Do you know the definition of pro forma? This article will provide you with all of the information you need on the word pro forma, including its definition, etymology, usage, examples, and more!
What does the word pro forma mean?
According to Investopedia and other sources like Collins English Dictionary, the term pro forma is a Latin phrase that means for the sake of form or as a matter of form. Pro forma is a method of using projections or presumptions to calculate financial results. While most things are calculated using standard generally accepted accounting principles (GAAP), pro forma financials are not. They leave out one-time expenses that are not part of normal company operations. These might include costs following a merger, change in capital structure, new capital investment, or acquisition such as restructuring costs or other nonrecurring transactions. A pro forma financial statement might exclude things that a company or business may feel obscures the accuracy of its financial outlook. This is a piece of information that a company might use to assess its future prospects. In the United States, it is illegal for a publicly traded company to use pro forma financial results that mislead investors, and they must use the most conservative possible estimates of revenue and expense. These take into account the operating performance and other important aspects of the company, but are not GAAP numbers within the GAAP framework. The Securities and Exchange Commission (SEC) permits that publicly traded companies must report GAAP financial results as well to fulfill the minimum requirements or the seller could lose their licenses.
Pro forma statements and pro forma balance sheets present what are expected corporate results to outsiders like buyers, such as expected net revenues based on calculations of a future period. Pro forma figures and pro forma results are assumptions. These are often the numbers that are shared in investment proposals. A pro forma income statement uses the pro forma calculator method to draw the focus of potential investors to specific figures when a company issues an earnings announcement.
Pro forma forecasts are hypothetical financial figures that may leave out one-time charges or previous business operations and are used for estimate purposes. These unaudited pro forma financial information documents are not the real financial statements of a company. These began to boom in the late 1990s and occurred when dot-com companies used the pro forma method to make losses appear like profits and fudge the inflow and outflow of funds in a fiscal year using hypothetical conditions. It quickly became the norm.
In order to create a pro forma income statement, first you have to calculate the estimated revenue functions for your specific business. You are supposed to use realistic market assumptions, not numbers you hope to happen. You should do careful research and work with experts to find out what a normal annual revenue stream is, as well as asset accumulation assumptions. Then you must calculate your liabilities and costs which includes employee pay, insurance, utilities, licenses, permits, loans, lines of credit, lease expense, materials, taxes, and more. Finally, you have to estimate your cash flows. This identifies the net effect on cash if the proposed business change is implemented. The idea of a cash flow differs from NI under something called accrual accounting. Here, revenues and expenses are seen prior to or after cash changes hands.
Other things can be pro forma such as a pro forma apology, pro forma documents, a pro forma session which is held in Congress in either the House of Representatives or the Senate in which no formal business is expected to be conducted such as in recess appointments, or a pro forma invoice. While the term pro forma can be used in a variety of different circumstances for almost anything, it is most commonly used in the financial world and business world when discussing numerical projections.
According to Etymonline, the word pro forma can also be spelled proforma and comes from the Latin, literally meaning “for form’s sake” or “by way of formality. This comes from the Latin preposition pro meaning on behalf of and the Latin formā, the ablative of forma. The concept of something that is pro forma may be confusing at first. Before doing any sort of document for a business or making projections in terms of numbers, costs, and revenue, you should make sure to speak with a financial advisor and an accountant. These people will make sure that you are projecting accurate numbers and that you are making wise business decisions.
What are synonyms of pro forma?
There are many different words that mean the same thing as the word pro forma, which are called synonyms. Synonyms and words and phrases that have the same meaning as another word or phrase. Synonyms are very useful to know if you want to expand your vocabulary or if you want to avoid repeating yourself. This list of synonyms for the word pro forma is provided by Thesaurus.
- going through the motions
- phoning it in
- walking through it
Overall, the word pro forma is a Latin term meaning for the sake of form. These are usually used to reference financial projections and cash flow statements in hypothetical confusions. These financial accounting statements are under obligation not to be used to mislead investors. Pro forma earnings are merely forecasts. Pro forma has three syllables – pro-for-ma, and the pronunciation of pro forma is ˈprəʊ ˈfɔːmə.