The pro forma balance sheet provides a firm a sense of how its activities will affect its ability to meet its short-term liabilities and how its finances will evolve over time. It can also quickly show how much of a firm’s money will be tied up in accounts-receivable, inventory, and equipment. The pro forma balance sheet is also used to project the overall financial soundless of a company. For example, a firm may have a very aggressive set of pro forma income statements that project rapidly increasing growth and profitability. However, if this rapid growth and profitability push the firm’s debt ratio to 75 percent (which is extremely high), investors may conclude that there is too much risk involved or the firm to be an attractive investment.
Definition