Pro Forma

Key Highlights

• Pro forma, meaning “for form” in Latin, refers to financial documents or statements created using predictions or “what-if” scenarios, rather than real past results.

• Types of pro forma statements includes income statement, balance sheet and cash flow statement.

What is Pro Forma?

Pro forma, meaning “for form” in Latin, refers to financial documents or statements created using predictions or “what-if” scenarios, rather than real past results. They’re like a financial crystal ball, showing what might happen in the future based on certain assumptions.

Why They’re Used?

• To forecast how a company’s finances might look after big moves, like mergers, acquisitions, or new investments.

• To help investors, and lenders see the potential impact of plans or decisions.

• Useful for business planning, budgeting, pitching to investors, or showing the expected effects of major changes.

Types of Pro Forma Statements

• Income Statement: Predicts future sales, costs, and profits.

• Balance Sheet: Estimates future assets, debts, and ownership value after a planned event.

• Cash Flow Statement: Forecasts how cash will come in and go out, spotting future money needs.

Key Features

• They’re based on guesses and scenarios, not hard rules like standard accounting (GAAP), and usually aren’t audited.

• They look like regular financial statements but use assumptions to show possible outcomes.

• Must be clearly marked as pro forma, with notes explaining how they differ from actual data.

Example

If a company is thinking about buying another business, it might create pro forma statements to show how its finances would look afterward, factoring in new debts, sales, and costs.