# Pro Forma Budgets, Forecasts and Business Plans

How pro formas support budgets, forecasts, projections, funding plans, and business plans.

Canonical: https://finamodel.com/faq/pro-forma-budgets-forecasts-and-business-plans

## Questions and answers

### What is a pro forma budget?

A **pro forma budget** is a forward-looking financial plan prepared from stated assumptions rather than completed transactions. It sets out the revenue, costs, cash movements and funding that management expects—or has authorised—for a future period. It is commonly prepared monthly for one year, with annual totals for later years.

The terms are related but not interchangeable:

- A **budget** is the approved target and spending plan against which performance is measured.
- A **forecast** is management’s latest best estimate, updated as actual results and expectations change.
- A **projection** shows what would happen under a specified hypothetical scenario.

For example, a café preparing next year’s budget might assume 40,000 transactions at an average sale of £12:

```text
Revenue = 40,000 × £12 = £480,000
Gross profit = £480,000 × 65% = £312,000
Operating profit = £312,000 - £250,000 fixed costs = £62,000
```

The pro forma budget should then translate those operating assumptions into an income statement and cash plan. A £62,000 accounting profit does not necessarily mean £62,000 of extra cash: equipment purchases, loan repayments, stock purchases and customer-payment timing may create a different cash outcome.

Build the budget from identifiable drivers, document who owns each assumption, and include a base case plus material risks. Once the year begins, compare actual results with the approved budget and explain differences in price, volume, timing and cost. The [budget-versus-actual guide](/blog/budget-vs-actual-analysis) explains that review process, while the [cash-flow forecasting guide](/blog/cash-flow-forecast-excel) shows how to test liquidity. You can browse the [pro forma template collection](/pro-forma) for suitable model structures.

### How is a pro forma used in a business plan?

A pro forma turns a business plan’s narrative into a **numerical, testable case**. The plan may describe the market, product, hiring strategy and funding objective; the pro forma shows whether those claims can produce sustainable revenue, profit and cash flow. It normally includes projected income statements, cash flows and balance sheets, supported by operating schedules.

Start by mapping every important claim to a measurable driver:

| Business-plan claim | Pro forma driver |
|---|---|
| Acquire new customers | Leads × conversion rate |
| Increase subscription revenue | Average customers × monthly price |
| Expand the team | Hiring date × salary and on-costs |
| Open a second location | Fit-out cost, capacity and opening date |

Suppose a start-up expects 600 average paying customers in Year 1 at £30 per month. Revenue is `600 × £30 × 12 = £216,000`. If gross margin is 75%, gross profit is £162,000. Payroll of £180,000 and other operating costs of £60,000 produce a £78,000 operating loss before financing and tax. With £120,000 opening cash, the timing of customer receipts and capital expenditure determines whether the company can reach Year 2 without raising more funds.

A credible pro forma should include:

- a base case linked to the plan’s most supportable assumptions;
- downside and upside cases that change related drivers together;
- monthly cash balances and the resulting funding requirement;
- reconciliations and a clear record of assumption sources.

*Do not reverse-engineer assumptions merely to reach an attractive fundraising number.* Use the pro forma to expose gaps and revise the operating plan. The [financial forecasting methods guide](/blog/financial-forecasting-methods) explains common driver-based approaches, and the [start-up financial model](/pro-forma/startup-financial-model) provides a relevant structure. More general workbooks are available in the [template library](/templates).

### What are pro forma projections?

**Pro forma projections** are forward-looking financial statements or schedules calculated from explicit assumptions. They answer a conditional question: *what would revenue, profit, cash or financial position look like if this operating plan, transaction or scenario occurred?* Depending on the decision, projections may cover a single metric, an income statement, or a fully linked three-statement model.

A projection is not automatically a promise or the most likely outcome. In practical planning language:

- the **budget** is the approved target and resource plan;
- the **forecast** is the current best estimate based on information available today;
- a **projection** is a calculated outcome under specified assumptions, often one of several cases.

Consider a business with £1.0 million of current revenue. A three-year base projection assumes 12% annual volume growth, 3% annual price growth and a stable 40% gross margin:

|  | Year 1 | Year 2 | Year 3 |
|---|---:|---:|---:|
| Revenue | £1.15m | £1.33m | £1.53m |
| Gross profit | £0.46m | £0.53m | £0.61m |

Revenue grows by roughly 15.4% because volume and price compound: `1.12 × 1.03 - 1 = 15.36%`. A downside projection could reduce volume growth and extend customer-payment days; both profit and cash should then update through the same formulas.

Good projections state the period, currency, accounting basis and scenario; separate historical results from projected figures; and link outputs to documented drivers. Test internal consistency and compare the cases, but avoid false precision—outputs are only as reliable as their assumptions. The [scenario-versus-sensitivity guide](/blog/scenario-vs-sensitivity) shows how multiple-variable scenarios differ from one-variable sensitivities. For liquidity-focused projections, use the [cash-flow forecast guide](/blog/cash-flow-forecast-excel), or browse the wider [pro forma library](/pro-forma).