pro forma
Financial statements based on hypothetical assumptions or projections rather than actual historical results, often used in acquisition analysis or forward-looking business plans.
Example
“The merger's pro forma financial statements showed what the combined company's revenue would have looked like last year.”
Memory Tip
PRO FORMA = 'as if' financials. What the numbers would look like under assumed conditions.
Why It Matters
Pro forma statements help you understand the potential financial outcomes of major decisions like buying a house, starting a business, or making a large investment. By projecting future cash flows and expenses, you can make better informed choices about whether a financial commitment makes sense for your situation.
Common Misconception
Many people assume pro forma statements are guaranteed predictions of what will actually happen. In reality, they are based on assumptions that may or may not come true, and actual results often differ significantly from projections due to unexpected market changes or unforeseen circumstances.
In Practice
A company considering acquiring another business might create pro forma statements showing combined revenues of 50 million dollars annually with projected synergies saving 5 million dollars in operating costs. These projections help the acquiring company decide if paying 200 million dollars for the target company is worthwhile, though the actual combined results may differ if market conditions change or integration proves more difficult than expected.
Etymology
From Latin 'pro forma' (for form's sake, as a matter of form) — presented in a FORMAL way based on assumptions.
Common Misspellings
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Related Terms
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See Also
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