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FINANCIAL GOALS & PERFORMA STATEMENTS

Financial Goals & Performa Statements


Five Essential Ingredients
Before putting pen to paper and formulating finanial goal!" it i! important to
#ea$e fi$e %e& priniple! into &our finanial goal! plan'(ere t)e& are in *rief+
1. Create Wealth : Find a #a& to greatl& inrea!e t)e $alue of #)at &ou do' A!%+
,(o# an I *e #ort) more to t)e ompan& I #or% for-, Or !tart a ne# inome
!tream u!ing modern te)nolog&' If &ou %no# &our !u*.et" and #ant to *uild an
inome !tream #it) gro#ing" di$er!ified re$enue!'
2. Maintain Wealth + Inlude in &our finanial goal! a *udget t)at allo#! &ou to
!pend le!! t)an &ou earn' In$e!t #)ate$er i! left'
. Increase !o"r Wealth : Compounding gro#t) #ill reall& inrea!e t)e !peed
#it) #)i) &ou attain &our finanial goal!' Rein$e!t t)e profit! from &our pa!t
in$e!tment!'
#. Protect !o"r Wealth : Build into &our finanial goal! plan a !trateg& for
proteting &our a!!et!' Sear) out e/pert! in &our area #)o an gi$e ad$ie and
ma%e !ure &ou are proteted again!t litigation'
$. En%o& !o"r Wealth : 0on1t #ait until &ou )a$e aumulated a fortune *efore
&ou !tart en.o&ing t)e proeed! of &our finanial goal!' Re#ard &our!elf
oa!ionall&' E/periene t)e .o& of gi$ing *& !)aring a perentage of &our #ealt)
to people or au!e! &ou are a*out'
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
3)en t)e!e fi$e e!!ential ingredient! are #o$en into an& finanial goal! plan" t)e
goal! *eome moti$ating' Su) goal! tou) emotion4 t)e& e$ol$e from .u!t an
aademi e/eri!e of nee!!it& into a #a& of life t)at tou)e! t)e !en!e of
a*undane'
Financial Goal Setting ' Fo"r Ste(s
T)ere are no )ard and fa!t rule! for implementing a finanial goal !etting plan' T)e
important t)ing i! to at lea!t do !omet)ing a! oppo!ed to not)ing" and to !tart
NO3'
(ere are four !tep! &ou an appl& to an& finanial goal !etting e/eri!e+
Ste( 1: Identif& and )rite do)n &o"r financial goals" #)et)er t)e& are !a$ing to
!end &our %id! to ollege or 2ni$er!it&" *u&ing a ne# ar" !a$ing for a do#n
pa&ment on a )ou!e" going on $aation" pa&ing off redit ard de*t" or planning for
&ou and &our !pou!e5! retirement'
Ste( 2: *rea+ each financial goal do)n into several short'term 6le!! t)an 7
&ear8" medium9term 67 to : &ear!8 and long9term 6; &ear! or more8 goal!4 #)i)
#ill ma%e t)i! proe!! ea!ier'
Ste( : Ed"cate &o"rself and do &o"r research' Read Mone& maga<ine or a
*oo% a*out in$e!ting" or !urf t)e Internet1! in$e!tment #e* !ite!'
Ste( #+ Eval"ate &o"r (rogress as often as needed' Re$ie# &our progre!!
mont)l&" =uarterl&" or at an& ot)er inter$al &ou feel omforta*le #it)" *ut at lea!t
!emi9annuall&" to determine if &our program i! #or%ing'
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
If &ou1re not ma%ing a !ati!fator& amount of progre!! on a partiular goal" re9
e$aluate &our approa) and ma%e )ange! a! nee!!ar&'
Sometime! #)en people #rite do#n t)eir goal!" t)e& di!o$er t)at !ome of t)e
goal! are too *road in meaning and nearl& impo!!i*le to rea)" #)ile ot)er! ma&
!eem !maller in !ope and ea!ier to a)ie$e' Brea% &our goal! do#n into t)ree
!eparate time ategorie!' B& plaing a time frame on &our goal! &ou are moti$ating
&our!elf to get !tarted and )elping to allo# &ou t)e )ane to !ueed' >u!t
remem*er t)at &ou an ad.u!t t)e time frame #)ene$er &ou #ant to'
,ong'term goals 6o$er ; &ear!8 are t)o!e t)ing! t)at #on1t )appen o$ernig)t" no
matter )o# )ard &ou #or% to a)ie$e t)em' T)e& ma& ta%e a long time to
aompli!) 6)ene t)e rea!on t)e& are alled long term goal!8" !o gi$e &our!elf a
rea!ona*le amount of time" t)at are *a!ed on &our *e!t e!timate! of #)at it #ill
ta%e to a)ie$e t)em' E/ample! of long9term goal! mig)t inlude ollege eduation
for a )ild" retirement plan or pur)a!ing a )ome' 3)ate$er t)e a!e" t)e!e goal!
