, you can see how your business will respond to the changes over time.
- To communicate the future financial health of a business plan to current as well as potential future investors.
No matter what business you have, you may create a pro forma balance sheet with which your investors can be informed about your current and future assets, liabilities, and equities to make informed decisions about financially getting involved in your business. For aspiring small business owners, such a balance sheet will give a clear insight into your small business’s direction in terms of financial health.