Pro Forma Statements

Analyzing Pro Forma Statements

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FIN-571

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Analyzing Pro Forma Statements

The XYZ Company, Inc. is in the casual dining industry for the last 5 years. This is a small company that currently own one restaurant and is planning to open the second one. Board of directors has asked the Finance Department to prepare Pro Forma Statements for the following 5 years to understand how the company will behave and if it is a viable project to pursue. Of course, this decision will not only depend on financial forecasts, but this will be part of the information that will be reviewed to determine if they will move forward with this idea. The financial performance of the company for the next years has been forecasted and presented in Pro Forma Statements.

Financial Data for Pro Forma Statements

The new restaurant can be ready in a year, so we are estimating the new sales figures will be incorporated starting as early as next year. Sales are expected to increase 25%, because the new restaurant will be smaller than the actual one. With this new endeavor, also expenses will increase. The project is estimated to cost $5 million dollars. The company expects to finance the new restaurant with debt.  All financial statements accounts will vary directly with changes in sales. Let’s see if the project is feasible with the Pro Forma Financial Statements.

Pro Forma Income Statement

The Income Statement represents a sales increase of 25% as forecasted by management because of new restaurant to be opened. The projected Net Profit will increase each year based on this assumption, having the company to triplicate its Profit in 5 years, from $144,335 million today to $440,475 million in 2020. Costs and expenses has increased accordingly (25% each year).

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Pro forma Balance Sheet

The Balance Sheet has been also forecasted based on the 25% of increase mentioned above. In this case a new fixed asset of $5,000 million has been added from next year on, to incorporate new restaurant facility. The 25% has also been applied to this new facility because the facility will appreciate. Because of this addition, the Balance Sheet became “imbalanced”. Total assets does not equal to liabilities and stockholders total. This is caused because company has decided to do all investment on debt. A new line in long term liabilities has been added (New long term debt) to balance the statement and reflects the new debt. This is the external funding needed (EFN) that was calculated subtracting total liabilities and stockholders’ equity from Total assets. For this new debt the 25% of increase because of interests has been applied. [pic 2]