Pro-forma financial statements can raise expectations about a business’s financi

Question

Pro-forma financial statements can raise expectations about a business’s financial performance. If the actual performance does not meet those expectations, there can be negative consequences.

1. Should companies continue to publish pro-forma information?

2. Should they be expected to publish pro-forma information? Why

*Comment: it seems like pro-forma information can be easily manipulated because there’s not much regulation; therefore, it is not difficult for companies to abuse it and make earnings appear to be something there not. I would like a different perspective on it. Most of my conclusions are that it does more harm than good.

Explanation / Answer

Businesses use pro forma statements for decision-making in planning and control, and for external reporting to owners, investors, and creditors. Pro forma statements can be used as the basis of comparison and analysis to provide management, investment analysts, and credit officers with a feel for the particular nature of a business's financial structure under various conditions. As a vital part of the planning process, pro forma statements can help minimize the risks associated with starting and running a new business. They can also help convince lenders and investors to provide financing for a start-up firm. But pro forma statements must be based upon objective and reliable information in order to create an accurate projection of a small business's profits and financial needs for its first year and beyond. After preparing initial pro forma statements and getting the business off the ground, the small business owner should update the projections monthly and annually.

Although pro forma statements have a wide variety of applications for ongoing, mature businesses, they are also important for small businesses and start-up firms, which often lack the track record required for preparing conventional financial statements. As a planning tool, pro forma statements help small business owners minimize the risks associated with starting and running a new business. The data contained in pro forma statements can also help convince lenders and investors to provide financing for a start-up firm.

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