Dazzling their audiences with high-powered lights, sound, and music, these venues are still one of the highest cash flow businesses in the world.
In legitimate cases, pro forma financial statements take out one-time charges to smooth earnings. However, companies can also manipulate their financial results under the guise of pro-forma financial statements to provide a picture that is rosier than reality.
What Are Pro-Forma Earnings? Pro-forma earnings are not computed using standard GAAP and usually leave out one-time expenses that are not part of normal company operations, such as restructuring costs following a merger. Every investor should stress GAAP net incomewhich is the "official" profitability determined by accountants, but a look at pro-forma earnings can also be an informative exercise.
Pro forma earnings figures are inherently different for different companies. There are no universal guidelines that companies must follow when reporting pro forma earnings, which is why the distinction between pro forma and earnings reported using GAAP is very, very important.
GAAP enforces strict guidelines that companies must follow when reporting earnings, but pro forma figures are better thought of as "hypothetical," computed according to the estimated relevance of certain events and conditions experienced by the company.
For example, net income does not tell the whole story when a company has one-time charges that are irrelevant to future profitability.
Some companies therefore strip out certain costs that get in the way. We like to call pro forma the "everything-but-the-bad-stuff earnings. And, if a company missed non-pro-forma expectations but stated that it beat the pro-forma expectations, its stock price will not suffer as badly; it might even go up - at least in the short term.
Problems with Pro Forma Despite the positive reasoning behind pro-forma statements, there are many ways in which pro-forma earnings can be manipulated. Items often left out of pro forma figures include the following: Amortization, for example, is not an item that is paid for as a part of cash flow.
But under GAAP, amortization is considered an expense because it represents the loss of value of an asset. See What is the difference between amortization and depreciation?
Under GAAP, however, a one-time expense is included in earnings calculations because, even though it is not a part of operations, a one-time expense is still a sum of money that exited the company and therefore decreased income.
Sometimes companies even take unsold inventory off their balance sheets when reporting pro-forma earnings. Of course it does, so why should the company simply be able to write it off? The Securities and Exchange Commission SEC will investigate companies suspected of trying to deceive investors in the pro-forma modification of earnings.
Read more about how companies are regulated in Compliance: The Price Companies Pay. But by being skeptical when reading pro-forma earnings, you may end up saving yourself big money. To evaluate the legitimacy of pro-forma earnings, be sure to look at what the excluded costs are and decide whether these costs should be considering impactful.
Intangibles like depreciation and goodwill are okay to write down occasionally, but if the company is doing it every quarter, the reasons for doing so might be less than honorable.It's at the end of your business plan, but the financial plan section is the section that determines whether or not your business idea is viable, and is a key component in determining whether or not your plan is going to be able to attract any investment in your business idea..
Basically, the financial plan section consists of three financial statements, the income statement, the cash flow. An effective business plan has to include at least three important "pro forma" statements (pro forma in this context means projected).
NEW-VENTURE IDEA CHECKLIST •Basic Feasibility - Is it legal/can the product or service work •Competitive Advantage of the Venture •What is the Customer Profile •Marketing of Goods & Services •Production of Goods & Services •Financing the Venture •Staffing Decision •Control Mechanism. See this Guide to Writing a Business Plan Step By Step for a detailed description of how to write each section of a full-sized plan.
Keep in mind that a business plan is a living document and you can always start with a one-page plan and enlarge it with additional detail as required. Jul 16, · But, if you do need to expand your one-page business plan into a more full-fledged plan that includes more details on your company and your target market, you can follow our step-by-step guide for writing a detailed business plan, download our free business plan template, or review any of our more than complete sample business /5(98).
Restaurant Business Plan (Company Name) (Company Name) (Street Address) (City, State Zip Code) The median household income is $46, Major employers include Union Pacific and Bank of America. The statement of cash flow shows the incoming and outgoing cash of the business.
Table Pro Forma Cash Flow.