generall& re=uire longer ommitment! and often more mone& in t)e end'
Intermediate'term goals -79; &ear!8 are t)e t&pe of goal! t)at an1t *e e/euted
o$ernig)t *ut mig)t not ta%e man& &ear! to aompli!)' E/ample! mig)t inlude
pur)a!ing?replaing a ar" getting an eduation or ertifiation" or pa&ing off &our
de*t! li%e redit ard! et' 6depending on t)e amount8'
Short'term goals 6#it)in one &ear8 generall& ta%e one &ear or le!! to a)ie$e"
*a!ed on t)e date t)e ta!% i! needed" t)e total e!timated o!t" and t)e re=uired
!a$ing!'
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
3)at are &our goal!- To find out" &ou need to ma%e up a li!t" deide #)i)
timeline &our goal fit! into" detail t)e !tep! nee!!ar& to a)ie$e &our goal!" t)en
ta%e ation to#ard rea)ing t)o!e goal!' It5! t)at !imple' @ou mig)t *e #ondering
#)ere to !tart #it) &our finanial goal !ettting plan' T)e!e are !ome *a!i tip! to
)elp &ou in ma%ing t)e *e!t )oie! for &ou'
After loo%ing at t)e!e tip!" it i! *e!t for &ou to go out and do !ome re!ear) to find
t)e met)od6!8 t)at !uit &ou *e!t'
Begin *& ta%ing ;A97BA out of ea) pa& )e% and put it in a !a$ing!
aount
Loo% into different in$e!tment !trategie! !u) a! IRA5!" !to%!" RRSP5!"
mutual Fund!" per!onal in$e!tment! et' T)ere are man& more and all an
a!!i!t &ou in !)ort and long term goal!'
Start ma%ing a *udget for &our!elf t)at lea$e! &ou #it) !ome e/tra mone&
and follo# it
2!e &our oupon! t)at i! #)& t)e& are t)ere' It !eem! li%e !mall !a$ing!" *ut
add toget)er &ou ould !a$e CB9:B dollar! at ea) trip to t)e mar%et'
S)op around for *argain!
3or% #it) a redit oun!elor to get )elp in lo#ering &our mont)l& e/pen!e!
and get rid of &our de*t
T)e!e are .u!t !ome of t)e t)ing! t)at &ou an do #)en *eginning &our finanial
goal !etting plan' T)e !tep! to !etting goal! !ue!!full& don5t )ange" onl& t)e
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
met)od! t)at &ou u!e to go a*out it' For e/ample+ #)en it i! areer #i!e" #or% to
get notied4 for relation!)ip!" #or% on maintaining &our intima& or getting it
*a%4 in finanial goal !etting" #or% to !a$e and in$e!t mone& et'
It reall& i! t)at ea!&'
Pro Forma Statement
Pro forma, a Latin term meaning ,a! a matter of form", i! applied to t)e
proe!! of pre!enting finanial pro.etion! for a !peifi time period in a
!tandardi<ed format'
Bu!ine!!e! u!e pro forma !tatement! for dei!ion9ma%ing in planning and
ontrol" and for e/ternal reporting to o#ner!" in$e!tor!" and reditor!'
Pro forma !tatement! an *e u!ed a! t)e *a!i! of ompari!on and anal&!i! to
pro$ide management" in$e!tment anal&!t!" and redit offier! #it) a feel for
t)e partiular nature of a *u!ine!!1! finanial !truture under $ariou!
ondition!'
Bot) t)e Amerian In!titute of Certified Pu*li Aountant! 6AICPA8 and
t)e Seuritie! and E/)ange Commi!!ion 6SEC8 re=uire !tandard format! for
*u!ine!!e! in on!truting and pre!enting pro forma !tatement!'
