What is a Pro Forma?

What does "Pro Forma" mean?
A pro forma is a future projection or prediction of financial performance for a business or income-producing property. Pro forma statements can be prepared as income statements or balance sheets, usually over one or more operating cycles, one year at a time.

Pro forma statements are an attempt to show the anticipated profit, losses, and change in the value of a business or income-producing asset based on certain actions implemented within the projected period.

In the case of an investment property, these actions might include renovations, filling vacancies, or simply increasing rents to current market standards.

In the case of a business, these actions might include hiring new employees, investing in better infrastructure, implementing new efficiencies or expanding a new or existing arm of the company that will result in more revenue.

A pro forma is often presented as a type of income statement. They are used in many different scenarios and industries, such as:

When banks are underwriting a commercial loan, they will look at the applicant’s pro forma statements to see where the business is headed and what impact will be made by the new debt.

When investors are briefed on a potential investment opportunity or performance update, the pro forma will help them understand where the business is headed.

When two companies merge, the pro forma will help both parties understand where the other is headed and what financial results will come about from the merger.

Pro forma statements can be very useful in making a business decision. Still, their usefulness is limited by their accuracy, and their accuracy is limited by the quality of assumptions made in preparing the pro forma. Since pro forma statements are essentially an educated guess about what financial statements will look like in the future, careful consideration is required to prepare projected financials that have a high likelihood of coming to fruition.

It’s not uncommon for loan applicants or commercial real estate brokers to prepare a very uneducated pro forma and/or intentionally inflate or exaggerate some aspect of a pro forma statement to impress the decision-makers who are reviewing them making the final decision.

For this reason, it’s important for all parties involved to carefully review the projected numbers and use discernment to verify the accuracy of the numbers and the likelihood of the final outcome following what the pro forma says.

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[lxaxv-]

Hey, I just want to appreciate your English which allows me to understand everything perfectly even though I am from Germany. Many other Youtubers tend to use extreme technical vocabulary when talking about subjects in this area.

[antecool]

Thanks for the info, very useful. One question, what type of financial professionals help small businesses prepare a pro forma financial statement? Thank you.

[vbkurhade]

Thanks for informative, useful content. For a development project who is responsible for putting together pro-forma statement? Is it feasibility expert team? or many stake holders like feasibility expert, planning expert, developer participate in it? How much market trend data is used from Financial section as well expected Project Duration calculations?

[cesaralmaraz]

what is the difference between a pro-forma and an OM ( offering memorandum) or is it the same thing? =

[ahmadhachicho]

Great video! How many months or years forward does a pro forma usually show?

[amh]

Its very good, but you don't have quantitive side, Thank you