Analyzing Pro Forma Statements
October 20, 2014
In order to create an initiative for growth, an analysis of the company's short term and long term financing needs are assessed to determine strategies for the company to manage working capital. The suggested initiative to increase XYZ Company, Inc. revenue over the next five years is by acquiring assets through a merger with UVW Company to produce more of product X. Companies must be able to manage growth either through the acquisition of assets or through the capital budgeting process. Through the acquisition of assets, external financing will be required. Growing quickly will allow XYZ Company to gain a larger market share and reinforce its viable position in the marketplace. Expanding too rapidly can have consequences. If the company has too much debt-financing and cash flows are reduced the company will risk being unable to repay its debts. Management must ensure the business can grow, what funding may be needed, and determine the sustainable growth rate. Pro Forma
A pro forma statement is a method of calculating financial results to emphasize projected figures for a company. A pro forma is intended to give investors a clear view of company operations. For XYZ Company, the pro forma statements will reflect the merger with UVW to produce more of their best-selling products and adding a list of new ones. Management expects sales and costs to increase by 20 percent for the coming year. Forty-one percent of total liabilities for the company are loans payable to stockholders; therefore management is reluctant to create additional financing through debt. The company will finance the merger through sale of stocks, and liquidation of excess equipment because cash on hand is relatively small. The merger will allow unnecessary extra equipment and inventory to also be sold to finance the new, united company. Though the merger will increase sales, operating costs are also expected...
References: Dileep, R. (2010). Forbes: The 12 Best Sources of Business Financing. Retrieved from http://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-entrepreneurs-finance-dileep-rao.htmlThomas, J. (n.d). Diversification Strategy. Retrieved October 19, 2014 from http://Reference for Business; Encyclopedia of Business, 2nd ed. http://www.referenceforbusiness.com/management/De-Ele/Diversification-Strategy.html
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