Pro forma Statement

Pro forma Statement

Pro Forma Financial statement is a tool in accounting and finance in which financial reports are prepared to meet the needs and apprehensions of investors and stakeholders regarding future project's revenues, returns, and costs. It is means of looking at the financial health of the business say after a time period of five years or so. These statements are usually prepared when a business undertakes new projects and investments or in case a totally new business is started. These statements are usually prepared on the basis of several assumptions such as futuristic cash flows, assets and liabilities. The pro forma statements can be prepared for balance sheet and income statement. It is highly recommended by the lenders and investors to provide with these statements (Swan, W. 2008). The pro forma statements for the given data are prepared on the following assumptions:

Cash and cash equitant in banks and at hand are going to increase by 20% every year.

Accounts Receivables are estimated to be recovered at the end of each month.

Current assets are sum of all liquid assets.

Value of fixed assets i.e. property, equipment, and vehicles remain constant throughout the analyzed time period.

All fixed assets would be depreciated by 5% each year and follow straight line amortization method.

The sales will increase by 15% every year.

The cost of sales would be controlled adequately and would increase by 4% each year.

4% of Revolving loan will be paid back each year.

Inventory at the beginning of the year will increase by 10% and inventory at the end of the year will decrease by 10%.

Strategies to Manage Working Capital

The working capital of XYZ company can be improved by increasing the asset base and decreasing the liabilities. In addition, it can also be improved if company restricts its collection policy by collecting its receivables soon so that accounts payables can be slowed down. This approach can be implemented by launching new payment system such as the credit card system to fasten the payment process received by customers. The time factor involved in receiving cash from customers and paying cash to suppliers for their service should be matched with each other in order to balance the payment process from both ends (Pietersz, G, 2005).

Another way to increase working capital is to lower the liabilities and increase sales. It can be done by decreasing the cost of inventory and increasing the margin for sales. Therefore, company should focus on keeping only what is needed in the inventory stock by implementing a demand driven computerized system, which creates cohesiveness and interlink all the associated departments with each other to smooth the operations of supply and demand.

Financing Needs of Company

The company uses both debt and equity as a greatest source of finance. However, it has been managing well by using internal sources of finance such as cash in hands because it plans to accumulate sufficient cash to fund its operations on daily basis. The company is managing its debt well on short term basis as it pays off ...