You might be a little bit confused about the difference between a budget and pro forma financial statement, so I thought I would try to explain a couple of the small differences. Let’s start with the definitions:
Budget – According to Investopedia a budget is an estimation of the revenue and expenses over a specified future period of time.
Pro Forma Financial Statement – As described here, “In business, pro forma financial statements are prepared in advance of a planned transaction, such as a merger, an acquisition, a new capital investment, or a change in capital structure such as incurrence of new debt or issuance of equity.”
So there are just a couple of subtle differences here. A pro forma financial statement is essentially a budget based on a certain event occurring. Typically a budget is developed each year and might be approved by a board of directors. Many times a budget is focused more on expenses than revenue because you can control your expenses, but you can’t always control your sales.
A pro forma financial statement on the other hand is a projection based on a specific event. For example a pro forma would project your financials if:
You acquired a new company
- You secured a large client
- You raised a round of investment
- You are approved for a loan
These situations would change your future financial results. The real difference between a budget and pro forma financial statements is negligible. The 2 terms may even be used interchangeably at times.
To learn more about budgeting for the future check out our recent blog post on the top 15 financial projection mistakes.