Pro Forma Meaning: How To Use Pro Forma Documents

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In business, finance, and law, terminology can shape how you make decisions and interpret documents. One term that appears across sectors—from corporate mergers to government proceedings—is pro forma. 

While common parlance among investors and management teams, the Latin phrase’s precise meaning shifts with context. A business owner looking to manage their cash flow, an accountant preparing financial statements, and a vendor submitting a pro forma invoice should all have an understanding of the term. 

Here’s how pro forma applies to financial statements and the role it plays in legal and commercial transactions.

What does pro forma mean?

“Pro forma” is a Latin term, meaning “for the sake of form” or “as a matter of form.” When determining what pro forma means, the answer usually depends on the document in question. The examples below show how different sectors apply the term to different document types and scenarios.

• Accounting. Pro forma accounting presents financial results that exclude specific one-time income or expenses to provide a clearer idea of typical performance.

• Commerce. A pro forma invoice is a preliminary bill of sale sent to buyers in advance of a shipment or delivery of goods.

• Government. A pro forma session is a brief meeting of a legislative body, like the US Senate, held to satisfy a constitutional requirement without conducting significant business.

For ecommerce companies, it’s most likely that pro forma refers to financial statements or documents prepared in advance to project future results or illustrate the impact of a hypothetical scenario, rather than to report past performance.

What is a pro forma invoice?

While a true invoice is a demand for payment, a pro forma invoice is an estimate or quote. It lists goods, prices, and other details such as shipping and handling costs, but it’s not a request for payment. It’s a document used to determine customs duties or to help the buyer arrange internal funding.

What is a pro forma financial statement?

Pro forma financial statements are documents that offer investors and company management projections to determine the viability of a project. By simulating future financial conditions, pro forma financial statements offer stakeholders a what-if scenario, such as how a merger would look or how a new capital structure would affect the balance sheet.

Unlike current financial statements that report on the past based on strict accounting standards, pro forma statements allow companies to present information based on certain financial assumptions. For instance, if a business wants to show what its income would look like if it hadn’t incurred massive restructuring costs last year, it would present pro forma results.

What is the purpose of a pro forma financial statement?

• To establish comparability
• To manage risk
• To secure investments

The primary purpose of a pro forma financial statement is to facilitate planning and decision-making. Standard financial reports look backward; pro forma analysis looks forward. This is particularly useful in scenarios such as:

To establish comparability

Businesses can face irregular events like natural disasters, lawsuits, or one-time asset sales that distort their financial picture. When a company strictly reports its net income including these anomalies, it might look less profitable than it truly is. 

By creating pro forma statements that exclude these non-recurring items, management can present a more realistic view of operating expenses and revenues. This helps stakeholders compare the company’s business performance against that of previous years or competitors without having to factor in one-off events.

To manage risk

When a company considers a major transaction like a merger, acquisition, or significant debt issuance, it involves substantial risk for every entity involved. Pro forma financial models allow the finance team to run several scenarios for risk management. 

For example, when considering taking on debt, it’s typical to run a best- and worst-case scenario. With these pro forma figures, executives can assess whether the cash flow will be sufficient to cover debt payments or if the capital structure should be adjusted. This predictive power makes pro forma a tool for those managing corporate growth strategies.

To secure investments

Investors and creditors rarely lend money based on past success—they invest in future potential. If pitching to banks or venture capitalists, a startup must provide pro forma projections for the next three to five years. These documents demonstrate that the management team has a plan to generate profit, control expenses, and eventually provide a return on investment.

Types of pro forma financial statements

• Investment pro forma

• Mergers and acquisitions pro forma
• Historical pro forma
• Risk analysis pro forma

Because pro forma is a versatile concept, there are several main types of statements that analysts and accountants typically create. Each of the following serves a distinct audience and goal:

Investment pro forma

A company will often create pro forma statements to map out its expected financial position for the coming year. This involves estimating revenues, cost of goods sold (COGS), and operating expenses. These projections often form the basis of the company’s annual budget. It’s a living document, meaning you make adjustments as real-world data comes in.

Mergers and acquisitions pro forma

When two companies merge, the accounting can get messy. A pro forma statement combines the financial statements of both entities. This helps shareholders understand the pro forma results of the combined entity. It typically includes adjustments for synergies—or cost savings expected from the merger—and new interest expenses from debt taken on to finance the deal. This is critical in acquisitions, since it can show the deal will add value.

Historical pro forma

Sometimes, pro forma refers to providing better context for recent company decisions. For example, if a company sold off a large division in December, its full-year income statement might look misleadingly large. A pro forma income statement for that year might omit the division’s contributions to costs and income. This retrospective adjustment helps stakeholders focus on the revenues and expenses associated with continuing operations.

Risk analysis pro forma

This type focuses on multiple scenarios involving specific variables. For instance, a pro forma balance sheet might be prepared specifically to test the impact of a change in tax law or a 20% tariff increase on raw materials. It helps the business determine if it has enough liquidity to survive adverse conditions.

Limitations of pro forma financial statements

• Lack of regulation
• Bias
• Inconsistency

Although valuable, pro forma statements are not without controversy. Because they’re based on assumptions rather than hard facts, they carry inherent risks, including:

Lack of regulation

The biggest limitation is that pro forma figures do not always strictly adhere to generally accepted accounting principles (GAAP)—the standard rulebook for accounting maintained by the Financial Accounting Standards Board (FASB). Pro forma, by definition, deviates from these rules to show a specific viewpoint.

This flexibility allows companies to be creative—sometimes too creative. For instance, a company might exclude stock-based compensation from its pro-forma expenses to show a profit, even though that compensation is a real cost to shareholders.

Bias

Because pro forma projections are created by management—with a vested interest in the company’s success—there’s a natural tendency toward optimism. They might make inflated financial assumptions regarding future sales growth while underestimating projected costs. Investors must always read the fine print to understand exactly what adjustments were made and what was excluded.

Inconsistency

Two companies in the same industry might calculate pro forma income differently. One might exclude restructuring costs while the other includes them. This makes it difficult to compare pro forma results side by side. Analysts often have to unwind the pro forma adjustments to get back to a comparable GAAP figure.

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