Pro Forma Balance Sheets
A pro forma balance sheet is similar to a historical balance sheet, but it represents a future projection. Pro forma balance sheets are used to project how the business will be managing its assets in the future. For example, a pro forma balance sheet can quickly show the projected relative amount of money tied up in receivables, inventory, and equipment. It can also be used to project the overall financial soundness of the company. For example, a pro forma balance sheet can help quickly pinpoint a high debt-to-equity ratio.
Pro forma current assets
To obtain your company’s estimated cash position, you need to do a careful cash flow projection. Let’s assume that the projected cash flow for a company called Bright Lawn, or the anticipated funds in Bright Lawn’s checking account on December 31, 1999, will be $50,000.
• Pro forma accounts receivable
To estimate the accounts receivable on December 31, you need to take into consideration the average collection time of receivables and the sales projections for prior periods. For example, let’s assume that Bright Lawn receives payment thirty days after services are performed.
So, in this case, we need to look at the projected sales for December, which are $70,000. Because it takes thirty days to collect payment, we would expect to have all of December’s billings outstanding on December 31. Bright Lawn’s account receivables would be estimated at $70,000.
• Pro forma total current assets
Pro forma total current assets are determined by adding projected cash and projected accounts receivable.
Pro forma fixed assets
• Pro forma land
Land is the easiest of pro forma asset values to calculate. Because land does not depreciate, it will always have the same value. Just enter the value of the land at its original purchase price. Bright Lawn’s land holdings are valued at $30,000.
• Pro forma buildings
Buildings do depreciate. Let’s assume we are depreciating the building over thirty years. Bright Lawn bought its building for $300,000. Each year the building will depreciate by $10,000. By December 31, 1999, the building will be three years old, so the total depreciation will be $30,000. This will be reflected later in the accumulated depreciation total. Under the building heading we show the original value of the asset or $300,000.
• Pro forma vehicles
Vehicles also depreciate. They depreciate over a much shorter period of time than do buildings. Let’s assume we are depreciating Bright Lawn’s truck over a seven-year period. The truck was purchased for $73,500 on January 1, 1999. So, each year the truck will depreciate by $10,500. On December 31, 1999, after one year of depreciation, the truck will have an accumulated depreciation of $10,500.
• Pro forma total assets
Pro forma total assets are determined by adding up the pro forma total current assets and pro forma total fixed assets.
Pro forma current liabilities
• Pro forma accounts payable
Pro forma accounts payable are determined by figuring out how much you will spend on supplies during the last months of 1998 and how long it takes you to pay your bills. Because Bright Lawn pays its bills in thirty days, it should only have outstanding bills for the supplies it anticipates purchasing in December as of December 31, 1999. Since Bright Lawn estimates a supply expenditure of $30,000 in December, it will have a pro forma accounts payable of $30,000.
• Pro forma accrued payroll
It should be easy to determine a pro forma accrued payroll. Just check your payroll calendar to find out what employee pay periods will remain unpaid by the beginning of the pro forma balance sheet period. Bright Lawn’s weekly payroll is $10,000. Since it pays employees on a weekly basis, the pro forma accrued payroll will be 10,000 on December 31.
• Pro forma notes payable
Pro forma notes payable include all notes or portions of notes that are payable within one year. Bright Lawn will include in its pro forma notes payable the portion of its outstanding mortgage that will fall due during 2000 on its year-end 1999 balance sheet. The amount is calculated to be $15,000.
• Pro forma total current liabilities
To obtain pro forma total current liabilities, you add up pro forma accounts payable, accrued payroll, and notes, or portions thereof, payable, within one year. Bright Lawn’s total current liabilities are projected to be $55,000.
Pro forma long-term liabilities
• Pro forma mortgage note payable
The size of a pro forma mortgage note payable is calculated by taking the mortgage note payable at the end of the current year and subtracting the principal, not interest, payments that will be made during the upcoming year. To obtain that portion of the mortgage that will be classified as a long-term liability, you need to subtract what is classified as current liability. In Bright Lawn’s case, $15,000 is subtracted from the current remaining principal payments of $200,000. Therefore, the long-term portion of Bright Lawn’s pro forma mortgage note payable is $185,000.
• Pro forma total liabilities
Pro forma total liabilities are determined by adding up current and long-term liabilities. Bright Lawn’s pro forma total liabilities are $240,000.
Pro forma owners’ equity
• Pro forma common stock
The common stock portion of the owners’ equity will not change from year to year unless new stock is issued.
• Pro forma retained earnings
Pro forma retained earnings can be tricky to determine. They are the last item to be calculated on a pro forma balance sheet.
Total assets must balance the total liabilities and owners’ equity. In Bright Lawn’s case, we already know that the total pro forma liabilities must total $483,000.
Also, total liabilities added to total owners’ equity must equal total liabilities and owners’ equity. So, you can determine total owners’ equity by subtracting total liabilities from total liabilities and owners’ equity.
Common stock added to retained earnings must equal total owners’ equity. So, by subtracting common stock from total owners’ equity, retained earnings can be determined. This completes a pro forma balance sheet.
* Source Streetwise Small Business Start-Up