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 show whether you are going to run out of money, and how much additional money you need to borrow, beg, or steal to be able to pay your bills!
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, a number that a banker might look to use to measure the creditworthiness of a business.
Let’s go through a pro forma balance sheet using an example of a company called Bright Lawn.
Pro Forma Current Assets
- Pro forma cash: Take the current cash balance and add it to your projected cash flow between now and the pro forma period you’re looking at . I explain how to project future cash flow in an upcoming presentation. Let’s assume that Bright Lawn’s checking account balance on December 31 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 30 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 30 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: These are determined by adding pro forma cash and pro forma accounts receivable. In this case, Bright Lawn’s pro forma total current assets are $120,000.
Pro Forma Long-Term 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 30 years. Bright Lawn bought its building for $300,000. Each year the building will depreciate by $10,000. By December 31 Bright Lawn will have owned the building for three years 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 buildings do. Let’s assume we are depreciating Bright Lawn’s truck over a seven-year period. The truck was purchased for $73,500. So, each year the truck will depreciate by $10,500. On December 31 Bright Lawn will have owned the truck for one year and hence the truck will have an accumulated depreciation of $10,500.
- Pro forma total long-term assets: These are determined by adding up all pro forma holdings; in this case, Bright Lawn’s total long-term assets are $363,000.
Pro Forma Total Assets
Pro forma total assets are determined by adding up the pro forma total current assets and the pro forma total long-term assets; in this case, it is $483,000.
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 the year and how long it takes you to pay your bills. Because Bright Lawn pays its bills in 30 days, it should only have outstanding bills for the supplies it anticipates purchasing in December as of December 31. 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 following year under current liabilities on its December 31 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, for 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 the 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 plus owners’ equity. In Bright Lawn’s case, we already know that the total pro forma assets total $483,000.
- Also, total liabilities added to total owners’ equity must equal total liabilities plus 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.