How Do I Choose the Best pro Forma Format?

Osmand Vitez

A pro forma financial statement is one that simply presents accounting estimates formed into standard financial statements. Choosing the best pro forma format is essential to making informed decisions based on accounting estimates and pro forma statements. A few factors that help a company decide on the best pro forma format include available accounting information, use for the pro forma statements, and the individuals who require specific data from accounting estimates. In some cases, a government regulator may have requirements and restrictions on pro forma statements that companies prepare. These requirements may only affect a limited number of companies, such as those that are publicly held.

Man climbing a rope
Man climbing a rope

Not all accounting systems are the same, just like the business activity or procedures in a company are not going to be the same in a given industry. Therefore, the accounting inputs a company has can greatly affect the type of pro forma format the accounting system uses for these statements. At issue is the amount of data necessary to present the most accurate pro forma statement in the company. For example, a pro forma statement may only be necessary for six or eight months; these statements most certainly require less inputs than a statement for 12 or 18 months. The accuracy of short-term statements may also be less important than those of long-term statements.

Another important factor for selecting the pro forma format of financial statements is the use of the documents. A department certainly needs less information than the CEO or other executives, who want more information on all departments and business activities. The head of a department may need information on only the production activity within his or her department. Again, this data may actually be more managerial in nature than financial, at least in terms of accounting and the systems in place for measuring financial activity. The use for these statements is perhaps the most internal factor for the pro forma format.

Along with the use of pro forma statements, the individuals making decisions are also important for the pro forma format. For example, a lower department manager does not need all the information that a senior manager or executive needs. The separation of duties may help restrict the amount of information one position or individual needs in terms of accounting. Most companies are not willing to give financial estimates to individuals for no reason. This protects both the viability and truthfulness in a company.

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