Question

What strategies for improving accuracy in your pro forma statements. How important is historical data and competitors comparison?

Answer 1

answer-

A pro forma financial statement is one based on certain assumptions and projections (as opposed to the typical financial statement based on actual past transactions). Entrepreneurs usually create pro forma statements to project future financial returns from new business ventures. Pro forma statements are commonly included in the entrepreneur’s business plan.

strategies to make pro forma statement more accurate are-

Calculate revenue projections for your business. Make sure to use realistic market assumptions to write an accurate pro forma statement. Research and speak to experts to determine what a normal annual revenue stream is, as well as cash flow and asset accumulation.

Estimate cash flows. This portion of the pro forma statement will project your future net income, sale of assets, dividends, issuance of stocks, etc Business owners may consider underestimating sales and income while overestimating expenses and cash outflows. This creates pro forma statements that are extremely conservative and force business owners to create streamlined business operations. Lenders and investors may be less concerned by a business owner’s conservative pro forma financial statements.

Create the chart of accounts. This chart of accounts will make up the pro forma statement for a 3 to 5 year period. Year one will broken down into monthly increments, while the following years ( years 2 and 3) will be broken down by quarter, and years 4 and 5 are broken down annually.

Business owners should also use short-term pro forma statements to avoid creating specific long-term financial expectations.

it is very important because historical data helps to give the actual information of cost and expenses and transaction occurs so that we can predict accurately and help forecast if the new goods will cause expenses to increase. Competitiors comparison helps us to know what strategies they are taking to make their pro forma effective and how we can use that information to make our pro forma more accurate and effective. we also able to get insight of competito's expenses and sales which helps us to make business decisions.