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Analyzing Pro Forma Statements


Analyzing Pro Forma Statements

Currently, XYZ Company, INC. makes $1,750,450 mil in revenue and $144,335
thousand in net profit. The new proposed initiative will increase sales by implementing a
recurring sales business model. The revenue gained is generated from new sales only, and
recurring business is a missed opportunity for XYZ.
In the past, managers at XYZ have tested several farming and drip marketing campaigns
to gain recurring business. These campaigns were able to increase revenues by 25-30% for the
months each campaign was tested. The managers at XYZ Company Inc. believe that creating a
department with a sole focus on account management will increase sales revenue by 35% every
year it is maintained.
Sales from recurring business model will increase by 35% each year while beginning and
ending inventory will remain the same. As a standard operating procedure, the beginning and
ending inventory should remain the same to help regulate costs. Salaries and commissions will
also increase in proportion to the increase in sales. The new initiative will require additional staff
that will add to staff and commission costs. Advertising costs are projected to rise by a standard
35% each year; however this is related to the costs of acquiring new business.
Salary and wages, payroll taxes, and employee benefits are projected to increase in
proportion to sales. While office supplies, postage, professional fees, telephone, utilities and
miscellaneous expenses projected to increase by 35% each year as these are related to the
additional costs of running the new department. Training and education is projected to increase
by 40% in 2015 to hire, create and implement a new sales training curriculum. As sales begin to
increase, and the recurring business model is fully implemented for a year, this should decrease
by approximately 5% each year after that.

Financials vs. the Initiative

According to Parrino, Kidwell, & Bates (2012), planning for financials and using models
such as pro formas, help business to make financing and investment decisions. Managers can
take the information developed in this five-year projection for the XYZ Company to determine
how to fund this initiative. It will also help to forecast how this decision will affect other parts of
the business.
The pro forma profit and loss statement shows that if sales increase by 35% as projected,
gross profit will increase by 27% in 2015 and 37% in 2016-2018. This medium equals a
combined total of $1.6MIL by the end of 2018. The lowest reaping year will be 2015, and this is
due to the extra costs being allocated to costs incurred initially to implement the initiative such as
training and education, as well as purchases and production labor.
Recommendations and Conclusion
The total assets for XYZ Company will increase by a combined total of $853,678 if the
pro forma projections are correct. A total of $157,226 will go to current assets, and another
$696,452 will go to fixed assets of that number. Managers can decide on several different ways
to finance this, namely from the addition in retained earnings, accounts payables or through the
sale of debt or equity.
In the short term, the company will need the additional financing to revamp the sales
training modules, as well as hire, and train new employees to develop this program. It is also
assumed that the lag time to see results from new account managers will be at least 45-60 days as
long as the training program is properly executed.

The concern for managers would be issuing new debt, though the company made over a
million dollars in revenue last year, the net profit was a little less than $150K. Despite this, the
company is missing the opportunity of gaining revenue through upsells and recurring business. If
the business hopes to increase its sales, the model must be implemented.
At this time, issuing common stock is not a viable solution, as the company is still young,
and it would not be wise to dilute earnings this early in the business model. As such it is
suggested that the XYZ Company, fund this initiative for the first three months by using retained
earnings. This recommendation is the safest bet to avoid debt and diluted valuation of the
company that would occur if more common stock were issued.

Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed).
Hoboken, NJ: Wiley