Analyzing Pro Forma Statements Case

Analyzing Pro Forma Statements

FIN/571

July 27, 2015

Susanne Elliott

Analyzing Pro Forma Statements

        In order for a company to keep growing, forecasting financial statements is essential. More specifically, Pro Forma statements can help general and financial managers plan accordingly with regards to the company’s financial needs.  Assessing how much and when financing will be needed can be obtained by looking in to the future balance sheet and income statement.  Pro Forma statements help provide necessary information about finances at a particular time (Parrino, P., Kidwell, D.S., Bates, T., 2012).  Pro Forma analysis has demonstrated to be a useful tool in planning for future inventory orders, employment retention, and soling company disputes.

        In the initial phase of forecasting, managers are permitted to evaluate the results further to identify problems and correct them accordingly.  Because time is of the essence, managers must have ample time during the forecasting stage.  By using the Pro Forma analysis, financial managers are able to deal with potential problems now and fix them before they cause issues in the future.  Pro Forma statements can also be used to plan, evaluate changes, identify inaccuracies, detect flaws, and evaluate strengths and performances (Parrino, et. al., 2012)

Income Statement Projections

        Below, XYZ Company, Inc., is seeking to grow their business within the next five years.  They have decided to expand their product line and add two to three new products.  In planning for the future, they have requested a Pro Forma statement be drafted outlining any potential problems that could result from the expansion.  The results of the Pro Forma analysis determined that, XYZ Company, Inc., had an increase in sales and production due to the new products.  Because of this, XYZ Company, Inc., was able to purchase additional assets and was able to secure a loan in order to expand the company.  The five-year projections of the Pro Forma showed an increase in sales of about $1.3 million. Increasing sales up to $4,348,832.  Based on this information sales will increase 20% within the next five years.  After considerations such as cost of goods, hiring, costs of materials, and other important aspects of the expansion, XYZ Company, Inc., will be left with a net profit of  $359,153 by the end of the fifth year.