Pro Forma Statements

We reviewed the complexities of creating a strategic plan for the business. By definition, strategy is a forward-looking process that considers where the company wants to be and what it will take to get there. The same applies to preparing future financial forecasts or pro formas. This chapter covers the process for determining future financial performance. It is important to understand the use of common sizing and the percentage of sales methods.

If we could accurately predict the future, we could easily become wealthy by making many wise investments (and we're not just speaking of winning lottery numbers). Even imperfect information could guide our decisions and lead to a greater chance of success. As individuals, we constantly try to predict the future (for example: should I buy the phone plan with 500 or 1000 minutes?) and the accuracy of our predictions has financial consequences (paying for minutes we don't use, or running over).

One way companies try to envisage the future is through the use of pro forma statements. 'Pro forma' is Latin 'for the sake of form'. Accurately predicted pro forma statements can help a company plan for the future. How much will sales be next year? Profits? Pro formas (for short) can also be created for distinct scenarios to see which would be more profitable. If created properly, pro forma statements can be a type of financial crystal ball that help a company 'see' the future, although we should always remember that no prediction is likely to be 100% accurate.


Source: https://2012books.lardbucket.org/books/finance-for-managers/s05-pro-forma-statements.html
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