Understanding the Differences Between Actual and Pro Forma

Introduction

You're deciding between reported numbers and adjusted forecasts, so here's the quick difference: Actual (GAAP/IFRS) are the audited, rule-based results that say what happened in the fiscal period; Pro Forma (adjusted/forecast) are management's adjustments or forward-looking models that show what might or could happen under different assumptions. This distinction matters because Actual anchors accountability and comparability for investors, lenders, and regulators, while Pro Forma helps managers and analysts test scenarios, plan budgets, and justify strategy-useful, but easier to bias if you don't check the assumptions. One-liner: Actual shows what happened; pro forma shows what might or could happen. If you rely only on pro forma, you may defintely understate downside risk.

Key Takeaways

• Actual (GAAP/IFRS) = audited, rule-based record of what happened; Pro Forma = management-adjusted or forecasted view of what might happen.
• Use Actuals for accountability, compliance and comparability; use Pro Forma for planning, valuation and scenario testing.
• Actuals provide assurance; Pro Forma is unaudited and variable-watch for excluded costs, synergies, and one‑time adjustments.
• Always demand clear reconciliations to GAAP, verify assumptions, focus on cash flow, and run sensitivity scenarios to surface downside risk.
• Action: Finance must provide GAAP vs Pro Forma reconciliation and three scenario forecasts (base/optimistic/pessimistic) by Friday.

Actual financials (what happened)

Components: income statement, balance sheet, cash flow, notes

You need a clear map of the four parts so you can trace what actually happened last year and why.

The income statement shows operating performance: revenue, cost of goods sold, gross profit, operating expenses (SG&A, R&D), depreciation, interest, taxes, and net income. One-liner: the income statement records what you sold and spent.

The balance sheet snapshots resources and claims at period end: cash, receivables, inventory, property & equipment, goodwill, intangible assets, current and long-term liabilities, and equity. Check working capital and capital structure changes month-to-month.

The statement of cash flows converts accrual earnings to cash via operating, investing, and financing activities. Reconcile net income to operating cash flow and flag large non-cash items (stock comp, impairment, deferred taxes).

The notes explain policies, judgements, contingencies, leases, pensions, related-party transactions, and segment detail. Read notes before relying on headline numbers.

Practical steps:

• Reconcile net income to operating cash flow within 5 days
• Trace large balance-sheet moves (> 10% change) to supporting schedules
• Compare accounting policies in notes to prior year for changes
• Calculate ratios: current ratio, quick ratio, debt/EBITDA, ROIC

Governance: audited, follows GAAP or IFRS, legally required

Actual financials are governance-backed records produced under an accounting framework and, for public companies, audited by external auditors. This gives you assurance and legal standing.

US public companies follow U.S. GAAP; many internationals use IFRS. For US filers, Form 10-K deadlines (FY results) are typically 60 days for large accelerated filers, 75 days for accelerated filers, and 90 days for non-accelerated filers - those timeframes affect when audited numbers appear. One-liner: audited actuals are the legally defensible record.

Audit outputs to review: the auditor's report (opinion), management's representation letter, and any internal control findings (SOX Section 404 for US public companies). A clean opinion means numbers are materially correct; qualified, adverse, or disclaimer opinions are red flags.

Practical steps and checks:

• Obtain the audited financial statements and notes before valuation work
• Confirm reporting standard (GAAP vs IFRS) and map key policy differences
• Read auditor's opinion and any emphasis-of-matter or going-concern language
• Ask Finance for the audit-adjusted trial balance and journal entry list
• Owner: Finance - provide audited TB and control memos within 5 business days

Example: audited FY results, recognized revenue and realized expenses

Seeing numbers flow from transactions to audited statements helps you sanity-check adjustments.

Illustrative audited FY2025 example (hypothetical for learning): revenue $120.0 million, cost of goods sold $48.0 million, gross profit $72.0 million, operating expenses $40.0 million, operating income $32.0 million, interest & taxes $7.0 million, net income $25.0 million. One-liner: recognized revenue minus realized expenses equals reported profit.

