When, where, why, and how the Business pro forma is used will be discussed in this paper. The purpose of a business pro forma and components (income statement, balance sheet, statement of cash-flows) will also be included. The roll and purpose of an executive summary will be discussed as well. The word pro forma is a Latin term meaning “as a matter of form”. Looking at its meaning in business, financial statements are a main focus. Business pro formas are prepared in advance of a planned transaction.
The pro forma statement illustrates projected earnings if a company were to sell off parts of its operation, merge with another company, or beginning a new venture. When a performance statement is used a company is able to get a broad view of the future level of receivables, payables, inventory and other corporate accounts such as anticipated profits and borrowing requirements. The pro forma statements have a process of presenting financial projections for a specific time period.
There are standard formats that are followed when constructing a pro forma, the American Institute of Certified Public Accountants (AICPA) and the Securities and Exchange Commission (SEC) require standard formats for business when preparing a pro forma statement. Business pro formas are used for many different reasons. When developing a business plan it is essential for management to review pro forma financial statements to help make decisions in planning and control of the new business. Management will often use the pro forma statement to compare and contrast alternative business plans.
Pro forma statements allow management to do a number of different things. Managers get a projected view of financial and operating characteristics. Also develop the various sales and budget projections, assemble the results in profit and loss projections, and translate this data into cash-flow projections. This allows management to make educated decisions in research and development, marketing production, and assess the viability of a company. Pro forma statements can provide management with investment analysis, and credit officers with an overview of a business’ financial structure under various conditions.
Pro formas should be prepared when a person is thinking of going into business before investing their time or money. The purpose of the pro forma is to persuade lenders and investors into provide financing. Sometimes these figures may be misleading. To insure creditability of information the entrepreneur must conduct their own research or consult with similar businesses for an inside look of the market. The pro forma income statement is a measure that usually excludes items that the company thinks are unusual or non-reoccurring.
The pro forma income statement provides a projection of how much profit a company anticipates to make for a specific time period. There are four steps that should be followed when preparing a pro forma income statement: establish a sales projection, set up a production schedule, calculate other expenses, and determine forecasted profit. Depending on the orientation of a company (service or product) cost of goods sold is determined by the production schedule if selling a product, if providing a service cost of goods sold will be determined by the value of the service.
Information provided by the income statement can allow management to make educated business decisions. The pro forma balance sheet is used to show a business how it will be managing future assets. It may also be used to show overall financial sturdiness of a business. The balance sheet is composed of pro forma current assets. Projected cash and pro forma accounts receivable are calculated on balance sheet. When calculating pro forma accounts receivable a business must take into consideration the average collection time of receivables and sales projections for prior periods.
After adding projected accounts receivable and projected cash this yields pro forma total current assets. The next section of the pro forma balance sheet includes pro forma land, pro forma buildings, pro forma vehicles, etc. which are added to pro forma total current assets which yield pro forma total assets. The next section deals with liability. It begins with pro forma accounts payable which is determined by figuring out how much a company will spend on bills and previous purchased supplies. Next is the pro forma accrued payroll, which is easy to determine after establishing salaries.
The pro forma notes payable is notes payable within one year. Pro forma total current liabilities are calculated by adding pro forma accounts payable, accrued payroll, and notes payable. Proceeding this, pro forma long term liabilities are calculated which may include things such as pro forma mortgage note payable. Combining pro forma long term liabilities and pro forma current liabilities will provide pro forma total liabilities. The last section of the pro forma balance sheet is pro forma owner’s equity, which includes pro orma common stock and pro forma retained earnings. The pro forma statements of cash-flows are projected statements of cash flows. Cash receipts are classified as operating, investing, or financing activities. In direct presentation it reports the major classes of gross cash, operating receipts, and payments and the difference between them. Indirect presentation reconciles net income with the net operating cash-flows which requires balance sheet data such as accounts receivable, accounts payable, inventory, and net income.
An executive summary is an overview of a business. Key points are summarized rather than explained in detail, such as: services/products, locations, market research, projections, marketing procedures, and traits that distinguish this business from other like businesses. The mission statement for the company should also be stated here. The executive summary should be clear, concise, and entice the reader to want to know more about the business. This is one of the most important parts of the business plan.
Pro forma statements are a vital part of business planning and control. Managers use them in the decision making process when constructing an annual budget, developing long range plans, and choosing among capital expenditures. Pro forma statements are also valuable in external reporting. Public accounting firms find pro forma statements vital in assisting users of financial statements in understanding the impact on the financial structure of a business due to changes in the business entity, accounting principles, or accounting estimates.
Although pro forma statements have a wide variety of applications for mature businesses, they are also very important for small business and startup firms, which often lack the track record required for preparing conventional financial statements. As a planning tool, pro forma statements help small business owners minimize the risks associated with starting and managing a new business. The data contained in pro forma statements can also help persuade lenders and investors to provide financing for a start-up company. Project proposal Zerbe’s Choppers is the name of the business proposed.
Zerbe’s Choppers is a lawn service company that would operate in Lafayette and close surrounding areas. The physical location of the company would be located in Lafayette. Services available include grass cutting, cleaning debris from the lawn after the grass is cut, and tree trimming. This is a company that prides itself on customer service. All employees from the secretary answering the phone, to the people cutting the grass will be trained in customer service. Customers will come from friends and families of employees, word of mouth, and door-to-door marketing, signs in yards, and radio and newspaper advertisements.
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