Proforma Statements Essay

7531 words - 30 pages

Pro forma Statements∗ After thoroughly analyzing a company's current situation and the road it took to get there, it is natural to next ask where it is going. The answer will depend on numerous factors including the economic environment, competition, customer tastes, and both strategic and tactical choices. It is the job of the pro forma financial statements to translate these operational forces into numerical estimates of expected financial performance. There are several reasons for projecting future financial performance. First, pro forma statements are very useful when evaluating alternative business strategies. It is one thing to discuss strategy at the conceptual level, but much more valuable to be able to identify the profit and funding effects of alternative strategies. Second, evaluating alternative future events permits explicit measurement of risk. Financial projections do not eliminate the sources of risk. However, they do help the decision‐maker find which risks are important and how realizations of those risks will affect the company. Finally, pro forma statements identify the amount of funds needed and assist in deciding on the appropriate structure for the funding. It is simply not possible to develop an adequate funding plan without relying on pro forma statements. Pro forma statements provide financial estimates of the impact of a business plan. As such, pro formas incorporate the following information: • A marketing plan indicating what will be sold, how it will be sold, and how the
products will be priced; • A production plan outlining fixed asset requirements, production volume and timing,
and inventory management; • A human resources plan that estimates the number and type of employees together
with compensation schemes; • An accounting plan that incorporates managerial controls and specifies financial
accounting choices; and • A financial plan that provides for the necessary funds to execute the plan. Insiders who develop pro forma statements are at a real advantage because they have access to the details of all of these items. This doesn't have to be in the form of a formal planning document, but can occur when key managers within the firm give simple guidance to the analyst. For outsiders such as lenders and investors, the job is more difficult because numbers must be projected without access to all of those internal data. Nonetheless, by considering both historical financial data together with information about the company, its industry and the economy, there is generally enough data to provide reasonable financial estimates. Income Statement
The beginning point of any pro forma analysis is the company's operations. Sales and production will drive almost all of the income statement and balance sheet
∗ Peter C. Eisemann. No portion of this document may be reproduced without the express written consent of the author.

accounts. We will first look at the income...

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