How Do I Choose the Best pro Forma Model?
A pro forma model is a method a company uses to put together documents or information that are estimates of future transactions. The most common pro forma documents are typically financial statements that contain expected dollar amounts from future business activity. To choose the best, companies must look at the data inputs available and decide what the pro forma statements will look like and who will be using the statements for making decisions. Another example of a pro forma document is a trade invoice that includes items in a future transaction. Though the business has yet to complete the transaction, the documents simply declare the value of items in a potential future transaction.
The inputs that go into a pro forma model can dictate which model to use when attempting to create forward-looking documents. As in the examples above, one model was for financial statements and another for trade invoices. Each of the models is for a specific type of information, leading to the creation of a specific model. With this in mind, a company can potentially have more than one pro forma model in place for business activities. Having more than one model in place for pro forma documents allows a company to accurately predict many different types of business activity.
A pro forma model most likely has a standard form that produces the same document in terms of format. Individuals who prepare a pro forma model may need to keep this output format in mind when choosing a model in the first place. For example, pro forma financial statements most likely need to look like the actual financial statements prepared by the accounting department. The same is true for trade invoices, where the estimates should be in a format similar to the actual invoice. Having a pro forma model that produces a different output than the traditional output may create confusion in the company.
One final consideration for a pro forma model is the users of the information. Individuals who use the information may not have all the same needs for the data. Therefore, the company may need models that provide data for owners and executives and another for operational managers. In some cases, the same pro forma model may be able to create the required outputs for each individual through minor changes in the inputs placed into the model. These models are most likely for internal stakeholders rather than outside stakeholders.
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