General premises to build a pro forma financial statement
This is the fundamental characteristic that distinguishes proforma statements from regular financial statements.
What is "forward-looking" or "future-oriented"?
What are "projections" or "forecasts"?
This is the first line item on any proforma income statement and is typically projected using either top-down or bottom-up approaches.
What is "Revenue" or "Sales"?
This fundamental accounting equation must always balance in a proforma balance sheet, where one side equals the other.
What is "Assets = Liabilities + Equity"?
This is the starting point for the indirect method cash flow statement, taken directly from the bottom line of the income statement.
What is "Net Income" or "Profit After Tax"?
This simplest type of model assumes all income statement and balance sheet items grow at the same rate as sales
What is the "Percentage of Sales Model" or "Constant Ratio Method"?
Also: "Linear Growth Model" or "Scaled Model"?
The quality of proforma statements depends entirely on the quality of these.
What are "assumptions" or "inputs"?
These costs vary directly with production volume or sales, such as raw materials or direct labor.
What are "Variable Costs"?
These are short-term assets expected to be converted to cash within one year, including cash, accounts receivable, and inventory
What are "Current Assets"?
These are added back to net income in the operating section because they reduce profit but don't involve cash outflow.
What is "Depreciation and Amortization" or "Stock-based Compensation"?
(Also called Non-Cash Expenses)
This comprehensive model integrates all three financial statements and allows for scenario testing and sensitivity analysis.
What is a "Three-Statement Financial Model"?
These three financial statements must mathematically connect and balance in any complete proforma model.
What are the "Income Statement, Balance Sheet, and Cash Flow Statement"?
This important profitability metric is calculated as Revenue minus Cost of Goods Sold, showing how efficiently a company produces its goods.
What is "Gross Profit" or "Gross Margin"?
This equity account accumulates a company's historical profits that weren't distributed as dividends, and it increases by net income each period.
What are "Retained Earnings"?
This section of the cash flow statement includes purchases of equipment and property, representing long-term investments in the business.
What are "Capital Expenditures" or "CapEx" under investing activities?
(Also known as Investing Activities)
This advanced model projects financials for potential mergers or acquisitions, including synergies and financing structure.
What is a "M&A Model" or "Merger Model"?
This modeling approach builds revenue projections from individual customer or unit sales rather than overall market percentages.
What is "bottom-up forecasting" (vs. top-down)?
These expenses remain constant regardless of sales volume, including items like rent, salaries, and insurance.
These expenses remain constant regardless of sales volume, including items like rent, salaries, and insurance.
This financial concept measures short-term liquidity and is calculated as Current Assets minus Current Liabilities.
What is "Net Working Capital" or "Working Capital"?
This financial metric shows how much cash a company generates from its core operations, calculated as operating cash flow minus capital expenditures.
What is "Free Cash Flow" or "FCF"?
FCF = Operating Cash Flow - Capital Expenditures
This type of model calculates the intrinsic value of a company by projecting free cash flows and discounting them to present value.
What is a "Discounted Cash Flow (DCF) Model" or "Valuation Model"?
This financial mechanism in proforma models automatically balances cash shortages or surpluses, often represented as a "plug" figure.
What is a "revolving credit facility" or "cash sweep"?
This analysis determines the sales volume at which total revenue equals total costs, resulting in zero profit.
What is "Break-Even Analysis"?
This ratio, calculated as Total Debt divided by Total Equity, shows the proportion of financing coming from creditors versus owners.
What is the "Debt-to-Equity Ratio" or "Leverage Ratio"?
This reconciliation proves your cash flow statement is correct, showing that beginning cash plus total cash flow equals ending cash.
What is the "Cash Reconciliation" or "Net Change in Cash"?
Beginning Cash + Net Cash Flow = Ending Cash
This model focuses specifically on working capital needs, using ratios like DSO, DIO, and DPO for projections.
What is a "Working Capital Forecasting Model" or "Cash Conversion Cycle Model"