Before we talk about the future, let’s mention a bit about the past. Business owners, sales leaders, finance executives and other stakeholders are all tasked with monitoring basic financial statements. Tools like the Income Statement, Balance Sheet and Statement of Cash Flows tell stories about business results in the past. These stories contain lots of juicy info that help businesses and investors navigate an ever-changing marketplace.
How much did we actually sell last month? Last year? Did we lose any customers? What are the trends with specific expenses? Is there enough cash in the piggy-bank for making our payroll next month? The answers to all of these questions and more help us to start placing bets on the future. This is where a Pro Forma comes into the picture.
Now since we can’t jump into the passenger seat of Marty McFly’s DeLorean, this is where things become a bit more challenging. Since the dawn of time we humans have been doing our best to figure out what the future holds. And while reading palms and tea leaves can be more exciting than reading a pro forma financial statement, they don’t hold up so well in a boardroom.
So what is a Pro Forma? Well, our helpful friends over at Investopedia state: “Pro Forma, a Latin term that means ‘for the sake of form’ or ‘as a matter of form’, refers to a method of calculating financial results using certain projections or presumptions.” Put simply, it’s the crystal ball of business finance. Since we can’t tell the future, the best we can do is…
- Anticipate the needs of real people in a market
- Seek to quantify demand and the ability to sell to them over time (knowing that there are other companies competing for their attention)
- Understand the capacity to fulfill those sales
- Take a stab at what expenses might look like along the way
In the end, this is all rolled up into a nice spreadsheet that projects income, expenses and earnings into a future period of time. You might call it the presentation of an educated guess on future business results.
It’s also important to know that for offering an investment, companies CANNOT mislead investors with their forecasts (read “it’s illegal”). They can give you some idea of the trajectory, but they must use credible and conservative estimates when presenting any Pro Forma information.
So as an investor, you can see why all of this might be a little useful to know. You too are betting on the future and you’re counting on a business to give you a decent idea of why it’s worth handing your money over to help them grow.
Even still, as an investor, always keep in mind that crystal gazers, soothsayers and fortune tellers are in short supply. There is always a chance that you lose your investment. A business must have a Pro Forma. But when it comes down to it, here at Vicinity we side with Peter Drucker who said, “The best way to predict the future is to create it.” We’re all about supporting local businesses who are working to create and shape the future of their own communities.