Walkthrough steps you should do with any FY2025 audited result:

• Confirm revenue recognition policy in the notes (performance obligations, timing)
• Match large receivable balances to confirmed customer invoices and subsequent cash receipts
• Validate one-time items (restructuring, impairment) are labeled and quantified in notes
• Reconcile depreciation and amortization schedules to PP&E and intangibles
• Cross-check tax provision to effective tax note and deferred tax movement
• Run a cash conversion check: change in working capital vs operating cash flow

What this example hides: timing differences, off-balance-sheet items, and audit adjustments - always ask for the auditor adjustments schedule and the footnote that reconciles management's opening balances to audited closing balances; it's where many issues show up (and yes, that last word is defintely important).

Pro forma financials (what-if and adjustments)

Define pro forma: management adjustments, forecasts, carve-outs

You're preparing projections or evaluating a deal, and you need numbers that show scenarios rather than history. Pro forma financials are management-prepared statements that adjust GAAP/IFRS results to reflect planned transactions, forecasts, or carve-outs.

Direct takeaway: pro forma answers what would the financials look like if these events or assumptions were true.

Steps to prepare pro forma (practical):

• State the purpose: M&A, fundraising, budgeting.
• Start from audited FY numbers-use the actual FY period, e.g., FY2025.
• List each adjustment clearly (transaction close-date, one-time items, forecast items).
• Attach source documents: contracts, board minutes, pro-forma journal entries.
• Provide a GAAP-to-pro forma reconciliation on the face or in notes.

Here's the quick math: start with GAAP EBITDA, add or subtract quantified adjustments, produce pro forma EBITDA. What this estimate hides: timing, tax, and cash impact may differ materially from accounting adjustments.

One-liner: pro forma shows how management thinks the business will look after specific changes-use it, but verify it.

List common uses: M&A modeling, fundraising decks, internal budgeting

If you're valuing a target, pitching investors, or running next year's budget, pro forma is the go-to tool. It's flexible, but that flexibility is why you must be explicit and conservative.

Common uses and practical how-to:

• M&A modeling - combine standalone FY2025 actuals, add transaction adjustments, and model synergies with timelines and cost curves.
• Fundraising decks - show projected revenue and margin improvements by milestone; tie projections to KPIs (CAC, LTV) and milestones.
• Internal budgeting - create a baseline pro forma for the coming year and alternate scenarios (base, upside, downside).

Best practices:

• Produce three scenarios: base, upside, downside; quantify assumptions per scenario.
• Link key drivers to operational plans (headcount, pricing, customer growth).
• Always reconcile projected line items back to GAAP FY2025 starting point.
• Document who made each assumption and the evidence (contracts, pilot results).

One-liner: use pro forma to translate assumptions into numbers, but show the support and alternate cases.

Note variability: can exclude one-time costs, show synergies, or normalize earnings

Pro forma adjustments vary widely; that's both the benefit and the risk. Common adjustments include removing one-time costs, adding estimated synergies, or normalizing earnings for unusual events.

Typical adjustments and what to check:

• One-time items - restructuring, legal settlements; confirm they are genuinely non-recurring and quantify cash vs non-cash. Example: removing a $2.5 million one-off restructuring charge increases FY2025 EBITDA but reduces transparency if similar cuts recur.
• Non-cash items - stock-based compensation, depreciation; removing them inflates EBITDA but not cash. Always show cash-flow impact separately.
• Synergies and cost saves - attach a timeline and proof points (customer overlap, supplier consolidation). Adjust conservatively: show realized in years, not immediately.
• Carve-outs - present stand-alone adjustments for divested or acquired units with supporting transitional service agreements or purchase terms.

Due diligence checklist (actions you can take):

• Require a line-by-line GAAP-to-pro forma reconciliation tied to FY2025 audited statements.
• Ask for third-party support for material synergy claims (consultant memo, vendor quotes).
• Run sensitivity scenarios: vary top 3 assumptions by ±20% and show P&L and cash flow impacts.
• Insist on showing cash vs accounting effects-highlight non-cash add-backs in the pro forma footnotes.

One-liner: pro forma can clarify future value, but inconsistent or unsupported adjustments are a red flag-dig into the reconciliation and cash impact, defintely.

