A pro forma cash flow is a statement which predicts the rate at which money will flow into and out of a company in the future. This can give the company's management some insight into whether they are likely to have to make temporary arrangements, such as borrowing, to cover a cash flow shortage. It can also expose some fundamental problems with the company's operations that need to be permanently fixed.
Pro forma is a Latin phrase which translates as "as a matter of form," and is used in several contexts in the world of finance. For example, it can refer to a set of accounts which include additional details beyond those required by corporate accountancy laws. In this case, it refers to the fact that the financial statements are prepared in advance of the time they cover and are thus a forecast rather than a record, albeit a forecast based on existing evidence.
When looking at the future of a business, it is too simple to just consider how much the company is set to spend and how much it expects to make. The timing of the payments can be just as important. A pro forma cash flow helps identify problems which could occur where a profitable company is caught short because payments and receipts are on a different schedule.
A pro forma cash flow begins with the existing cash balance for the company. It then lists the sources of income and the anticipated payment dates. For example, if a company supplies goods on credit, it may know at the start of February that it will receive a certain amount during the month covering sales from January.
The statement then looks at forthcoming expenditure. Some of this will be a fixed, regular sum such as staff costs. Other expenses will be known but only payable at certain times, such as taxes. There will also be variable costs such as buying stock or materials. Where payment dates are variable, it is usually safest to work on the basis that the company will pay suppliers as soon as possible but not receive payment from customers until the last possible date.
How accurate a pro forma cash flow statement is depends on the timescale involved. A forecast covering the next 30 days could be taken as extremely reliable as the payments due to be made and received during that time may already be known. This means that the forecast will be extremely accurate unless there are unforeseen issues such as a customer going out of business before paying their bills. A forecast for the next 12 months may be less reliable as it will include estimates of future sales. This does not make the forecast worthless: even if overall sales are unpredictable, a business owner may still have a very good idea of seasonal variations.