,An&one t)in%ing of going into *u!ine!! !)ould prepare pro forma
!tatement!" *ot) inome and a!) flo#" *efore in$e!ting time" mone&" and
energ&",
A pro forma inome !tatement i! !imilar to a )i!torial inome !tatement" e/ept it
pro.et! t)e future rat)er t)an tra%! t)e pa!t' Pro forma inome !tatement! are an
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
important tool for planning future *u!ine!! operation!' If t)e pro.etion! predit a
do#nturn in profita*ilit&" &ou an ma%e operational )ange! !u) a! inrea!ing
prie! or derea!ing o!t! *efore t)e!e pro.etion! *eome realit&'
Pro forma inome !tatement! pro$ide an important *en)mar% or *udget for
operating a *u!ine!! t)roug)out t)e &ear' T)e& an determine #)et)er e/pen!e!
an *e e/peted to run )ig)er in t)e fir!t =uarter of t)e &ear t)an in t)e !eond'
T)e& an determine #)et)er or not !ale! an *e e/peted to *e run a*o$e a$erage
in >une' T)e an determine #)et)er or not &our mar%eting ampaign! need an e/tra
*oo!t during t)e fall mont)!' All in all" t)e& pro$ide &ou #it) in$alua*le
informationDt)e !ort of information &ou need in order to ma%e t)e rig)t )oie!
for &our *u!ine!!'
>ame! O' Gill #rote in )i! *oo% Financial Basics of Small Business Success. A!
a $ital part of t)e planning proe!!" pro forma !tatement! an )elp minimi<e t)e
ri!%! a!!oiated #it) !tarting and running a ne# *u!ine!!' T)e& an al!o )elp
on$ine lender! and in$e!tor! to pro$ide finaning for a !tart9up firm'
But pro forma !tatement! mu!t *e *a!ed upon o*.eti$e and relia*le information in
order to reate an aurate pro.etion of a !mall *u!ine!!1! profit! and finanial
need! for it! fir!t &ear and *e&ond'
After preparing initial pro forma !tatement! and getting t)e *u!ine!! off t)e
ground" t)e !mall *u!ine!! o#ner !)ould update t)e pro.etion! mont)l& and
annuall&'
.ses of Pro Forma Statements
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
1. *.SI/ESS P,0//I/G : A ompan& u!e! pro forma !tatement! in t)e
proe!! of *u!ine!! planning and ontrol' Beau!e pro forma !tatement! are
pre!ented in a !tandardi<ed" olumnar format" management emplo&! t)em to
ompare and ontra!t alternati$e *u!ine!! plan!' B& arranging t)e data for t)e
operating and finanial !tatement! !ide9*&9!ide" management anal&<e! t)e
pro.eted re!ult! of ompeting plan! in order to deide #)i) *e!t !er$e! t)e
intere!t! of t)e *u!ine!!' In on!truting pro forma !tatement!" a ompan&
reogni<e! t)e uni=uene!! and di!tint finanial )arateri!ti! of ea) propo!ed
plan or pro.et'
Pro forma statements allo) management to+
Identif& t)e a!!umption! a*out t)e finanial and operating )arateri!ti!
t)at generate t)e !enario!'
0e$elop t)e $ariou! !ale! and *udget 6re$enue and e/pen!e8 pro.etion!'
A!!em*le t)e re!ult! in profit and lo!! pro.etion!'
Tran!late t)i! data into a!)9flo# pro.etion!'
Compare t)e re!ulting *alane !)eet!'
Perform ratio anal&!i! to ompare pro.etion! again!t ea) ot)er and again!t
t)o!e of !imilar ompanie!'
Re$ie# propo!ed dei!ion! in mar%eting" prodution" re!ear) and
de$elopment" et'" and a!!e!! t)eir impat on profita*ilit& and li=uidit&'
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
Pro forma !tatement! for ea) plan pro$ide important information a*out future
e/petation!" inluding !ale! and earning! forea!t!" a!) flo#!" *alane !)eet!"
propo!ed apitali<ation" and inome !tatement!' Management al!o u!e! t)i!
proedure in )oo!ing among *udget alternati$e!' Planner! pre!ent !ale! re$enue!"
prodution e/pen!e!" *alane !)eet and a!) flo# !tatement! for ompeting plan!
#it) t)e underl&ing a!!umption! e/plained' Ba!ed on an anal&!i! of t)e!e figure!"
management !elet! an annual *udget'
0uring t)e our!e of t)e fi!al period" management e$aluate! it! performane *&
omparing atual re!ult! to t)e e/petation! of t)e aepted plan u!ing a !imilar
pro forma format'
2. FI/0/CI0, M12E,I/G : Pro forma !tatement! pro$ide data for
alulating finanial ratio! and for performing ot)er mat)ematial alulation!'
