Creating & Analyzing Pro Forma Financial Statements

Creating & Analyzing Pro Forma Statements

Introduction

The globalized economy of today offers numerous opportunities to businesses for growth and development. Almost every business looks out for new opportunities to sustain and grow with the passage of time. The David Creative is a music studio company that has been performing so well in Chicago since last few years. Mark and Kennie, owners of the business, have now decided to open up additional studios in Los Angeles, New York, and Asia. This paper focuses on an initiative that must be implemented to increase sales over next five years and an analysis of pro forma financial statements for that period.

Initiative to Increase Sales

Research indicates that even after the recent global financial crisis, there are still positive stories regarding the state of music business today (see the graph given below). Digital networking has also proven good for the industry, increasing revenue streams from composers, artists, and music companies (Hatitye, 2009). Thus, interest in music industry has been increasingly enlarged or at least sustained despite the economic crisis. Therefore, The David Creative has decided to implement an initiative of expansion in other areas across the globe, including NY, LA, and Asia.

(Source: Hatitye, 2009)

The business is looking to operate in other countries and states such as LA, Asia, and NY in order to increase its sales through by increasing its market share internationally. However, the feasibility of this option must be assessed by analyzing five years pro forma statements of the business.

Pro Forma Financial Statements' Analysis & Interpretation

Pro Forma Income Statement

Pro forma income statement of The David Creation reveals that the decision of expansion in New York will be profitable for the business (see appendix). It is assumed that due to expansion, the sales of company will increase by 20% per year. This increase is also backed by the market research which revealed that music industry will further grow in future. The return and allowances of sales are estimated to be around 0.20% of sales per year, since the company deal with music and instruments. On the other hand, direct cost will also increase with the increase in sales and thereby it is assumed to be increased by 15%. Selling expense is estimated to be decrease after two years. The reason behind this decline is that the company will highly advertise in first few years and eventually this expense will reduce to some extent. However, wages will remain same for the next five years. These wages include payroll of indirect labors i.e. receptionist and a person for studio cleaning and maintenance. The depreciation is calculated based on straight line method and estimated to be 2000 for the given period.

Salaries are expected to be approximately $80,000, which include salary of owners and direct labors. The owners, Mark & Kennie's salary is assumed to be $20,000, and direct employees' salary will be $10,000. These direct labors include 4 employees that will work as instructors and helpers for various musical instruments ...