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Pro formas serve many purposes—internal forecasting, loan applications, pitching new ventures—but they don’t necessarily follow generally accepted accounting principles (GAAP). Investopedia defines them as: “… Essentially, a pro forma financial statement can exclude anything a company believes obscures the accuracy of its financial outlook and can be a useful piece of information to help assess a company’s future prospects.” That leaves a lot of room for flexibility—and potential untrustworthiness.
It’s widely accepted that pro formas are only as good as their underlying assumptions. Yet, once included in an offering or financial document, they often take on a life of their own—as if their mere presence confirms their validity.
In new ventures, pro formas can shape vision and expectations, sometimes making projections feel more realistic than they are simply because they’re neatly presented as an Exhibit. Early skepticism or scrutiny of assumptions might be put on hold, watered down, or forgotten altogether. With many moving parts in a business deal, initial reviews of financial projections might be put aside with, “We’ll come back to them later.” But once they lose priority, they might not get the same level of scrutiny again—a mistake that can haunt everyone involved.
Pro Formas ties in with Puffing and Raising Capital, subjects of other blogs, which are an integrated topic in The Pinball Theory of Business & Life. In closing, here’s a question:
If the people preparing the pro formas were the recipients,
would they trust them?