Finanial model! *uilt on pro form pro.etion! ontri*ute to t)e a)ie$ement of
orporate goal! if t)e&+ 78 te!t t)e goal! of t)e plan!4 C8 furni!) finding! t)at are
readil& under!tanda*le4 and :8 pro$ide time" =ualit&" and o!t ad$antage! o$er
ot)er met)od!'
3. 0SSESSI/G 34E IMP0C3 1F C40/GES: A ompan& prepare! pro
forma finanial !tatement! #)en it e/pet! to e/periene or )a! .u!t e/periened
!ignifiant finanial )ange!' T)e pro forma finanial !tatement! pre!ent t)e
impat of t)e!e )ange! on t)e ompan&1! finanial po!ition a! depited in t)e
inome !tatement" *alane !)eet" and t)e a!)9flo# !tatement' For e/ample"
management mig)t prepare pro forma !tatement! to gauge t)e effet! of a
potential merger or .oint $enture' It al!o mig)t prepare pro forma !tatement! to
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
e$aluate t)e on!e=uene! of refinaning de*t t)roug) i!!uane of preferred
!to%" ommon !to%" or ot)er de*t'
4. E53E6/0, 6EP163I/G. Bu!ine!!e! al!o u!e pro forma !tatement! in
e/ternal report! prepared for o#ner! 6!to%)older!8" reditor!" and potential
in$e!tor!' For ompanie! li!ted on t)e !to% e/)ange!" t)e SEC re=uire! pro
forma !tatement! #it) an& filing" regi!tration !tatement!" or pro/& !tatement!'
T)e SEC and organi<ation! go$erning aounting pratie! re=uire ompanie!
to prepare pro forma !tatement! #)en e!!ential )ange! in t)e )arater of a
*u!ine!!1! finanial !tatement! )a$e ourred or #ill our'
Financial statements ma& change 7eca"se of+
C)ange! in aounting priniple! due to adoption of a generall& aepted
aounting priniple different from one u!ed pre$iou!l& for finanial
aounting'
A )ange in aounting e!timate! dealing #it) t)e e!timated eonomi life
and net re!idual $alue of a!!et!'
A )ange in t)e *u!ine!! entit& re!ulting from t)e a=ui!ition or di!po!ition
of an a!!et or in$e!tment" and?or t)e pooling of intere!t! of t#o or more
e/i!ting *u!ine!!e!'
A orretion of an error made in report or filing of a pre$iou! period'
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
3)en a ompan& )ange! an aounting met)od" it u!e! pro forma finanial
!tatement! to report t)e umulati$e effet of t)e )ange for t)e period during
#)i) t)e )ange ourred'
3he SEC Format
T)e SEC pre!ri*e! t)e form and ontent of pro forma !tatement! for ompanie!
!u*.et to it! .uri!dition in irum!tane! !u) a! t)e a*o$e' Some of t)e form and
ontent re=uirement! are+
An introdutor& paragrap) de!ri*ing t)e propo!ed tran!ation" t)e entitie!
in$ol$ed" t)e period! o$ered *& t)e pro forma information" and #)at t)e
pro forma information !)o#!'
A pro forma onden!ed *alane !)eet and a pro forma onden!ed inome
!tatement" in olumnar form" !)o#ing t)e onden!ed )i!torial amount!" t)e
pro forma ad.u!tment!" and t)e pro forma amount!' Footnote! pro$ide
.u!tifiation for t)e pro forma ad.u!tment! and e/plain ot)er detail! pertinent
to t)e )ange!'
T)e pro forma ad.u!tment!" diretl& attri*uta*le to t)e propo!ed )ange or
tran!ation" #)i) are e/peted to )a$e a ontinuing impat on t)e finanial
!tatement!' E/planator& note! pro$ide t)e fatual *a!i! for ad.u!tment!'
5. P61 F16M0 S303EME/3S F16 C40/GES I/ E/3I3! 0/2
F16 *.SI/ESS C1M*I/03I1/S : T)e FASB" t)e AICPA" and t)e
SEC )a$e pro$ided !ignifiant direti$e! to t)e form" ontent" and nee!!it&
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
of pro forma finanial !tatement! in !ituation! #)ere t)ere )a! *een a )ange
in t)e form of a *u!ine!! entit&' Su) a )ange in form ma& our due to
)ange! in finanial !truture re!ulting from t)e di!po!ition of a long9term
lia*ilit& or a!!et" or due to a om*ination of t#o or more *u!ine!!e!'
