Financial Forecasting

Nathalie Moyen

Applied Financial Management

Financial Forecasting

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Pro Forma Statement

A pro forma statement is a prediction of the companys future financial

statements.
Take into account management goals (e.g, CAPX outlays)
Forecast:
assets
existing liabilities and owners equity

The two forecasts will not necessarily be equal.

The plug is additional external funding, to make the balance sheet
balance.

Nathalie Moyen

Applied Financial Management

Financial Forecasting

2 / 11

% of Sales Forecasting

Variable costs, current assets, and current liabilities tend to vary

proportionately with sales.
1

Look at a few years of financial statements. Which financial

statement items have maintained a relatively constant proportion to
sales?

Forecast future sales based on its historical annual growth rate.

Extrapolate those financial statement items as a proportion of sales.

Nathalie Moyen

Applied Financial Management

Financial Forecasting

3 / 11

Income Statements ($ thousands)

Nathalie Moyen

Applied Financial Management

Financial Forecasting

4 / 11

Balance Sheets ($ thousands)

Nathalie Moyen

Applied Financial Management

Financial Forecasting

5 / 11

The CEO is asking for a bigger bank loan...

...to meet the following goals and commitments:

Cash and Securities at 5% of Sales
Accounts Payable at 14% of Sales
CAPX of $43,000 and Depreciation of $50,000
Current Portion of Long-Term Debt of $100,000
No change to payout ratio of 50%
No equity issue

Nathalie Moyen

Applied Financial Management

Financial Forecasting

6 / 11

Pro Forma Income Statement ($ thousands)

Nathalie Moyen

Applied Financial Management

Financial Forecasting

7 / 11

Pro Forma Balance Sheet ($ thousands)

Nathalie Moyen

Applied Financial Management

Financial Forecasting

8 / 11

Whats the Plug?

Additional External Funds=Assets(Liabilities+Owners Equity)

If no new equity, how big should the new bank loan be?
What is total debt (current debt + long-term debt + bank loan)?
What is the interest expense (assume 10% interest rate)?
Recompute the pro forma statements until balance sheet balances.

Nathalie Moyen

Applied Financial Management

Financial Forecasting

9 / 11

Dealing with Uncertainty

Sensitivity Analysis: Change one parameter at a time

What if sales grow at 15% instead?
What if COGS becomes 88% of sales?
Scenario Analysis: Change many parameters at a time
What if sales grow at 15% and COGS becomes 88% of sales?

Nathalie Moyen

Applied Financial Management

Financial Forecasting

10 / 11

Financial Forecasting Takeaways

A pro forma statement forecasts what the balance sheet will look like
in the future.
It can show how much money you need to raise on external markets,
given management goals.
It is prudent to do sensitivity/scenario analyses to assess the effect of
uncertainty on future balance sheets.

Nathalie Moyen

Applied Financial Management

Financial Forecasting

11 / 11