Pro Forma for Startup
The term Pro Forma comes from Latin which essentially translates to “for the sake of form”. It is used to refer to a financial statement or any other document pre-prepared for an expected transaction, which is based on estimated figures.
It is used to indicate the potential financial impacts of a deal. It gives an indication of how the transaction will affect finances in the near future.
A Scenario : Understanding Pro Forma
John, a budding entrepreneur, is determined to make a revolution in the tech domain with his revolutionary business concept. He has crafted an advanced product that he believes will create ripples in the market once it is launched.
John is looking to gain investments from venture capitalists and in order to secure the money, he has to create a pro forma. The pro forma is an outline of his business plan’s projected financial performance which he needs to present.
To prepare a pro forma, John has enlisted the help of a financial analyst. This individual is responsible for procuring all the required financial data such as sales projections, operating costs & capital expenditures.
Based on the data obtained, the analyst construct a financial model which displays John’s expected financial performance in the upcoming five years.
John’s financial analyst has provided him with multiple pro forma models that effectively consider the anticipated growth of the organization, revenue flows, expenses and effects of various financing plans. These scenarios reflect a range of growth rates & funding amounts.
John relies on a pro forma when presenting his business plan to possible investors. It offers them insight into the financial insights of his organization as well as the likelihood of making profitable investments. This allows them to make informed decisions before investing in John’s business.
In this scenario, the pro forma plays an important role in securing funding for John’s startup. By providing a clear picture of the expected financial performance, the pro forma helps to build confidence in the business and attract investment.
