Analyzing Pro Forma Statements Essay
Analyzing Pro Forma Statements
In order to create an initiative for growth, an analysis of the company’s short term and long term financing needs are assessed to determine strategies for the company to manage working capital. The suggested initiative to increase XYZ Company, Inc. revenue over the next five years is by acquiring assets through a merger with UVW Company to produce more of product X. Companies must be able to manage growth either through the acquisition of assets or through the capital budgeting process. Through the acquisition of assets, external financing will be required. Growing quickly will allow XYZ Company to gain a larger market share and reinforce its viable position in the marketplace. Expanding too rapidly can have consequences. If the company has too much debt-financing and cash flows are reduced the company will risk being unable to repay its debts. Management must ensure the business can grow, what funding may be needed, and determine the sustainable growth rate.
A pro forma statement is a method of calculating financial results to emphasize projected figures for a company. A pro forma is intended to give investors a clear view of company operations. For XYZ Company, the pro forma statements will reflect the merger with UVW to produce more of their best-selling products and adding a list of new ones. Management expects sales and costs to increase by 20 percent for the coming year. Forty-one percent of total liabilities for the company are loans payable to stockholders; therefore management is reluctant to create additional financing through debt. The company will finance the merger through sale of stocks, and liquidation of excess equipment because cash on hand is relatively small. The merger will allow unnecessary extra equipment and inventory to also be sold to finance the new, united company. Though the merger will increase sales, operating costs are also expected to rise to meet the demand for the next five years.
A substantial financial reason for a merger is economies of scale. The operating economies will be lower in the combined business firm. Benefits to a merger would include the ability to buy raw materials in bulk at lower prices, the possibility of better interest rates on loans for being a larger company, and better quality goods through a more efficient company. Though fixed costs may increase slightly, overall efficiency is expected to occur. XYZ’s current net sales are $1,747,698 and expected to grow 20% a year to reach $4,352,628 in five years. “Growth may also improve the effectiveness of the organization. Larger companies have a number of advantages over smaller firms operating in more limited markets” (Thomas, 2014).
Additional funding post-merger will not be needed due to the liquidation of excess assets, and the sale of stock. Based upon the financial statements of the XYZ Company, management has decided that acquiring another business in the same industry will create a more efficient and effective company. The revenues earned from the combined business will continue to increase in the next five years. The company’s short term and long term financing needs have been addressed. Meeting payroll obligations, inventory purchases, and expansion are all included in the pro forma statement for XYZ.
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