‘Pro Forma’ Definition
The online financial accounting classes at the Harvard Business School define pro forma financial as “financial statements that are used to forecast future periods. In other words, they may also be referred to as a financial forecast statement or a financial projection.”
Pro forma is Latin and means, “for the sake of form,” or “as a matter of.” Labelling a document as pro forma indicates that you are formally presenting information regarding future hypothetical events - future expectations, sales and revenue forecasts, budgeting, and balance sheet projections etc.
Most businesses use pro forma financial documents, statements, or presentations internally to help in decision-making, and externally to investors, creditors, and shareholders to highlight the logic and rationale behind the decision making.
Types of Pro Forma Statements
A variety of Pro Forma statements can be created according to a business’ requirements, however, the most common statements are:
● Annual Pro Forma Statement
Businesses use this Pro Forma statement to project and anticipate events in the year ahead, to plan and make strategic and operational decisions accordingly.
● Risk Assessment/Analysis Pro Forma Statement
This type of statement helps stakeholders visualize the risk factors that might drive business decisions that a business might have to anticipate soon.
● Investment and Financing Pro Forma Statement
This type of Pro Forma statement is most suitable for businesses seeking investments and financing. The design and assumptions are constructed to invite financial investment by presenting financiers with projected revenues from the business’ current standpoint.
Why Use ‘Pro Forma’ Statements
Like a ‘letter of intent’, the pro forma highlights certain future events and their outcomes. In business and finance, pro forma statements have become a vital part of business projections and the CFO toolkit since their inception in the 1990s.
Pro Forma Uses
● A Pro Forma statement helps create and visualize strategic plans and executing decisions based on those plans
● Pro Forma helps leadership teams assess the potential impact of a decision, along with the risk factors involved with the decision.
● Various Pro Formas displayed with their assumptions allow businesses and finance teams to assess different scenarios and their outcomes in a parallel fashion.
● As above, the Pro Forma is a financial instrument to attract new lending and investment opportunities.
● Used correctly, Pro Forma provides a unique and flexible tool to anticipate a business’ future.
Difference between a Financial statement, and a Pro Forma Statement.
One may ask, what is the difference between a financial statement, and a pro forma statement? Both have numbers, both give an insight into the financial health of a business, and its performance. The purpose of a pro forma statement is to focus on realistic future outcomes, while financial statements analyse and report on business activities over a period.
Dryrun is the World’s Foremost Fast, Flexible Pro Forma Software
So, for the “what ifs,” in the world of finance, and business the simple answer is Pro Forma, done on a user-friendly platform that imports accounting data and allows users to use their cloud information as a safe place to stress-test decisions and outcomes that occur in real-time.
By using pro forma software for near and year-term planning, businesses gain a forward-looking advantage and will ensure that the business stays in business.
Start today and let the power of managing your 'what ifs' take your business to new heights in the future.