Your firm has been approached evaluate a 3 year Pro-Forma Financial plan for a firm. What are the three most essential interacting variables you...

When you say "Pro-Forma Financial plan," what you mean is Pro-Forma Financial Statements included in a Business Plan. The three essential interacting variables of financial statements are revenue, assets and liabilities. These derive from three elements of Pro Forma Financial Statements: (1) income statements, (2) balance sheets and (3) statements of cash flow.

Revenue, assets and liabilities are "variables" because they will not be the same from projection year to projection year as future (pro...

When you say "Pro-Forma Financial plan," what you mean is Pro-Forma Financial Statements included in a Business Plan. The three essential interacting variables of financial statements are revenue, assets and liabilities. These derive from three elements of Pro Forma Financial Statements: (1) income statements, (2) balance sheets and (3) statements of cash flow.

Revenue, assets and liabilities are "variables" because they will not be the same from projection year to projection year as future (pro forma) projections will not be based on the same fiscal year data: pro forma projections will vary and be variables in the business plan because data from fiscal years vary.

The variables represent sales, cash and inventory, and liabilities. In the income statement, revenue is represented as sales less the cost of goods sold (or COGS), operating expenses, depreciation, interest, taxes and dividends. In the balance sheet statement, assets and retained earnings (liabilities plus equity) must balance. Assets represent business values such as land held, inventory, cash and accounts receivable (invoices issued but not yet paid). Liabilities represent debit values such as wages, taxes and purchasing accounts not yet paid; loans; common stock holding values; and retained earnings (as in retained for growth). In the cash flow statements, properly called the statement of cash flow, a distinction is drawn between cash and revenue because revenue may represent income that is not collected, while cash flow represents income that is accounted for and is collected: this income is cash.

Pro Forma statements--all of which are income statement, balance sheet, statement of cash flows and statement of stockholders' equity--project the expected revenues, cost of goods sold and expenses throughout some future year or years, e.g., throughout the ensuing three years. From these pro forma projections, vital net profit and net loss can also be projected. Pro forma statements are important to potential investors or purchasers (as in mergers or acquisitions), owners and share holders who need to know revenue, assets and liabilities, and cash flow.