Introduction
A Pro forma statement is an accounting instrument that illustrates the anticipated performance of a specific business unit. Moreover, this type of financial reporting might be considered credible since it is significantly regulated by official market observers. The case study of pro forma statement is aimed to demonstrate the particular aspects of a specific aspect’s projection. Three of the most popular pro forma statements illustrate the revenue increase, capital funding, and break-even passage projection.
Revenue Increase Projection
First and foremost, revenue increase projection is a classical example of a pro forma statement since it is widely regarded as credible proof of a business’ investment attractiveness. In this case, the revenue is projected to be increased to $ 304 500, which is 50% more in terms of Year-to-Year growth. Nevertheless, the business is still lacking $ 76 508 to pass the break-even point when the investors consider the company as an investment in a profitable company. When it comes to the cash flow statement analysis, it becomes clear that the business has organically developed to a diversified type of revenue. This earnings type is usually a positive sign for investors even though the company has generated negative cash flow during the year (Guan et al., 2020). Last but not least, the firm has compensated cash position decreased by augmenting the volume of long-term investment and property, plant, and equipment (PP&E). As a result, even though the owner’s equity had two times slower growth compared to the liabilities side, the business is fundamentally profitable in the long-term perspective.
Capital Funding Projection
Secondly, capital funding projection is focused on projecting massive operational scale growth. One of the most important aspects of capital funding is the actual source of money and its purposed application in the business model. In the capital funding projection case, the main source was borrowing, which is significantly widespread in today’s world due to low-interest rates on direct and obligational debts (Kim & Andreas, 2020). Since the long-term liabilities have risen 317 times, the investors may understand that the company was operating on a much smaller business scale before significant investment in production. In addition, the firm’s income credibility has led credit organizations to accept such a substantial amount of additional funding (Patton Power, 2021). However, due to the excessive borrowing, the company had to pay $ 150 000, which is nearly 30% of the year’s revenue. Last but not least, the new cash was strategically used for PP&E purchases. The other $ 1 132 600 was left in the cash position as an immediate source of investments.
Passing the Break-Even Projection
Thirdly, the last case study aimed to demonstrate the important scenario in any firm’s growth history, when the company begins generating income. The break-even point was surpassed by the 300% increase in revenue, compared to only 70% of expenses growth. When it comes to cash flow analysis, it becomes evident that the main source of high profitability has come from financing activities. More specifically, the company has chosen a balanced strategy of additional funding since $ 300 000 came from sharing the equity on the public offering and $ 200 000 has a direct borrowing source. As a result, despite the unprecedented rise in employees’ salaries, the company had organically entered a new level of development since both sides of the accounting equation had not changed throughout the whole year. Moreover, the firm has a positive cash position, which might signify the anticipation of better investment opportunities in the future.
References
Guan, S., Tian, S., & Deng, G. (2020). Revenue diversification or revenue concentration? Impact on financial health of social enterprises.Public Management Review, 23(5), 754–774. Web.
Kim, A., & Andreas, K. (2020). Do firms behave differently when nominal interest rates are below zero? Danmarks Nationalbank Working Papers, 164–194. Web.
Patton Power, A. (2021). Reflections on debt and equity. Adventure Finance, 51–58. Web.