Income Statement

Performing vertical analysis of the income statement involves comparing each income statement item to sales. Each item is then reported as a percentage of sales. For example, if sales equals $10,000 and operating expenses equals $1,000, then operating expenses would be reported as 10% of sales.

Balance Sheet

Performing vertical analysis of the balance sheet involves comparing each balance sheet item to total assets. Each item is then reported as a percentage of total assets. For example, if cash equals $5,000 and total assets equals $25,000, then cash would be reported as 20% of total assets.

3. Pro-Forma income statement

Results from both horizontal and vertical analysis are employed to create pro-forma financial statements and budgets for use within the organization. The evident trends and interdependent relationships help management create financial statements reflecting anticipated performance for future operating periods. Also known as the projected income statement, or projected balance sheet, these statements communicate to management the anticipated production and operational needs of the organization that they might appropriately secure and allocate all necessary resources, human, financial, material or otherwise. Financing must be secured, cash must be available for inventory purchases and all payments, and all goals and expectations must be well communicated to everyone in the organization to provide a point of reference for future operational decision-making activities. Pro forma statements and budgets will also reflect the impact of intended process or product changes within the company, providing users and planners with a view of how these changes will directly affect the financial reports once implemented. The ability to analyze these potential changes further serves management in the decision making process as the value-added principle is applied. The master budget and all divisional budgets will convey goals and expectations for operational efficacy within the different departments of the organization and provide a means of measure by which to gauge progress and performance.

In order to do the short-term financial forecast (see chart 1) they use pro forma statements. First the sales forecast is completed, which can be done by an analysis of external, internal or a blend of the two forms of data. In order to prepare the pro forma income statement, we use the percent-of-sales method. The percent-of-sales method predicts sales by expressing the income statement objects as a ratio or percentage of the projected sales, such as Cost of Goods Sold/Sales = $60,000/$200,000; which equals 30%. To prepare the pro forma balance sheet we apply the judgmental approach. The judgmental approach is a simple way to prepare the pro forma balance sheet in which data is estimated by either management assumptions, or percentage of sales and plugged into the forms.

Chapter 6. Drawing up the financial plan

By working out of the annual financial scheme of the company a starting point is the sales volume budget (account or the forecast of volume of realization of production) as its indicators affect practically all other income and expenditure items. After account of an estimated proceeds from production realization the budget (plan) of production is constituted and budgeting (account) of all costs is conducted. These accounts reflect process of production and production sales that in the western practice is called as operational activity, and summary account — the operational budget.

It is possible to present the approximate short form of the plan of financing as follows (the data conditional):

By plan working out it is necessary to differentiate activity directions — economic, investment, financial that will raise productivity of management of monetary streams. Also it is expedient to define in advance an interval of planning proceeding from concrete conditions of managing. This position allows predicting further monetary streams in the form of receipts, gives the chance to make the look-ahead report on profit.

From positions of a finance administration a planning important point is definition of the centers of financial responsibility in the event that activity of the enterprise enough diversificated. It is possible to allocate three groups: The centers, incomes of which activity steadily exceed expenses; the centers which yet do not bring the steady income, but, probably, become those in the near future; the centers of expenses. Allocation of such centers is made for the purpose of tracing of the monetary streams which are passing through them. Management of expenses on the responsibility centers is based on the corresponding organization of the industrial (administrative) account.

Planning methods are concrete ways and receptions of calculations of indicators. At planning of financial indicators following methods can be applied: standard, settlement-analytical, balance, optimisation of planned decisions, economic-mathematical modelling.