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

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…