T)e purpo!e of pro forma finanial !tatement! i! to failitate ompari!on! of
)i!tori data and pro.etion! of future performane' In t)e!e irum!tane!
u!er! of finanial !tatement! need to e$aluate a ne# or propo!ed *u!ine!!
entit& on a *a!i! ompara*le to t)e predee!!or *u!ine!! in order to
under!tand t)e impat of t)e )ange on a!) flo#" inome" and finanial
po!ition'
Pro forma adjustments to aounting priniple! and aounting e!timate!
reformat t)e !tatement! of t)e ne# entit& and t)e a=uired *u!ine!! to
onform #it) t)o!e of t)e predee!!or'
Oa!ionall&" a partner!)ip or !ole proprietor!)ip #ill !ell all or part of t)e
*u!ine!! intere!t' Sometime! it i! nee!!ar&" e!peiall& if t)e *u!ine!! i!
,going pu*li", to reorgani<e into a orporation' T)e finanial !tatement! on
a orporation #it) a $er& !)ort )i!tor& are not )elpful in a t)oug)tful
anal&!i! of future potential'
Similarl&" *eau!e of t)e differene! in federal inome ta/ lia*ilitie!" a
re!tatement of t)e predee!!or *u!ine!! in )i!torial term! onl& onfu!e! t)e
piture' Sine t)e finanial !tatement! of t)e predee!!or *u!ine!! do not
ontain !ome of t)e e/pen!e item! applia*le to a orporation" t)e pro forma
finanial !tatement! ma%e ad.u!tment! to re!tate ertain e/pen!e! on a
orporate *a!i!'
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
6. 0C8.ISI3I1/ 16 2ISP1S0, 1F P063 1F 0 *.SI/ESS: For a
ompan& t)at deided to a=uire part of a ne# *u!ine!! or di!po!e of part of it!
e/i!ting *u!ine!!" a meaningful pro forma !tatement !)ould ad.u!t t)e )i!torial
figure! to demon!trate )o# t)e a=uired part #ould )a$e fared )ad it *een a
orporation' Proforma !tatement! !)ould al!o !et fort) on$entional finanial
!tatement! of t)e a=uiring ompan&" and pro forma finanial !tatement! of t)e
*u!ine!! to *e a=uired'
A pro forma inome !tatement om*ine! t)e )i!torial inome !tatement of
t)e a=uiring ompan& and a pro forma inome !tatement of t)e *u!ine!! to
*e a=uired for t)e pre$iou! fi$e &ear!" if po!!i*le'
Pro forma ad.u!tment! e/lude o$er)ead o!t! not applia*le in t)e ne#
*u!ine!! entit&" !u) a! di$i!ion and )ead offie e/pen!e!'
T)e pur)a!e of a !ole proprietor!)ip" partner!)ip" Su*9C)apter S
orporation" or *u!ine!! !egment re=uire! pro forma !tatement! for a !erie!
of &ear! in order to reflet ad.u!tment! for !u) item! a! o#ner!1 or partner!1
!alarie! and inome ta/e!'
S"mmar&
Pro forma !tatement! are an integral part of *u!ine!! planning and ontrol'
Manager! u!e t)em in t)e dei!ion9ma%ing proe!! #)en on!truting an
annual *udget" de$eloping long9range plan!" and )oo!ing among apital
e/penditure!'
Pro forma !tatement! are al!o $alua*le in e/ternal reporting'
Pu*li aounting firm! find pro forma !tatement! indi!pen!a*le in a!!i!ting
u!er! of finanial !tatement! in under!tanding t)e impat on t)e finanial
SAMRITI GOEL
MBA LECT2RER
FINANCIAL GOALS & PERFORMA STATEMENTS
!truture of a *u!ine!! due to )ange! in t)e *u!ine!! entit&" or in aounting
priniple! or aounting e!timate!'
Alt)oug) pro forma !tatement! )a$e a #ide $ariet& of appliation! for
ongoing" mature *u!ine!!e!" t)e& are al!o important for !mall *u!ine!!e! and
!tartup firm!" #)i) often la% t)e tra% reord re=uired for preparing
on$entional finanial !tatement!'
A! a planning tool" pro forma !tatement! )elp !mall *u!ine!! o#ner!
minimi<e t)e ri!%! a!!oiated #it) !tarting and running a ne# *u!ine!!'
T)e data ontained in pro forma !tatement! an al!o )elp on$ine lender!
and in$e!tor! to pro$ide finaning for a !tart9up firm'
SAMRITI GOEL
MBA LECT2RER