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Pro Forma Statement, Pro Forma Invoice
Definitions and Meaning

Pro forma statements are prepared to show (preview) the shape or form of real statements coming in the future. Figures in pro forma statements are viewed as estimates that may change in the real document arriving later.

Pro Forma Statements Show What the Future Will Look Like—If Expected For Results Arrive.

What is a Pro Forma Statement?

A pro forma statement is a financial statement prepared as a projection of the future. It usually takes into account historic relationships, anticipated changes in these relationships, and known future financial developments.

The Pro Forma designation describes the purpose of the statement: "Pro Forma" in Latin means "As a matter of form" or "For the sake of form." Pro forma documents in business are prepared to show the shape or form the final document will have

 

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What is the Purpose of Pro Forma Statements?

Pro Forma financial statements often serve to "preview" expected outcomes of a proposed action, such as

  • New business start up
  • Business expansion.
  • Merger or acquisition.
  • A Capital investment.
  • Change in capital structure (e.g., through bond issue or bank loan).

The pro forma statements serve in this way to anticipated results of the action by showing the likely future status of the firm's financial statements. This information is of keen interest to decision makers who are called upon to either approve or disapprove the proposed action: Directors, Corporate officers, planners, lenders, regulatory agencies, and Potential Partners

Pro Forma Statements for Partnerships or Alliances

Before undertaking a merger or Alliance Agreement, all parties to the proposed action need assurance that each party can look forward to a healthy business status for the foreseeable future, after joining together. Credible pro forma financial statements, for each party, help provide this assurance.

Pro Forma Statements Before Taking on New Debt

Firms seeking to increase their capitalization in the near term generally have available only two avenues for acquiring the necessary funds. They may either (1) issue new shares of stock, or (2) acquire new debt (secure bank loans or issue newbonds). in all such cases, potential lenders and regulatory agencies need assurance, before approving actions, that the firm's financial structure sill remain sound, and that the firm will be able to service a new debt load and fund expanded operations, all without unacceptable risk.

Pro Forma Statements for Budgeting and Planning

A pro forma Income statementandBalance sheet might be used, for example, to help determine the necessary amount and timing of a company’s future cash requirements. Pro forma statements show the form and contents expected in the real statements, including estimated figures or projections acting as "place holders" for figures to be developed later.

Pro Forma Statements for Company Start Up

Similarly, pro forma statements for a proposed company start up might be used as part of a funding request to potential investors or loan institutions, intending to show that the new company will be profitable and financially sound. Venture capital funding entities, especially, will seek this kind of assurance.

When used in this way, pro forma statements are essentially the heart of the business case for funding the company. Pro forma business results and other projections in this kind of business case call for a thorough, credible risk and sensitivity analysis to show:

  • The likelihood of other outcomes besides the desired projected outcome.
  • Risk factors that could lead to undesirable outcomes
  • Contingencies and critical success factors that must be managed to target levels, in order to achieve desired outcomes.
 

What is a Pro Forma Invoice?

Another form and use of pro forma statement is the pro forma invoice. A pro forma invoice is not an actual demand for payment. Vendors and services providers may submit a pro forma invoice to potential customers or clients before a purchase contract is signed, in order to show expected billing categories, estimated costs, and the classes of information that will appear on the real invoice.

When a pro forma invoice is used in this way, customer management may approve a purchase or sign a contract, even though the true costs will not be known precisely until an actual invoice is received later.