Understanding the Differences Between Actual and Pro Forma

Introduction

Actual and Pro Forma are two different terms used in financial reporting and analysis. Actual represents the amount of something that has already happened, while pro forma is an estimate of what will happen in the future. It is important to understand the differences between actual and pro forma to help you make decisions in your business or investing activities.

This blog post provides a guide to understanding actual and pro forma, including the definitions of each, an explanation of how they are used in financial analysis, and some tips to keep in mind when analyzing the data. We will also discuss the pros and cons of each approach and how to use them effectively in your business decisions.

What is Actual?

Actual is a form of financial reporting that takes into account all applicable revenue, expenses, gains, and losses that occurred during a specified period of time. This includes both current and non-cash items such as depreciation, stock-based compensation, as well as unrealized gains and losses.

Definition of Actual

Actual refers to a company’s financial performance that includes all of the revenue and expenses that were earned, incurred, and realized during the period. Unlike Pro Forma, Actual is based on actual cash flows, so it is a more true representation of a business’s financial performance.

Examples of Actual

• Revenue from goods or services
• Cost of goods or services
• Cost of research and development
• Interest expenses
• Depreciation
• Amortization
• Unrealized gains and losses

What is Pro Forma?

Pro forma is a Latin phrase used to describe data presented for the purpose of prediction or evaluation. It is typically used in the financial sector to examine potential outcomes and make decisions. Pro forma is not a substitute for accurate accounting but instead focuses on predicted results. Pro forma data often uses more optimistic assumptions than actual numbers, making it useful for establishing “what-if” scenarios.

Definition of Pro Forma

Pro forma is an adjective used to refer to financial data used for predictions and evaluations. Pro forma data may be used to predict future results to help guide decision-making. It often examines potential outcomes by combining various assumptions, such as more optimistic sales estimates or exaggerated cost assumptions.

Examples of Pro Forma

Pro forma data can be used for any situation where an accurate evaluation of a potential outcome is needed. Some common examples of pro forma calculations include business acquisitions, budgeting, and forecasting. Pro forma is also used when making decisions on whether to accept a business loan or investment, since accurate current numbers may not be available.

• Evaluating the potential cost savings of restructuring a company's operations
• Creating an accurate budget for a new product introduction
• Forecasting revenues for an entire fiscal year

Differences between Actual and Pro Forma

Differences in Definition

Actual numbers refer to historical financial data associated with an organization. This data generally reflects the organization in its 'as-is' state and thus is accurate to the best of the organization's knowledge. Pro forma numbers, by contrast, are based on projected scenarios and should be used in more speculative scenarios.

Differences in How Each is Used

The primary difference between the two figures is how they are used. Actual numbers are used to provide a historical picture of an organization's performance. Pro forma numbers, on the other hand, are used mainly to forecast future results in a particular scenario. This allows greater insight into how an organization might act or perform given particular changes.

Actual numbers also help investors make decisions about investing in an organization. Pro-forma numbers provide a more speculative picture, allowing investors to see how certain changes may affect the performance of an organization. However, since these are projected numbers, they cannot be taken as hard facts and should be used in more cautionary ways.

Uses for Pro Forma

Pro Forma statements, or projections for a company’s future performance and financial statements, can be used for a variety of purposes. Towards understanding actual versus pro forma statements, it is important to also examine the uses and applications of Pro Forma.

To Forecast a Company’s Future Performance

Investors rely on Pro Forma to understand the estimated future performance of a company, particularly in the case of private companies who have not yet been publicly traded. Pro forma often includes different estimates and predictions of expected performance, taking into account any changes or acquisitions that have been made, giving an idea of the company’s expected performance in the future. Having this information can be useful for gaining better insight into a company’s forecasts outcome.

As an Analysis Tool for Investors

Pro Forma can also be used as an analysis tool for investors. Using Pro Forma, investors can identify key data points, such as future earnings growth, cash flow and other information that may be valuable to them when making investments or decisions. By analyzing the Pro Forma statement and its contents, they can gain a deeper understanding of the company and the potential risks associated with their investment before making a decision.

For business owner’s and investors, this information can be extremely valuable in understanding how a company might perform in the future, thereby allowing them to make informed decisions and accurately assess future performance.

Other Considerations

There are other considerations when understanding the difference between actual and pro forma financial statements. Here, we explore two important considerations – accuracy and the employment of accurate data.

Level of Accuracy

It is important and advantageous to understand the degree of accuracy required in the financial statements. Actual statements refer to the actual and extremely accurate data collected at the end of the period, whereas pro forma statements are estimates. Pro forma statements reflect cash markets that are likely to exist later, and the predictions are very rarely if ever, completely accurate.

Organizations may not have access to all the data, or have too little time to analyze all available data, leading to inaccurate estimations in place of actual figures. When companies lack the ability to obtain factual financial data, it can affect their decisions and cause formidable losses.

Employment of Accurate Data

For actual statements, it is essential to employ the most accurate data available. Data should be accurate, up-to-date, consistent, and verifiable. When collecting data, special attention should be paid to all applicable laws, regulations, and rules, as well as any permanent agreements, especially those regarding pensions and rights of shareholders. The pro forma statements will also depend on the accuracy of the collected data, but the data calculations must be used with caution.

When preparing the financial statements, it is important to consider the effects of recent events that include specific information such as economic changes and changes in legislation. By taking these elements into consideration, it is possible to create an accurate financial statement, and make sounder decisions based on reliable information.

Conclusion

Actual and pro forma accounting refer to two distinct methods of financial reporting. Both forms of financial reporting are based on accepted accounting principles; however, actual financial statements report actual results, while pro forma statements are used to show prospective outcomes as predicted by investors and other parties. Pro forma accounting is often used to consider potential outcomes or for strategic planning purposes.

Summary of Actual and Pro Forma

Actual financial statements provide an accurate representation of a company’s performance, reflecting current operations and real-life results. This statement is “as reported”, meaning the financial activities of a reported period are reported in the same way as it was previously established. Conversely, pro forma financial statements are hypothetical outcomes used to guess future results as predicted by the issuer.

Outline of Uses for Pro Forma

Pro forma accounting is used in a variety of scenarios. It may be used to show both the potential future income and expense figures in various scenarios, such as the issuance of a new stock or the acquisition of a new company. Additionally, pro forma presentations are required when companies make public offerings, as they provide a look into the anticipated financial results.

• Pro forma accounting can also be used to consider potential future results from revised operating policies and actions, such as restructuring of debt.
• Business professionals may use pro forma statements for strategic planning purposes, such as developing new product ideas or assessing the impact of entering new markets.
• Analyzing pro forma statements is beneficial for understanding the estimated, best-case outcomes of decisions and their affects on the overall financial health of a business.

By understanding the uses and differences between actual and pro forma accounting, business leaders are better equipped to make strategic, informed decisions that drive future growth and success.