Introduction
A pro forma statement is a financial report built on estimates and projections. The statement is a crucial tool that company management uses in planning for the firm’s future based on the predictions on its future performance.
Pro Forma Income Statement
A pro forma income statement is beneficial for both the internal and external stakeholders of a company. The assumptions created for certain business undertakings help a company to know its future direction regarding income. In the DPSystems income statement, the company is projecting a 20% increase in gross revenue. They can achieve this through minimizing sales costs but increasing the products for sale. Also, the company may improve its revenues by carrying out product promotions and enhance product features. To edge out the competition, it may have to consider lowering prices of its products to make it appealing to more customers. Market expansion is another critical factor for improving sales for the company.
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A growing company will always accrue a certain amount of expenditure. Salary expense is the first expenditure when a company increases the capacity of its staff. The payroll will have to reflect the additional cost of remuneration. Payroll expense may stretch by 30%. Computer accessories, likewise to office supplies are increasing about an expected increase in output. General overhead costs cannot remain the same when all other factors of production are on an upward trend.
Pro Forma Balance Sheet
A projection on the balance sheet is an essential aspect of growth determination. It is a measuring rod by which investors and stakeholders quantify the viability of an organization’s operations. The DPSystems pro-forma balance sheet shows an increase in current assets and fixed assets for the company for the financial year 2018. Savings are poised to increase by 25%. The growth is a justification for improved sales. With increased staffing, computers and accessories requirements are set to grow. Besides that, furniture and fixtures will see an 8% addition to the company’s fixed assets.
Every increase in an organization’s fixed asset base attracts accumulated depreciation movement in a similar direction. For DPSystems, total accumulated depreciation for its fixed assets will change from $19,866 in 2017 to about $21,610 in 2018 which will be 9% deterioration in the value of its equipment. Payroll tax payable for DPSystem is expected to increase in 2018. The transformation may be an addition of 395 from the current $1,300 to $1,695. The tax charged on the payroll moves alongside the payroll expenses. Since the company expects to hire additional employees, it must put in place measures for tax obligations.
Since the firm has no concrete plans for issuing equities, the movement of its stock isn’t much vibrant. The slight changes in Equity draws could be as a result of some shareholders relinquishing their ownership in the company. It may not be easy to project any change in the company’s retained earnings for the year 2018. The item is usually the last to be calculated on balance sheet account.
Pro Forma Cash flow Statement
Inventory figures are set to increase by $2,400. The increase may be as a result of the company’s idea to expand into new markets and the procurement of more stock and factors of production. What will be left in store by the end of 2017 will be carried down to 2018. The company’s account payables are heading to 9300 in 2018 from 8500 in 2017. These are debts owed by expansion. Still, tax obligation is set to increase in 2018. It is because the tax depends on the net income which is already projected to increase. However, increase in mortgage may not be predetermined since it is a factor of fluctuation of prices and changes in the overall value of the currency.
Conclusion
The pro forma statements do not capture some items which fall in one-time cash expenses. It is because they are not part of regular operations. The pro forma figures help investors obtain a real picture of the company’s future status.
