Don’t bother me…what are pro forma statements?


As much as I enjoy working with small businesses, one of the points of friction when discussing business loans (or commercial mortgages in some cases) is the matter of pro forma financial statements.  As I have written in the past, most businesses run their business plan from their profit and loss statement.  A profit and loss statement shows revenue less expenses to equal what’s left over in the form of net income.  Many small businesses don’t bother looking at their balance sheet which shows them the other side of the ledger – what their business owns versus what their business owes.  A prudent business owner will look at their profit and loss in addition to their balance sheet on a regular basis to measure the performance of the business and some even go further to project what they think their balance sheet and income statement will look like over the next few years.  These are referred to as “pro forma” financial statements.

Pro forma financial statements are the anticipated results of a business.  Why does this matter?  Most banks and lenders will use the historical financial statements of a business to confirm that the business has historically met its obligations and meets standard financial tests.  In my experience, banks and lenders have been asking to see what the future of a business is anticipated to be and request pro forma financial statements as evidence.  They then take the pro forma statements and measure them against the historical statements to determine the likelihood of a business being able to qualify for a mortgage or loan.  In the past, historical financial statements were sufficient to approve a business for a mortgage or loan but with each passing day (and because of regulations) banks and lenders want to see that a business knows or has mapped out its future and that its future is somewhat consistent with its past.

Clients hate having this conversation if they have not prepared or do not use pro forma financial statements.  Many small businesses tend to operate “on the fly” constantly making adjustments based on market conditions and keeping pro forma financial statements up to date can be difficult.  This is one the due diligence items that can really slow down a transaction mostly because a business usually does not have someone in house that can help them and they need to refer to their accounting firm for help.  Pro forma financial statements can cost time and money both of which are in short supply for small business.

If you own a business and think that you may need to borrow money at some point, develop a habit of preparing and reviewing pro forma financial statements.  Over time you will begin to see the value and the process will unquestionably assist in managing your business and making improvements.

“Victory awaits him who has everything in order — luck, people call it. Defeat is certain for him who has neglected to take the necessary precautions in time; this is called bad luck.” – Roald Amundsen

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