Pro forma financial statements are projected or hypothetical financial reports used to forecast a company’s financial performance under specific scenarios. They help businesses and investors evaluate the potential impact of strategic decisions, such as mergers, acquisitions, new product launches, or changes in capital structure.

These statements include the three standard financial reports—income statement, balance sheet, and cash flow statement—but are based on assumptions and estimates rather than historical data. For example, a company planning to expand into a new market may create pro forma statements to estimate future revenues, costs, and profits.

Pro forma financials are commonly used for:

• Business planning and budgeting

• Attracting investors or securing loans

• Evaluating the financial impact of business changes

• M&A analysis and deal planning

It’s important to note that while pro forma statements are useful tools, they are not regulated in the same way as audited financials. Therefore, users should carefully review the underlying assumptions and recognize the potential for bias or overly optimistic projections.

In summary, pro forma financial statements are valuable for forward-looking analysis and strategic decision-making, offering insights into how future financial outcomes might look under various business scenarios.