Question

Pro Forma statements in general: “Pro forma” means “made in advance,” and consists of best (hopefully informed) guesses. Which is more dangerous to the company: overestimating sales or underestimating sales? (In your answer describe the downside to either mistake. Is there an upside to either mistake? If so, describe that/those as well.)

Answer 1

Proforma statement is including forecasting of various element of financial reports and it is issued in order to attract prospective investors.

it is a common error in proforma statement to overestimate or underestimate sales because there is no certainty of estimating the absolute figure.

According to me, overestimating of sales is the more dangerous thing for the company because it will be leading to higher expectation of better performance from the investors and company will not be able to fulfill it so company will be have underperformance to the sales figures in future, and it will lead to underperformance.

Underestimating of sales is also problematic because it will be leading to a lower profit for the company and investors may not be attracted because company will be having a proforma statement which will be underestimating sales and profit.

Yes, there is an upside of the mistake of underestimating of the sales & it will be leading to positive surprise for various investors when the company is reporting higher sales and it will be leading to better reputation the company and better road ahead for the company in the long run and it will be easy for the company to attract more fund.