Core differences and how to read them

You're deciding between relying on audited GAAP numbers or management's adjusted view - here's the direct takeaway: use actuals for certainty and pro forma for scenarios, but always reconcile and stress-test the adjustments.

One-liner: Actuals record what happened; pro forma shows what might happen.

Recognition: Actual records past transactions; pro forma applies adjustments

You're looking at two different accounting logics. Actual financials record transactions when they meet recognition rules under GAAP or IFRS (revenue when earned, expenses when incurred). Pro forma statements start with those actuals and then apply management adjustments - carve-outs, add-backs, timing shifts, or forecasted items - to portray a different operating picture.

Steps to read recognition differences:

• Map adjustments to GL accounts
• Confirm timing and cutoffs
• Check if adjustments are recurring or one-off
• Verify tax and minority-interest treatment

Practical example (illustrative, FY2025): GAAP revenue $120,000,000; management presents pro forma revenue of $135,000,000 after including expected contract renewals of $15,000,000. Here's the quick math: start $120m + expected renewals $15m = pro forma $135m. What this estimate hides: timing risk, collectability, and whether renewals meet revenue recognition criteria.

One-liner: Always ask which GL lines change and why - numbers without line-item mapping are guesses.

Assurance: Actual audited; pro forma unaudited and management-driven

Actuals come with external assurance: audited financial statements include an auditor's opinion and notes. Pro forma numbers are usually unaudited, created by management, and may not have auditor comfort. That changes how you weight them in decisions.

Best-practice checks:

• Obtain the audited financial statements and auditor's report
• Ask if auditors reviewed or provided comfort on any pro forma adjustments
• Require source documents for large adjustments (contracts, invoices, signed term sheets)
• Apply a credibility haircut to optimistic synergies or recurring add-backs

Example rule of thumb: if management claims $15,000,000 in run-rate synergies for FY2025, consider modeling a 30% realization assumption until proven - i.e., use $10,500,000 in base-case valuation, test higher and lower cases. This keeps you honest and reduces downside if synergies slip.

One-liner: Treat pro forma as a plan, not audited fact - demand evidence and haircut big claims.

Disclosure: Look for reconciliations and clear adjustment descriptions

Good pro forma disclosure explains exactly how you move from GAAP to adjusted numbers. That means reconciliation tables, line-item descriptions, timing, and the rationale for each adjustment. If you don't get that, assume the pro forma is unreliable.

What to require when reviewing disclosures:

• Reconciliation from GAAP net income to each pro forma metric
• Item-by-item descriptions and supporting documents
• Tax effect and minority interest treatment for each adjustment
• Dates and expected realization windows for forecasted items

Illustrative reconciliation (FY2025):

Here's the quick math: $8.4m + $4.0m + $2.2m + $1.5m = $16.1m. What this estimate hides: whether stock comp is truly non-cash for valuation (dilution), or if restructuring costs recur under new management.

Checklist for final diligence:

• Insist on a dated reconciliation workbook
• Verify supporting invoices/contracts for > $250,000 adjustments
• Run sensitivity scenarios (±25% on key adjustments)
• Focus on cash flow impacts, not just adjusted earnings

One-liner: If there's no clear, auditable path from GAAP to pro forma, don't build a model on it - get the bridge or walk away.

Action: Finance - provide GAAP vs pro forma reconciliation and three scenarios (base, conservative, upside) for FY2025 by Friday.

Understanding the Practical Applications and Examples

M&A: pro forma shows combined entity and estimated synergies

You're evaluating an acquisition and need a view of what the combined company could earn, not just what each company reported last year.

One-liner: Pro forma projects the post-deal business after purchase accounting and synergies.

Steps to build a reliable M&A pro forma:

• Model standalone historicals for both firms
• Apply purchase price and allocation (goodwill, intangibles)
• Project run-rate synergies and timing
• Include one-time integration costs
• Reconcile back to GAAP for the post-close periods

Example: Acquirer revenue $800m, target revenue $200m → combined $1,000m. Forecasted run-rate synergies $30m (approx 3% of combined revenue), with $10m one-time integration spend in year one. Here's the quick math: combined EBITDA uplift = synergies - one-time costs = $20m. What this estimate hides: execution risk, customer attrition, and realization lag - defintely stress-test timing.

