A pro forma statement and a cash budget are tools used for planning in companies. A pro forma statement projects future amounts a company expects. A cash budget works alongside the pro forma statement by planning a budget for the future.
A pro forma statement is set up similar to an income statement. The difference is that it projects future numbers rather than the past. If a company believes there is less demand for products in the future, it is planned for on the pro forma statement. All the information on this statement is determined by what the company believes will happen in the future. For instance, a retailer may project lower sales due to a recession.
Based on the projections for the future, a company develops a cash budget which correlates with the pro forma statement. By trying to predict future needs and operational income and expenses, a company develops a cash budget. If proper investigation and predictions are made, a cash budget can be very accurate.
These two things are used to make decisions in the company. If a company decides there is more demand for a product, they may decide to increase production. If they decide their prices will be too high in the future, they may lower their prices to protect their market.
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