Pro forma statement: Overview, definition, and example
What is a pro forma statement?
A pro forma statement is a financial statement that is based on certain assumptions or hypothetical scenarios, rather than actual historical data. These statements are often used for forecasting, planning, or presenting a projection of a company’s financial position or performance under specific conditions. Pro forma statements are commonly used in budgeting, mergers, acquisitions, or during financial analysis to show the potential impact of certain events or decisions.
Why is a pro forma statement important?
Pro forma statements are important because they provide a forward-looking view of a business's financials. They help stakeholders, such as investors, managers, or lenders, to assess the potential future performance of a company. Pro forma statements allow businesses to plan for different scenarios, test various assumptions, and make informed decisions about future strategies, investments, or operations. They are also used to present how a company might look after a proposed merger or acquisition, helping parties involved to evaluate the financial implications of such events.
Understanding a pro forma statement through an example
Imagine a company is considering expanding its operations and wants to understand how the expansion would impact its financial position. The company creates a pro forma income statement that includes projected revenue from the new operations, estimated costs, and other assumptions about how the expansion will affect profitability. The pro forma statement does not reflect actual historical financial data but instead reflects what the company expects under the new scenario.
In another example, a company that is planning a merger with another company may create a pro forma balance sheet that combines the assets, liabilities, and equity of both companies. This pro forma statement helps both parties understand the potential financial position after the merger and allows them to evaluate the impact of the merger on their combined operations.
An example of a pro forma statement clause
Here’s how a clause about pro forma statements might appear in a financial agreement:
"The Borrower agrees to provide the Lender with a pro forma statement of financial condition, including projected income and cash flow statements, for the next 12 months, based on assumptions outlined in the accompanying business plan."
Conclusion
A pro forma statement is a valuable tool for businesses to project their financial performance under hypothetical scenarios. By preparing these statements, companies can make better-informed decisions about future strategies, acquisitions, expansions, or investments. While pro forma statements are not based on actual historical data, they provide essential insights into potential outcomes and help businesses plan effectively for the future.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.