Exhibit 8 Supports Section VI Of Your Strategic Audit What I

Exhibit 8 Supports Section Vi Of Your Strategic Auditwhat Is A Pro Fo

Exhibit 8 supports section VI of your Strategic Audit. What is a Pro Forma Income Statement? It is a prediction of how the income statement figures would look like for the next five years for the firm you have chosen for the capstone. As in any financial prediction, it depends on assumptions. Assumptions are key to determining how the future would look like.

How to Create a Pro Forma Income Statement? Section VI of your Strategic Audit includes three strategic alternatives, generally known as stability, growth, and retrenchment. You need to build a pro forma for each of those strategic alternatives, so need to have three different sets of assumptions for each alternative. The easiest prediction assumes the near past will repeat into the near future. In other words, what happened financially in the previous five years will replicate into the next five years.

This is the extreme case of stability, and all future income statement variables are assumed to evolve based on the averages of the last five years. These assumptions are very strong, and in that sense, maybe very non-realistic. However, it is very easy to calculate, because you just need to know the average of the last five years. If costs went up 5% on average during the last five years, you assume costs will also go up 5% per year in the next five years. Assumptions for growth and retrenchment strategic alternatives cannot be based on averages of past performance.

Growth and retrenchment want clearly to differentiate from the past. You may start by looking at the averages of the ‘stable no strategy’ scenario, and from there to modify the assumptions for growth and retrenchment. How to use TemplateSA-EXH8-ProForma and 5-Y Financials The TemplateSA-EXH8-ProForma.xlsx can be downloaded from the attachments here and is a good reference to see how assumptions determine income statement items for the five years in the future, and how the common ratio percentages are calculated for those years too. That template does not show how the averages were calculated because it does not include the Income Statement date from the last five years. Your 5-Y financials Excel workbook has that information, and the sheet named ‘Pro-Forma no strategy’ has the average formulas connected to the real information.

After reviewing it and understanding all the formulas for the first year, copy/paste for the following four years. Do the same with the Common Size Percentages. To create the Pro-Forma Growth, right-click on the sheet name Pro-Forma No Strategy (bottom of Excel screen) and copy it. Then, rename the copy as Pro-Forma Growth. All the formulas would work, but you must change the assumptions to fit the new growth strategy alternative.

To create the Pro-Forma Retrenchment, follow the same steps mentioned before. Assignment Submission Procedures Attach your updated 5-Y Financial Excel workbook with the three Pro Forma sheets. You may add comments to your instructor in the “Add Comments” field if you wish. Then click the Submit button.

Paper For Above instruction

The development of a Pro Forma Income Statement is a fundamental component of strategic financial planning, particularly within the framework of a comprehensive strategic audit. This forward-looking financial statement serves as a predictive tool that projects the company's income statement over the next five years based on a variety of assumptions corresponding to different strategic alternatives—stability, growth, and retrenchment. These projections are crucial for assessing potential future performance, guiding strategic decision-making, and informing stakeholders about expected financial trajectories.

Understanding the Pro Forma Income Statement

A Pro Forma Income Statement is essentially a forecast that estimates future revenues, costs, and profits. Unlike historical financial statements, it hinges on assumptions about future conditions, which can significantly influence the accuracy and utility of the projections. The process involves analyzing past financial performance and translating it into future expectations, adjusting for strategic initiatives and external market factors. The core purpose is to visualize how different strategies might impact the company's financial health, enabling management to select optimal paths forward.

Creating Pro Forma Financial Statements

The construction of a Pro Forma Income Statement necessitates a systematic approach. For the "no strategy" or stability scenario, the simplest method assumes that the company's past five years of financial performance will recur in the next five years. This involves calculating the averages of key income statement figures—such as revenue, costs, and margins—and applying these familiar ratios and percentages to forecast future periods. For instance, if costs increased by an average of 5% annually over the past five years, it is logical (though perhaps overly simplistic) to project similar increases in subsequent years.

However, this stability assumption is inherently limiting because it does not account for strategic shifts or external changes. Growth strategies might assume higher expansion rates, increased sales, and economies of scale, whereas retrenchment strategies might project cost-cutting and downsizing, leading to different financial outcomes. Therefore, the assumptions for these strategies should diverge from historical averages, reflecting targeted initiatives such as market expansion, product diversification, or cost containment.

Using Excel Templates and Data Sources

The process is facilitated by using specific Excel tools, such as the TemplateSA-EXH8-ProForma.xlsx, which contains formulas linking assumptions to projected income statement items. This template allows users to input assumptions and observe their effects on future financial statements. Additionally, the 5-year financial data workbook provides historical figures and calculates averages, serving as a reference point for assumptions.

To generate projections for growth and retrenchment strategies, users typically duplicate the 'Pro-Forma no strategy' sheet, rename it accordingly, and modify the underlying assumptions to reflect the targeted strategic scenario. For growth, assumptions may include increased revenue growth rates, improved margins, and investment in new initiatives. Conversely, retrenchment assumptions may feature cost reductions, divestitures, and constrained revenue growth. Carefully adjusting these assumptions helps explore different potential financial trajectories, providing valuable insights for strategic planning.

Implications and Limitations

While the simplicity of assuming past averages recur in the future offers ease of calculation, it is often criticized for being overly optimistic or pessimistic, ignoring market dynamics, competitive actions, and macroeconomic factors. Nonetheless, it provides a baseline scenario against which more aggressive or conservative projections can be measured. Sensitivity analysis can further refine these forecasts, testing how variation in assumptions impacts projected outcomes.

Conclusion

In summary, the Pro Forma Income Statement is a vital tool in strategic financial management, enabling firms to anticipate future performance under different strategic choices. Through careful assumption-setting, leveraging Excel templates, and analyzing historical data, management can craft plausible projections that inform decision-making and strategic direction. As the business environment continually evolves, regularly updating and scrutinizing these forecasts ensures they remain relevant and valuable for strategic development.

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