Analyzing Proforma Statements

Introduction

The current market environment has presented dynamics that any company that’s seeks to succeed ought to adjust to. The consumer tastes and preferences are changing in an increasingly fact pace (Bender & Ward, 2009). As such, it is important to understand the market and execute decisions which will ensure that ultimately the firm does not only survive, but also thrive in the competitive business arena (Marcus, 2006). This paper presents XYZ’s company proforma Profit and loss statement as well as the proforma balance sheet statement for the five years ending December 31 20X4. The firm has just introduced another product in the market That is projected to increase the total sales by 10% each year from the year 20XX to 20X4.

The following tables indicate the projected income statement for the five years as well as the balance sheet.

XYZ Company, INC.
Proforma Profit and Loss Statement
Year Ended December 31
20XX 20X1 20X2 20X3 20X4
Sales 1,750,450 1,925,495 2,118,045 2,329,849 2,562,834
Returns and allowances 2,752 3,027 3,330 3,663 4,029
Net sales 1,747,698 1,922,468 2,114,715 2,326,186 2,558,805
Cost of sales
Beginning Inventory 50,000 55,000 60,500 66,550 73,205
PurchasesProduction Labor 610,162 671,178 738,296 812,126 893,338
Ending inventory 420,108 462,119 508,331 559,164 615,080
Ending inventory 30,000 33,000 36,300 39,930 43,923
Total cost of sales 1,050,270 1,155,297 1,270,827 1,397,909 1,537,700
Gross profit 697,428 767,171 843,888 928,277 1,021,104
Selling expenses
Wages 75,000 82,500 90,750 99,825 109,808
Commissions 25,000 25,000 25,000 25,000 25,000
Marketing 25,000 28,750 33,063 38,022 43,725
Total selling expenses 125,000 137,500 151,250 166,375 183,013
Operating expenses
Salaries 225,000 247,500 272,250 299,475 329,423
Payroll taxes 29,000 31,900 35,090 38,599 42,459
Benefits 27,000 29,700 32,670 35,937 39,531
Office supplies 500 550 605 666 732
Postage 250 275 303 333 366
Professional fee 2,000 2,200 2,420 2,662 2,928
Telephone 850 935 1,029 1,131 1,244
Utilities 950 1,045 1,150 1,264 1,391
Training and education 250 275 303 333 366
Miscellaneous 50 55 61 67 73
Total Operating Expenses 285,850 314,435 345,879 380,466 418,513
Operating Profit – EBDITA 286,578 315,236 346,759 381,435 419,579
Other Income expenses
Interest (9,650) (10,615) (11,677) (12,844) (14,129)
Depreciation (12,000) (13,200) (14,520) (15,972) (17,569)
Amortization (2,500) (2,750) (3,025) (3,328) (3,660)
Total Other Income expenses (24,150) (26,565) (29,222) (32,144) (35,358)
Total Pretax Profit 262,428 288,671 317,538 349,292 384,221
Income tax allowance 118,093 129,902 142,892 157,181 172,899
Net profit 144,335 158,769 174,646 192,110 211,321

Proforma Balance sheet for the five years ending December 31 20X4

XYZ company Inc.
Proforma Balance Sheet
For the years ending December 31
20XX 20X1 20X2 20X3 20X4
Current Assets
Cash 10,525 11,577.50 12,735.25 14,008.78 15,409.65
Accounts receivables 27,000 29,700.0 32,670.0 35,937.0 39,530.7
Inventory 30,000 33,000.0 36,300.0 39,930.0 43,923.0
Prepaid Expenses 2,000 2,200.0 2,420.0 2,662.0 2,928.2
Total current Assets 69,525 76,478 84,125 92,538 101,792
Fixed Assets
Property – Net of depreciation 215,000 208,000 201,000 194,000 187,000
Equipment net of depreciation 80,000 76,000 72,000 68,000 64,000
Vehicles – net of depreciation 5,000 4,000 3,000 2,000 1,000
300,000 288,000 276,000 264,000 252,000
Total Assets 369,525 364,478 360,125 356,538 353,792
Liabilities
Current liabilities
Revolving lines of credit 20,000 29,953
Accounts payables 5,000 5,500.0 6,050.0 6,655.0 7,320.5
Current portion of long term debt 15,000 15,000 15,000 15,000 500
Total current liabilities 40,000 50,453 21,050 21,655 7,821
Long term liabilities
Long term debts and capital leases 45,500 30,500.0 15,500.0 500.0
Loans payable to stockholders 60,500
Total long term liabilities 106,000 30,500 15,500 500
Total liabilties 146,000 80,953 36,550 22,155 7,821
Stockholders’ equity
Common stock 1,000 1,000 1,000 1,000 1,000
Additional paid in Capital 25,000 25,000 25,000 25,000 25,000
Retained earnings (cum prom Prev years) 53,190 60,000 65,000 68,000 68,000
Retained earnings ( from current P&L) 144,335 197,525 232,575 240,383 251,971
Total Stockholders’ Equity 223,525 283,525 323,575 334,383 345,971
Total liabilities and Stock holders’ equity 369,525 364,478 360,125 356,538 353,792

