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Pro forma is a business term you should know. Bankrate explains.
What is pro forma?
Pro forma is a way of describing statements issued ahead of some financial transactions or business announcements. A Latin phrase meaning “as a matter of form,” pro-forma actions are those that uphold basic conventions in an interaction. While pro-forma actions have social importance, in business they’re an expected courtesy that helps to contextualize and facilitate a transaction.
In virtually every context, pro-forma practices are considered a formality. They have applicability in a number of different circumstances, including law, government, and business. “Pro forma” may simply describe a norm or the performance of some expected action that meets the minimum requirements for a social or professional relationship between two parties.
In business, pro-forma statements report a company’s finances while offering a hypothetical outlook about its projected future. These statements are helpful for investors who may be interested in a company’s performance or to help facilitate a merger or acquisition because they indicate cash flow and net revenue. They’re also useful to banks when a company needs to apply for a loan or credit line. Generally, pro-forma statements don’t explicitly detail unusual expenses or sales.
Similar to a letter of intent, pro-forma documents are used as a kind of precursor to an invoice to express an interest in doing a transaction, such as a sales quote. In the U.S., pro-forma documents that report on a business’s earnings are governed by the Generally Accepted Accounting Principles (GAAP) of the Securities and Exchange Commission (SEC).
If you apply for a small-business administration loan, your bank might request a pro-forma financial statement. If you just need a personal loan, check out Bankrate’s comparison list.
Pro forma example
Pro-forma actions may be as simple as greeting coworkers in the morning or issuing a perfunctory announcement. They’re also used frequently by the U.S. Congress to prevent its members from adjourning for too long; as a matter of policy, no business is conducted, but a pro-forma session can prevent the president from making recess appointments or pocket-vetoing bills. Pro-forma practice in professional settings works much the same way: an action intended to set the terms of a future relationship between two parties.
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