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Managers involved with all levels of authority benefit from using forecasting for their
financial statements as these statements provide assistance for future planning concerning
financial needs. Pro forma statements allow managers to plan the amount of financing that is
needed as well as estimate the future balance sheet, income statement, and company value. The
full intention of a Pro forma statement is to forecast the companys financial statements at any
given time and for any given time period. The following literature describes the ins and outs of
Pro forma, its uses, and why Pro forma is beneficial for managers to use.
Pro forma analysis is a proven method for managers to decide if all of the numbers listed
on a balance sheet show stability and growth within the company. Concentration on a Pro forma
statement can show a decrease in numbers early on, with plenty of time to properly develop a
strategy that makes numbers rise once again. During the beginning stages of forecasting a
manager is able to analyze results of the Pro forma statement and other statements in an attempt
to identify areas that need attention, therefore taking care of issues while they are still in process,
or even months in advance. In addition to making adjustments to issues that arise, managers also
have a great opportunity to make changes so that projected goals can be made and opportunities
can be embraced.
The following graph illustrates the Pro forma process for the next five years based on
data from a 2014 sample provided (UOP, 2013). Based on this graph we can assume that there
will be an increase in sales due to a higher number of products being produced, new products
being introduced, and the quality of the products increasing. As shown, revenue will increase
approximately twice in 2015, followed by an increase of 10% in 2016. Cost of revenue is based
on sales percentage, therefore 60.1% shows that both operating expense and selling expense will
increase in the same manner as sales will.
Forecast for the next five years based off numbers for 2014:
Income Statement
2015
2016
2017
2018
2019
Sales
1,750,450
Returns and allowances
2,752
Net Sales
1,747,698
100.0
2,097,238
2,306,961
2,537,657
2,791,423
3,070,566
Cost of Sales
Beginning Inventory
50,000
Purchases
610,162
Production Labor
420,108
Ending Inventory
30,000
Total Cost of Sales 1,050,270
Gross Profit
697,428
60.1
39.9
1,260,324
836,914
1,386,356
920,605
1,524,992
1,012,665
1,677,491
1,113,932
1,845,240
1,225,325
Selling Expense
Wages
75,000
Commissions
25,000
Marketing
25,000
Total Selling Expenses 125,000
7.2
150,000
165,000
181,500
199,650
219,615
Operating Expense
Salaries
225,000
Payroll taxes
29,000
Benefits
27,000
Office Supplies
500
Postage
250
Professional Fees
2,000
Telephone
850
Utilities
950
Training & Education
250
Miscellaneous
50
Total Op. Expense 285,850
16.4
343,020
377,322
415,054
456,560
502,216
16.4
343,894
378,283
416,111
457,722
503,495
1.4
28,980
31,878
35,066
38,572
42,430
15.0
314,914
346,405
381,045
419,150
461,065
141,712
155,883
171,471
188,618
207,480
173,202
190,522
209,574
230,532
253,585
262,428
118,093
Net Profit
144,335
8.3
Although used for forecasting more times than not there are other reasons that managers
use Pro forma analysis; including planning, looking at variances, adjustments, make corrections,
eliminate possible errors, decide what areas are weak versus what areas are strong, and the
evaluation of performance. Pro forma statements are created by forecasting balances on a
specific date and adding them to a financial statement. Forecasting is done by deciding how
specific things can affect and influence areas of the business, from there a projection can be
made to determine ending numbers.
The balance sheet below shows not only the current balance sheet for 2014, but also the
Pro forma sheet for the following five years as well. Once again it has been assumed that the
current assets and liabilities will continue to increase in the same ratio that sales have. In
addition, there are fixed assets that the business has, therefore the company has taken a loan out
to meet the expectations of capital expansion and capital needs.
Forecast for the next five years based off numbers for 2014:
Balance Statement
2015
2016
2017
2018
2019
ASSETS
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Total Current Assets
Fixed Assets
Propertynet of dep.
Equipmentnet of dep
Vehiclesnet of dep
Total Fixed Assets
Total Assets
10,525
27,000
30,000
2,000
69,525
215,000
80,000
5,000
300,000
369,525
.60
1.54
2.86
1.10
12,630
32,400
36,000
2,400
83,430
13,893
35,640
39,600
2,640
91,773
500,000
583,430
700,000
791,773
15,282
39,204
43,560
2,400
100,446
900,000
1,000,446
16,811
43,124
47,916
2,640
110,491
1,100,000
1,210,491
18,492
47,437
52,708
2,400
121,036
1,350,000
1,471,036
LIABILITIES
Current Liabilities
Revolving lines of credit
20,000
Fixed
Accounts Payable
5,000
.29
Curr. Portion of LT Debt
15,000
Total Current Liabilities
40,000
Long-term Liabilities
LT debt and capital leases 45,500
Loans for stockholders
60,500
Total LT Liabilities
106,000
Total Liabilities
146,000
Stockholders Equity
Common stock
Additional Paid-in Capital
Ret. Earn.- Prior & Curr.
Total Stockholders Equity
Tot. Liabilities & Equity
1,000
25,000
197,525
223,525
369,525
6,000
30,000
56,000
6,600
42,000
68,600
7,260
40,439
67,699
7,986
39,225
67,211
8,785
39,225
68,010
70,203
75,424
75,424
55,424
61,586
130,703
186,703
135,924
204,524
135,924
203,623
115,924
183,135
122,086
190,096
370,727
561,249
770,824
1,001,355 1,254,941
583,430
791,773
1,000,447
1,210,490 1,471,036
Fixed
Fixed
Fixed
References:
Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.).
Hoboken, N. J. John Wiley & Sons.
ProjectionHub. Retrieved from http://blog.projectionhub.com/pro-forma-financial-statements/