pro forma
Pro forma is a financial statement that shows how numbers would look under a certain assumption, not how they actually turned out.
In plain English
You have probably done this yourself without a fancy name for it. Before you travel, you sketch out a rough budget in your head. If I get that contract, if my salary comes in on the 25th, if I do not spend on that owambe, this is roughly where my account will stand by month end. That sketch, built on ifs, is exactly what a pro forma statement is in the business world.
A pro forma statement is a set of financial figures prepared on an assumed or hypothetical basis rather than from actual results already recorded. Companies use it to show investors or lenders what the business would look like under a certain scenario, perhaps after a merger, after raising a loan, or after a big asset purchase.
Say a Lagos based logistics company is planning to acquire a smaller rival. Before the deal closes, the finance team will prepare a pro forma income statement that combines both companies' revenues and costs as if the merger had already happened last year. This helps the board and any bank financing the deal see the likely shape of profits, without waiting for the real thing to occur.
A UK example works the same way. A retailer applying for a bigger overdraft facility might show the bank a pro forma cash flow statement, one that assumes the new store openings planned for next year have already gone ahead, so the bank can judge whether the business will comfortably repay.
The catch is that pro forma numbers are built on assumptions chosen by the company itself, so they can be shaped to look more flattering than a strict accounting statement would allow. That is why regulators and careful investors always ask to see the actual, audited figures alongside any pro forma version, and treat the pro forma one as a guide rather than gospel.
A Nigerian fintech merging with a smaller payments startup prepares a pro forma statement showing combined revenue of ₦3.2 billion for the past year, as if the two companies had always been one, even though the deal only closes next quarter.
Questions people ask
Is pro forma the same as a forecast?
They are cousins but not twins. A forecast projects future results based on expected trends, while a pro forma statement restates a specific scenario, often involving a past or upcoming event like a merger, as if it had already happened.
Are pro forma figures audited?
Usually not in the same rigorous way as official financial statements. They are prepared by management for a specific purpose, so investors should treat them as illustrative rather than as verified fact.
Why would a company bother preparing one?
It helps lenders, investors or the board see the likely effect of a decision, such as a big loan or acquisition, before committing money, so everyone can judge the risk with clearer eyes.
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