Pro Forma Financial Statements
Financial analyses and projections can be very important in strategic planning. A projected or pro forma income statement summarizes the projected financial results for a specific future time period. Gross sales are forecasted and costs are estimated based on historical data and projections. Profit or loss is calculated based on accounting relationships.
In many ways, developing financial projections using a Model-Driven DSS forces managers to become concrete and to deal with business reality. Managers must quantify financial outflows and inflows to arrive at projected financial statements for a proposed plan. One can develop projections that are either revenue or profit driven. Also, the various pro forma statements can be linked together to speed up "what if" analyses in which assumptions and numbers are changed. Pro forma financial statements are useful for developing detailed financial plans, evaluating the progress of the strategic plan, pinpointing problem areas, and taking corrective action. The pro forma financial statements are also valuable when used as aids in the implementation of a strategic plan.
What are key questions to keep in mind when developing pro forma financial statements? What assumptions were made when the pro forma financial statements were prepared? How sensitive are these financial statements to changes in assumptions? Was a "what if" analysis conducted? Can we justify the numbers of the pro forma financial statements? For outside stakeholders, pro forma financial statements will be a critical part of their evaluation of a strategic plan, new venture plan, corporate acquisition or new product introduction. For this reason, the statements must present a convincing case, be consistent with other elements of the strategic business plan, and present a realistic picture of the financial consequences of strategic actions.
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