Revised RJCT Task 1 revisionB1. Adequacy of Funds: budgets and pro-forma statements to plan funding of the production capacity A budget is a formal plan that the company used to estimate the probable expenditures and income of the organization during the production period. During the production period, the company engaged in budgeting process in order to determine the most efficient and effective strategies for making money and expanding its asset base. A budget described the expected month-to-month route a company would take in achieving its goals. It summarized the expected outcomes of production and marketing efforts, and provided management benchmarks against which to compare actual outcomes.
The budget acted as a control mechanism by pointing out soft spots in the planning process and/or in the execution of the plans. The budget was used as an evaluative for the company to more quickly react and make necessary alterations. Consequently, the company was able to utilize its pro-forma statements for its production based on its financial statements. The company’s pro forma financial statements were prepared in advance of any planned transaction, such as new capital investment, or a change in capital structure such as incurrence of new debt or issuance of equity.
The pro forma financial statement modeled the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and taxes. For instance, during the 3rd quarter, the net profit from operations was computed by taking the operating profit shown in the income statement and adding back investments in the future that were expensed in the 3rd quarter. This helped in measuring how well the managers were able to create revenue from the quarter’s marketing, sales and manufacturing activities. The income statement included the expenditures for R& D and this money was spent to create future business opportunities.
Thus, these expenses were added back to the operating profit so that the financial performance measure was entirely focused on current quarter revenues and expenses. The second step involved the total number of shares of stock which was computed by adding all forms of equity investment. The company did not have an emergency loan as this could have automatically been issued to the loan shark and to become a permanent part of the equity financing. Third, the net profit from the quarter’s operations was divided by the number of shares of stock issued to determine the net profit from current operations per share of stock. Hometowne Financial performance = net profit from current operations / total shares issued = 630,560 / 40,000 = 15.76Net profit from current operations = operating profit + investments in firm's future = 320,560 + 310,000 = 630,560 operating profit: 320,560 investments in firm's future = 250,000 + 0 + 60,000 = 310,000 cost to open new sales offices: 250,000 R& D investment in new brands: 60,000 total shares issued: 40,000 number of shares issued to executive team: 40,000 The pro forma statements summarized the projected future status of the company, based on its financial statements.
For instance, when a transaction with a material effect on a company's financial condition was contemplated, the Finance department prepared for a management and board review, a business plan containing pro forma financial statements demonstrating the expected effect of the proposed transaction on the company's financial viability.