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Meaning ‘for the sake of form’, the term pro forma refers to a document that is often provided as a courtesy and satisfies predetermined minimum requirements in an effort to best predict the future outcome of a transaction within a business. One of the most common examples of this is a pro forma financial or accounting statement, although pro forma invoices are also common. In the investing world, pro forma describes a method of reporting financial results to emphasize certain current figures or projected outcomes.
Pro Forma Financial Statements
Pro forma financial statements are often created to summarize the projected financial status of a company, based on current financial statements. Pro forma financial statements are most commonly created in advance of an acquisition, a merger, a change in capital structure (like an issuance of stock or the incurrence of new debt), or a new capital investment, with the purpose of indicating hypothetical financial figures.
The pro forma statements describe the expected outcome of a proposed transaction, when all the underlying assumptions hold true. Generally a part of a business plan, pro forma statements are often reviewed by management and stakeholders.
Additionally, pro forma statements may be used to emphasize certain numbers when an earnings announcement is issued to the public.
When analyzing pro forma financial statements, it is important to keep in mind there is no requirement for the figures to comply with GAAP (generally accepted accounting principles). Pro forma financial statements may vary greatly from financial statements obtained by adherence to GAAP.
Using Pro Formas Statements When Starting a Business
Pro forma financial statements are a standard piece of information generally required by lenders and investors for start-up companies. The founders will prepare the pro forma financial statements to describe the company’s projected financial status through the start-up phase. Additionally, banks will request pro forma financial statements in lieu of tax returns to verify cash flow before issuing a loan or line of credit to a new business.
Pro Forma Invoices
A pro forma invoice is a document that states that a seller commits to selling goods at a predetermined price to a buyer in trade transactions. Simply put, a pro forma invoice is much like a ‘confirmed purchase order’, or an agreement between buyer and seller detailing the terms of the agreement. Conversely, a true invoice records Accounts Receivable for the seller and Accounts Payable for the buyer.
A pro forma invoice is simply a sales quote, which is used to facilitate the sale process, and precedes the actual commercial invoice. Although a pro forma invoice is usually considered to be a binding agreement between buyer and seller, it is important to note that the price of the goods can fluctuate in advance of the final sale.