Practical checks: insist on documented synergy levers (cost, procurement, cross-sell), sensitivity to 50% realization, and independent third-party validation for cost saves where material.

Fundraising: startups use pro forma to project growth and margin improvement

You're raising capital and investors want to see credible future profitability, not just last year's burn rate.

One-liner: Pro forma in fundraising shows the path from current losses to scaled margins under explicit assumptions.

Practical steps for fundraising pro formas:

• Start with last 12 months actuals
• Adjust for known post-period changes
• Build 3 scenario forecasts: base, aggressive, conservative
• Link revenue drivers to unit economics
• Show cash runway and break-even month

Example: Current ARR $6m, plateau churn 3% monthly, projected revenue growth of 40% year-over-year yields ARR ~$8.4m next year. If gross margin improves from 45% to 55% via product automation, EBITDA moves materially toward breakeven. Here's the quick math: incremental margin = revenue delta × margin increase; hidden limits include sales productivity and CAC payback timing.

Best practices: present unit-level drivers (ARPA, churn, CAC), run a cash-flow forecast to 18 months, and provide reconciliations from current GAAP burn to your pro forma operating cash flow.

Reporting rhythm: use actuals for compliance, pro forma for scenario planning

You need a clear reporting cadence that separates legally required numbers from planning views used for decisions.

One-liner: Actuals satisfy regulators; pro formas inform decisions and contingencies.

How to operationalize reporting rhythm:

• Close books monthly with GAAP statements
• Create a rolling 13-week cash forecast
• Produce quarterly pro forma scenarios
• Require documented reconciliations each cycle
• Assign owners for assumptions and validation

Example cadence: Month-end close by day 5, 13-week cash update by day 7, management pro forma scenarios by day 10. Here's the quick math: 13-week runway = current cash - projected outflows; what this estimate hides: timing mismatches and late receivables. Keep pro forma versions limited and labeled (base, upside, downside) and always attach a GAAP reconciliation.

Action: Finance - provide GAAP vs pro forma reconciliation and three scenarios (base, upside, downside) by Friday; owner: Finance FP&A.

Risks, red flags, and due diligence

You're vetting pro forma statements against GAAP numbers; act like the money is already at risk. Quick takeaway: treat pro forma as a forecast that needs proof-if adjustments move the needle by more than a few percent, dig in.

Watch for aggressive or inconsistent adjustments (revenue add-backs)

One-liner: if an adjustment meaningfully changes margins or revenue, assume it needs third-party support.

Common red flags to spot immediately:

• Management calls recurring items one-time
• Revenue add-backs without cash receipts or contracts
• Synergy claims that shift from estimates to realized savings too fast
• One-off gains counted as operating income
• Narrow time window comparisons (quarter vs quarter) to mask trends

Practical steps you can take right away:

• Quantify adjustments as a share of key metrics - flag when addbacks > 5% of revenue or change EBITDA by > 10%
• Request source docs: signed contracts, bank receipts, termination notices, vendor invoices
• Compare same adjustments across at least 3 reporting periods to check consistency
• Run a cash-collection check: does the balance sheet or cash flow show the assumed benefit?

What this hides: companies sometimes reclassify operating spend to non‑recurring to inflate margins - don't accept labels, test cash flow impact.

Demand reconciliations: always reconcile pro forma back to GAAP

One-liner: no reconciliation, no trust - always map to audited GAAP line items.

Required reconciliation elements and best practices:

• Present a line-by-line reconciliation: GAAP net income → pro forma net income → pro forma EBITDA
• List each adjustment with amount, rationale, and supporting doc
• Show tax effect of adjustments and how they affect EPS or cash taxes
• Include cash-flow bridge: GAAP operating cash flow → pro forma operating cash flow

Practical checklist for reviewers:

• Insist on a standardized template for all deals or periods
• Flag adjustments > 10% of reported net income or > 5% of revenue for detailed backup
• Require an independent accountant review if adjustments materially change valuation metrics
• Keep a traceable audit trail: who prepared, who approved, and date stamped evidence

Here's the quick math: pro forma EBITDA = GAAP EBITDA + sum(addbacks) - sum(deductions). If that sum materially exceeds historical variability, ask why.

