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Chapter 5 Pro Forma Statements

Predicting the Future

PLEASE NOTE: This book is currently in draft form; material is not final.

If we could accurately predict the future, we could easily become wealthy by making many wise investments (and we’re not just speaking of winnig lottory numbers). Even imperfect information could guide our decisions and lead to a greater chance of success. As individuals, we constantly try to predict the future (for example: should I buy the phone plan with 500 or 1000 minutes?) and the accuracy of our predictions has financial consequences (paying for minutes we don’t use, or running over).

One way companies try to envisage the future is through the use of pro forma statements. ‘Pro forma’ is Latin ‘for the sake of form’. Accurately predicted pro forma statements can help a company plan for the future. How much will sales be next year? Profits? Pro formas (for short) can also be created for distinct scenarios to see which would be more profitable. If created properly, pro forma statements can be a type of financial crystal ball that help a company ‘see’ the future, although we should always remember that no prediction is likely to be 100% accurate.