Forecasting corporate operating data generally plays the same role in business as does medical prognosis in the health care industry. Similar to the way a patient eagerly wants to hear about a disease's likely outcome, corporate management prefers to anticipate the ups and downs of the economy. Projected balance sheets and income statements help top leadership forecast operating information about profitability and solvency.
Projected Balance Sheet
A projected, or pro forma, balance sheet contains assumption data about specific future economic scenarios. Corporate leadership may present balance sheets for worst-case and best-case settings, specifying how either category could affect the firm's financial situation. A balance sheet is also called a statement of financial position or statement of financial condition. In a projected financial-condition report, accountants include projection data for assets, liabilities and equity, also called net worth. Assets run the gamut from cash and customer receivable to equipment and real estate. Liabilities include commercial paper and accounts payable.
Projected Income Statement
A pro forma income statement contains revenue and expense data that may result from a specific operating scenario. For example, a business may prepare a projected income statement to indicate to investors how it will benefit from a good economy, but also how a period of financial turbulence could have profound and negative implications for its businesses. An income statement is also called a statement of profit and loss, statement of income or P&L. This accounting report includes earnings, operating costs and net income -- or loss, if earnings are lower than costs.
A company prepares projected income statements and balance sheets to show the rest of the world how it would fare in certain competitive settings. It also may prepare the reports to meet specific criteria that lenders want to see before approving loans and advancing funds. Creditors may require that the business be forthcoming not only with actual data, but also with pro forma information based on worst-, neutral- and best-case scenarios. A projected P&L shows how much money a firm could make under management's assumptions, whereas a pro forma balance sheet indicates how financially strong the business could become under similar circumstances.
Pro forma income statements and balance sheets are part of the array of tools corporate management relies on to set adequate budgetary controls, cultivate better ties with the investment community and demonstrate to external financiers the firm's path to profitability. By putting a lot of effort in the projected reports, corporate leaders reassure investors that they know what they're talking about and that they've gone through the data to determine what's necessary to achieve the desired goals. Budgetary controls are actions, such as comparing actual performance and planned goals, that department heads take to ensure rank-and-file personnel are performing according to plan.