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Analyzing Pro Forma Statements


Decide upon an initiative you want to implement that would increase sales over the next five years, (for example, market another product, corporate expansion, and so on).

Using the sample financial statements, create pro forma statements of five year projections that are clear, concise, and easy to read. Be sure to double check the calculations in your pro forma statements. Make assumptions that support each line item increase or decrease for your forecasted statements.

Discuss and interpret the financials in relation to the initiative. Make recommendations on potential discretionary financing needs.

Write an analysis of the company's short term and long term financing needs and determine strategies for the company to manage working capital.


Solution Preview

With this explanation, I am attaching two excel spread sheets signifying both the Balance Sheet and the Income Statement as pro forma documents (meaning they are being used as a forecasting tool to view the condition of the firm form a financial perspective given certain assumptions about growth). The assumption regarding growth is 20% for the first 3 years, then 10% for the next 2 years, giving a 5 year view of the growth picture based on the percent of sales method.

Percent of Sales assumes that sales represent 100% of the performance of the firm. We then peg all calculations to that figure --- meaning that as sales increase, other items WILL increase as well. For example, if sales increase, then the cost of sales MUST increase (if we sell more stuff, we will purchase more raw materials for increasing our ending inventory). Sales expenses will increase, as will general administrative types of expenses. In addition, we will pay more in taxes based ...

Solution Summary

This provides a template or suggestions for the analysis and construction of pro forma financial statements using the % of Sales method --- which is widely used in industry.