Projected Financial Statements
Projected financial statements, also known as financial forecasts or pro forma financial statements, are estimates of a company’s financial position, results of operations, and cash flows in future periods based on assumptions about what the company’s financial results will look like under different scenarios.
These statements generally include:
- Projected income statement (or profit and loss statement): This estimates the company’s future revenues, cost of goods sold, operating expenses, and net income.
- Projected balance sheet: This projects the company’s future assets, liabilities, and equity.
- Projected cash flow statement: This forecasts the company’s future cash inflows and outflows, and how they will affect the company’s cash position.
Projected financial statements can be used for a variety of purposes, such as:
- Budgeting: Management uses projected financial statements to plan for the future, make decisions about capital expenditures, and set goals for the company.
- Investor Relations: Investors and analysts use these projections to assess the company’s future profitability and financial health.
- Financing: Banks and other financial institutions may require projected financial statements to assess a company’s ability to repay a loan.
- Valuation: Projected financial statements are often used in business valuation, especially in the Discounted Cash Flow (DCF) model.
It’s important to note that because these statements are based on assumptions and estimates, they are subject to uncertainty and may not accurately represent the company’s actual future financial results. Therefore, they should be used as a guide rather than a definitive prediction.
Example of Projected Financial Statements
Let’s assume we have a startup company, “TechStartup Inc.” that has been in business for one year. It is now creating projected financial statements for the next year.
- Projected Income Statement: The company anticipates that it will increase its revenue by 50% in the next year due to a new product launch and increasing market share. It expects its cost of goods sold (COGS) to stay roughly proportional to sales. It also plans to increase marketing expenses to promote the new product, but expects administrative and other operating expenses to remain relatively stable.
Here is what the projected income statement might look like:
- Revenue: $1,500,000 (up from $1,000,000)
- COGS: $600,000 (up from $400,000)
- Gross Profit: $900,000
- Operating Expenses: $500,000 (up from $400,000)
- Net Income: $400,000
- Projected Balance Sheet: The company plans to invest in new production equipment, which will increase its property, plant, and equipment (PP&E). To finance this, it will draw on its retained earnings and may also take on a new loan, which will increase its liabilities.
- Projected Cash Flow Statement: The cash flow statement will reflect the increased income from operations, the purchase of new equipment in investing activities, and the potential new loan in financing activities. It will show whether the company expects to increase its cash reserves or whether it might have a future need for more financing.
Remember, these are simplified examples. In reality, creating projected financial statements requires making detailed assumptions about all components of these statements. It’s also important to regularly compare these projections with actual financial results and adjust them as necessary to reflect changing circumstances.