Budgeting Basics and Beyond

25.5. Proformas: Evaluating Alternative Scenarios

Capstone students are able to test different tactical approaches and assess projected financial outcomes using a comprehensive set of Proforma reports provided in the capstone.xls spreadsheet.

In the Proforma Ratio Report example provided as Exhibit 25.8, the firm can project their financial performance for the next year—provided they meet the sales forecasts entered on the Marketing screen (Exhibit 25.5).

Of course, sales forecasts are rarely 100% accurate, since it's difficult to know for sure what competing firms are going to do. Savvy managers account for these uncertainties by comparing worst -case scenario results (very conservative sales forecasts) with best-case scenario results (optimistic sales forecasts) to prepare for more than one possible eventuality.

The Proforma Ratio Report also helps students link alternate decision tactics with the financial performance measures they selected (Exhibit 25.8).

The Proforma Income Statement (Exhibit 25.9) is an invaluable tool for management. Projected revenues and earnings can be evaluated. Brands that are projected to underperform can be quickly identified, and alternate decisions can be entered and re-evaluated.

Product managers can use the Proforma Income Statement to weigh increased volume vs. higher rates of return per sale, evaluate the drag created by excessive inventory overheads, compare contribution margins between brands, etc. Market Segment managers can use the Proforma ...