Pro Forma - Explained
What is Pro Forma?
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What is Pro Forma?
Pro forma is a Latin phrase that means as a matter of form. In business and investing, it refers to the manner in which a firm calculates and presents its financial results. The pro forma calculation method emphasizes current and projected figures.
How is Pro Forma Used?
Pro forma financial statements are designed to emphasize specific figures in a company's financial reports. The most notable examples of such reports are earnings statements published quarterly by public companies for shareholders and potential investors. Companies also use pro forma statements to highlight different financial transactions, like mergers and acquisitions. Pro forma statements do not have to comply with Generally Accepted Accounting Principles (GAAP). In fact, a company's pro forma figures often differ drastically from its standard GAAP documents. Since pro forma statements aren't restricted by GAAP, companies can create statements to emphasize the most important aspects of their business performance.
Pro Forma in Accounting
Company financial statements are examples of pro forma in the accounting field. These reports are usually included in earnings statements, but they don't include unusual or nonrecurring transactions. By eliminating miscellaneous costs from financial statements, potential investors can get a clearer picture of core business performance.
Pro Forma in Business
From a business perspective, companies use pro forma financial statements to present an analyze the different aspects of potential investments, planned transaction, and more. These projections usually estimate the impact of a transaction on different areas of the business, including cash flows, projected revenues, tax costs, and more. Using pro forma reports, companies can project the impact of a business move based on recent, accurate financial data.
Creating a Pro Forma Statement
If you want to create your own pro forma financial statement, there are numerous templates available online for free. Here are the basic components of a standard pro forma income statements. Step one is estimating revenue outlooks for your business, and this step is commonly referred to as pro forma forecasting. Base your estimates on objective measures that you can back up with hard data. Research your topics and consult with experts to determine an average annual revenue stream, cash flow, and asset accumulation projections. The next step is projecting your liabilities and expenses. This category includes loans, credit balances, and costs from things like leases, utilities, and other operating expenses. Again, use objective measures and be rational when forecasting these figures. Last, forecast the cash flows. This part of the pro forma statement shows the amount of money going in and out of your business. It includes figures like net earnings, asset sales, dividends, and more. These three components make up a standard pro forma income statement. You can use them to generate your own pro forma statements for the use of prospective investors and management.