Mitigate: run sensitivity scenarios, insist on cash-flow focus, verify assumptions

One-liner: stress-test assumptions; if valuation falls apart under reasonable downside, it's not investible.

Scenario and stress-testing steps you should require:

• Build at least 3 scenarios: base, downside (-25% revenue), upside (+25%)
• Stress-test key drivers: churn, pricing, customer concentration, and cost synergies
• Translate assumptions into cash: forecast free cash flow (FCF) for 3 years and monthly cash runway for 12 months
• Run sensitivity tables on discount rate, margin expansion, and realization timing for synergies

Verification and controls to insist on:

• Require source data for top 10 customers and verify contract lengths and payment terms
• Compare assumptions to industry benchmarks and recent public comps
• Insist forecasts show working-capital needs and capex; don't accept margin improvements without supporting spend reductions or pricing evidence
• Model a cash-only scenario: if EBITDA adjustments are non-cash, ensure projected cash flow supports valuation

What this estimate hides: optimistic timing for synergies or delayed capex can make FCF look better than reality - model timing sensitivity.

Action: Finance - provide GAAP vs pro forma reconciliation and three scenarios (base, downside -25%, upside +25%) with supporting docs by Friday.

Next steps: use actuals for reliability; use pro forma for planning and valuation

You're deciding whether to trust audited numbers or management's adjusted story for valuation and planning. Bottom line: anchor to audited FY2025 GAAP numbers, then layer pro forma adjustments only when they're fully documented and stress-tested.

Here's the quick math you should always run: start with FY2025 GAAP line items, then show each pro forma adjustment as a dollar amount and percentage of the relevant line (revenue, EBITDA, or cash). What this estimate hides is the timing and probability of those adjustments actually occurring - so model timing explicitly.

Use actuals for reliability; use pro forma for planning and valuation

Start with audited FY2025 GAAP financials as your control: income statement, balance sheet, cash flow, and audit notes. Treat those numbers as the only legally reliable record and the base for any valuation or covenant test.

When you build a pro forma for valuation, do these steps:

• Extract FY2025 GAAP totals by line item
• List each pro forma adjustment with source and date
• Show adjusted pro forma line and delta in dollars and percent
• Run DCF and multiples on both GAAP and pro forma bases
• Report valuation ranges under three scenarios

One-liner: Actuals show what happened; pro forma shows what might happen.

Action: require documented reconciliations, stress-test key adjustments

If you get a pro forma, demand a reconciliation back to FY2025 GAAP - line-by-line, with supporting schedules and primary evidence (contract, vendor quotes, HR approvals). Never accept an adjustment described only as management estimate.

Practical tests and thresholds:

• Flag adjustments > 10% of revenue or > 50% of reported net income
• Require source documents for each add-back (invoices, contracts, board minutes)
• Run sensitivity: vary each major adjustment by -25%, 0%, and +25% to show P&L and cash impacts
• Convert pro forma EBITDA moves into free cash‑flow impact for the first 3 years

One-liner: reconcile every dollar and stress the key assumptions until they hold up under several realistic outcomes.

Owner: Finance - provide GAAP vs pro forma reconciliation and 3 scenarios by Friday

Ask Finance to deliver a single package for review: a GAAP-to-pro forma reconciliation for FY2025, source workpapers, and three scenario models (base, downside, upside). Be specific about scenario definitions so you get apples-to-apples outputs.

Required deliverables and format:

• Single spreadsheet with tabs: GAAP FY2025, adjustments detail, pro forma P&L, pro forma cash flow
• Three scenarios: Base (management case), Downside (-25% revenue or +10% opex), Upside (+30% revenue or -5% COGS)
• 13-week cash flow and DCF for each scenario
• Workpapers tied to each adjustment (pdfs or links)

One-liner: Finance - produce the reconciliation and all three scenario models by November 28, 2025, sent to you and the CFO.

Next step and owner: Finance - provide GAAP vs pro forma reconciliation and 3 scenarios by November 28, 2025.