Assumptions for the five year sales growth

Due to a recent market study carried out by the company, it was established that the new product would help increase the total sales by 10% each year for the five years. The assumptions that go along with the increased sales are that the sales return of about 0.2% of sales will be returned. The rate of 0.16% will be maintained over the five years. Due to the introduction of the new product, the total cost of sales are projected to increase by the same percentage of increase in sales. This is an increase of 10% each year. This is because cost of sales are usually the direct costs associated with the unit sales. This in turn increases the cost of sales by the same margin by which the sales increase by.

Due to the introduction of the new product, coupled with the projected potential need to advertise the new product, marketing expenses have been projected to increase by 15%. This however, does not affect the sales commissions since the current policy on commissions provides for a fixed amount if sales exceed a certain amount, which has been projected that the sales will reach that point. The operating costs are projected to increase by the same margin of 10% since they are majorly variable costs whose amounts depend on the level of business activity.

Assumptions made on the Balance sheet

A look at the balance sheet indicates that the current assets will grow by the same margin that the sales are growing by. This is because most of the items under the current assets section have an almost direct relationship with the operations that affect the income statement and as such, the effects of growth in sales will have a similar impact on the current assets.

An analysis of the long term assets reveal that the firm does not intend to invest in any additional long term assets. The new product being introduced can be successfully traded without any necessary increase in long term assets. The firms depreciation method is straight line with property depreciating by $7,000 per year, equipment by $6,000 per year, and motor vehicles depreciating by $1,000 per year.

A look at the liabilities section reveal that due to the increase in projected retained earnings, the liabilities will significantly reduce over the five years with items such as revolving lines of credit being used only up to the year 20X1. Other long term liabilities such as the loans payable to stock holder are projected to be cleared in the second year and this will give way for the retained earnings to be the major source of financing. This is desirable since it is the cheapest source of finance for any company.

Discretionary financing needs

In the first year, 20XX, the company expect to acquire its financing from loans payable to stockholder, revolving lines of credit, additional paid in capital, and retained earnings. This indicates a spread on financing from all the available sources of finance for the company. However, as the years go by, the company projects to use retained earnings as their major financing source since it is the cheapest of lines of credit, loans, or capital (Bender & Ward, 2009). In the second year, the company will still need long term debts and capital leases to continue in operations but this will be reduced by the 100% retained earnings policy over the five years.

Strategies to manage working capital

working capital management is an important aspect of any business undertaking. An effective working capital management ensures that a company is able to meet its short term obligations as they fall due (Modiglian & Miller, 1958). XYZ company can employ several working capital management strategies. First the company may increase is accounts payable. This means that most of its purchases will be done on credit and this allows it to hold and trade with an amount of inventory it has not paid for. This enhances its cash flow position. The company could also continue to use the line of credit from the bank until its cash flow position is at a level where the cash and cash equivalents are at a desirable level in order to pay for the short term obligations as they fall due.

References

Bender, R., & Ward, K. (2009). Corporate Finance Strategy. New York: Macmillan.

Marcus, J. M. (2006). Modern Finance for SME. LOndon: Prentice Hall.

Modiglian, F., & Miller, M. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 261-297.

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