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LEGAL DICTIONARY

Pro Forma

What Is Pro Forma?

Pro forma is a legal term that translated from the Latin means "for the sake of form" or "as a matter of form." The term is used to refer to a method of calculating financial projections and to the documents or invoices that result from the process.

A pro forma financial statement can help business owners evaluate a corporation or company's potential, so they can make informed decisions. Likewise, in real estate settings, pro forma helps investors assess a property's future value.

Pro forma financial statements do not need to follow the strictest accounting standards and should only be considered as estimates.

What Is a Pro Forma Statement?

A pro forma financial statement is a written prediction of a company or property's future revenues and expenses based on past experiences and future projections. There are three types of pro forma statements:

  • income statement
  • balance sheet
  • cash flow statement

Each type shows a different view of the economic effects of a specific event or business decision.

The process for preparing a pro forma income statement, balance sheet, or cash flow statement is similar to preparing the standard version of the documents. However, rather than using real numbers, the process involves predicting various line items and forecasting how those projections will impact your bottom line.

Standard types of pro forma statements include the following:

  • Pro forma budgets: These documents anticipate projected revenues and expenses for a defined period, often a fiscal year.
  • Pro forma income statements: These statements are used to attract investor attention, such as when a company announces its quarterly earnings.
  • Pro forma earnings projections: These documents inform investors of the potential financial outcome of a proposed change in a business, such as an acquisition or a merger.
  • Pro Forma financial accounting: This type of earnings report does not include nonrecurring or unusual transactions, such as restructuring costs and adjustments that fix accounting errors from previous years.

Pro Forma FAQs

  • Why are pro forma statements important?

    Creating a pro forma statement allows management to see the possible outcomes of a business decision and how it could impact the company's profitability, cash flow, and financial position. This information helps managers make informed decisions that could significantly impact the company.

  • What is a pro forma invoice?

    A pro forma invoice is a bill of sale sent to a buyer in advance of a shipment or delivery of goods. The invoice template typically describes the purchased items and includes other information, such as shipping weight and transport charges. This type of invoice includes only enough information to enable customs officials to determine the duties required after a general examination of the goods.

  • What is a pro forma example?

    Pro forma statements allow companies to say, "What if?" What if we got a $50,000 loan to launch a start-up? What if an existing business was able to get investors to pledge $1 million to cover equipment and marketing costs for a new product?

    In each case, business owners would analyze the cost-benefit ratio of the situation and prepare accordingly. A pro forma plan includes metrics for both best-case scenarios and worst-case scenarios.

What Is Pro Forma?

Pro forma is a legal term that translated from the Latin means "for the sake of form" or "as a matter of form." The term is used to refer to a method of calculating financial projections and to the documents or invoices that result from the process.

A pro forma financial statement can help business owners evaluate a corporation or company's potential, so they can make informed decisions. Likewise, in real estate settings, pro forma helps investors assess a property's future value.

Pro forma financial statements do not need to follow the strictest accounting standards and should only be considered as estimates.

What Is a Pro Forma Statement?

A pro forma financial statement is a written prediction of a company or property's future revenues and expenses based on past experiences and future projections. There are three types of pro forma statements:

  • income statement
  • balance sheet
  • cash flow statement

Each type shows a different view of the economic effects of a specific event or business decision.

The process for preparing a pro forma income statement, balance sheet, or cash flow statement is similar to preparing the standard version of the documents. However, rather than using real numbers, the process involves predicting various line items and forecasting how those projections will impact your bottom line.

Standard types of pro forma statements include the following:

  • Pro forma budgets: These documents anticipate projected revenues and expenses for a defined period, often a fiscal year.
  • Pro forma income statements: These statements are used to attract investor attention, such as when a company announces its quarterly earnings.
  • Pro forma earnings projections: These documents inform investors of the potential financial outcome of a proposed change in a business, such as an acquisition or a merger.
  • Pro Forma financial accounting: This type of earnings report does not include nonrecurring or unusual transactions, such as restructuring costs and adjustments that fix accounting errors from previous years.

Pro Forma FAQs

  • Why are pro forma statements important?

    Creating a pro forma statement allows management to see the possible outcomes of a business decision and how it could impact the company's profitability, cash flow, and financial position. This information helps managers make informed decisions that could significantly impact the company.

  • What is a pro forma invoice?

    A pro forma invoice is a bill of sale sent to a buyer in advance of a shipment or delivery of goods. The invoice template typically describes the purchased items and includes other information, such as shipping weight and transport charges. This type of invoice includes only enough information to enable customs officials to determine the duties required after a general examination of the goods.

  • What is a pro forma example?

    Pro forma statements allow companies to say, "What if?" What if we got a $50,000 loan to launch a start-up? What if an existing business was able to get investors to pledge $1 million to cover equipment and marketing costs for a new product?

    In each case, business owners would analyze the cost-benefit ratio of the situation and prepare accordingly. A pro forma plan includes metrics for both best-case scenarios and worst-case scenarios.