What does "Pro Forma" mean?

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.

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D. Voight Thornton, MBA is an Certified Debt Consultant?Mr. Thornton was born in Incirlik Turkey (Adana AFB Base), and grew up in the Southwest (New Mexico). He earned his M.B.A. in Business Administration, Technology Management, while working as an Licensed Mortgage Loan Officer. His interest in the finance lead him to relocate to Arizona, to further his career,?Since graduating, Mr. Thornton? has worked in multiple compliance domains including his FinTech background. Mr. Thornton is licensed in Mortgage and as a certified Debt Consultant in the United States.