Accounting
Pro Forma Forecasts for XYZ Company
XYZ Company wishes to increase sales. There are different strategies which are available. One of the most straightforward approaches to increase sales is to increase the marketing budget with the aim of increasing total sales. As long as the firm has sufficient capacity for the increase, there will not be any need for capital investment. However, as production and sales increase, many other costs will increase; these will include the cost of the goods sold including the materials used, labor and commissions paid. The indirect and overhead costs will also increase.
When assessing the profit and loss forecasts, the first stage is to assess the impact that the change is likely to have on sales. In this caser it is assumed that a 10% increase in the marketing budget will increase sales by 10%. Most of the direct and indirect costs are then calculated so that they make up the same percentage of sales as in the current year. However, this approach is not suitable for all items. Interest is a proportion of the outstanding debt in any year. In the current year this is 9.1%, so it is assumed that the interest rate paid remains the same on a decreasing balance. The payments due in the following 12 months are given, so the long-term debt is reduced by this amount each year (assuming level payments). There have also been some assumptions regarding the depreciation and amortization, the fixed assets are reduced by level of depreciation each year, and when an asset is fully deprecated it disappears off the deprecation total. It is also assumed that amortization being taken off assets included in the property category. It is assumed all deprecation is on a straight line basis. Tax is assessed as 45% on the per tax profit. The net profit is carried over as retained earnings.
The pro forma for the profit and loss account is presented below.
Figure 1; Pro forma profit and loss forecast
Current
Forecast
Profit and loss
Percentage of sales xx0
XX1
XX2
XX3
XX4
XX5
Sales
1,750,450
1,925,495
2,118,045
2,329,849
2,562,834
2,819,117
Returns and allowances
0.16%
2,752
3,081
3,389
3,728
4,101
4,511
Net sales
1,747,698
1,922,414
2,114,656
2,326,121
2,558,733
2,814,607
Cost of sales
60.00%
1,050,270
1,155,297
1,270,827
1,397,909
1,537,700
1,691,470
Gross profit
697,428
767,117
843,829
928,212
1,021,033
1,123,136
Selling expenses
7.14%
125,000
137,480
151,228
166,351
182,986
201,285
Operating expenses
16.33%
285,850
315,204
346,724
381,396
419,536
461,489
Operating profit
16.37%
286,578
314,433
345,877
380,464
418,511
460,362
Other income (expense)
-9,650
-8,281
-6,916
-5,551
-5,506
-5,506
Depreciation
-12,000
-12,000
-12,000
-10,000
9,500
9,500
Amortization
-2,500
-2,500
-2,500
-2,500
-2,500
-2,500
Pre-tax profit
262,428
291,652
324,461
362,413
420,005
461,856
Tax allowance
45.00%
118,093
131,244
146,007
163,086
189,002
207,835
Net profit
144,335
160,409
178,453
199,327
231,003
254,021
With the profit and loss forecast it is possible to develop a pro forma forecast for the balance sheet. However, some assumptions have to be made. The retained earnings are included in the equity, but this also has to be accounted for as an asset or a liability (Harrison et al., 2012). In most cases the money would be out to work, but in this case we are assuming that it is held as cash, so the cash balance increases significantly. As there is no forecast capital investment, the value of the capital assets gradually decreases, and as there is no new loan taken out the debt also decreases. The items on the current assets and current liabilities are assumed to remain a percentage of sales. Fixed assets have been reduced by the total level of deprecation for that year and the debt is reduced by the interest paid, in reality it is likely to be reduced by capital repayments as well. This would reduce the outstanding cash level and debt level, but increase equity as more assets would be funded by equity rather than debt (Harrison et al., 2012). This does not make a difference to the overall debt + equity (which has been double checked to make sure it amounts to the same as the asset + liabilities). The balance sheet is presented below.
Figure 2; Pro forma balance sheet forecast
Current
Forecast
Balance sheet
Percentage of sales xx0
XX1
XX2
XX3
XX4
XX5
Current Assets
Cash
10,525
170,934
349,387
548,714
779,717
1,033,738
Accounts receivable
1.54%
27,000
29,653
32,618
35,880
39,468
43,414
Inventory
1.71%
30,000
32,926
36,219
39,840
43,824
48,207
Prepaid expenses
0.11%
2,000
2,118
2,330
2,563
2,819
3,101
Total current assets
69,525
235,630
420,553
626,997
865,828
1,128,460
Fixed assets
Property
215,000
211,000
207,000
203,000
199,000
195,000
Equipment
80,000
72,000
64,000
56,000
48,000
40,000
Vehicles
5,000
2,500
0
0
0
0
Fixed assets
300,000
285,500
271,000
259,000
247,000
235,000
Total assets
369,525
521,130
691,553
885,997
1,112,828
1,363,460
Current liabilities
Revolving lines of credit
1.14%
20,000
21,951
24,146
26,560
29,216
32,138
Accounts payable
0.29%
5,000
5,584
6,142
6,757
7,432
8,175
Current portion of long-term debt
15,000
15,000
15,000
15,000
0
Total current liabilities
40,000
42,535
45,288
48,317
37,149
40,313
Long-term liabilities
Long-term debt and capital leases
45,500
30,500
15,500
0
0
Loans payable to stockholders
60,500
60,500
60,500
60,500
60,500
60,500
Total long-term liabilities
106,000
91,000
76,000
61,000
60,500
60,500
Total liabilities
146,000
133,535
121,288
109,317
97,649
100,813
Stockholders equity
Common stock
1,000
1,000
1,000
1,000
1,000
1,000
Additional paid in capital
25,000
25,000
25,000
25,000
25,000
25,000
Retained earnings
53,190
197,525
357,934
536,387
735,714
966,717
Retained earnings from current P&L
144,335
160,409
178,453
199,327
231,003
254,021
Total equity
223,525
383,934
562,387
761,714
992,717
1,246,738
Total liabilities and stock holder equity
369,525
517,468
683,675
871,031
1,090,366
1,347,551
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