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what are the advantages and disadvantages of using a pro forma balance sheet for...

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lilia847 | Student, Undergraduate | eNotes Newbie

Posted August 10, 2011 at 3:42 AM via web

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what are the advantages and disadvantages of using a pro forma balance sheet for strategic planning purposes?

explan the advantages and disadvantades of thepro forma balance sheet

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litteacher8 | Middle School Teacher | (Level 1) Distinguished Educator

Posted September 29, 2011 at 9:11 AM (Answer #1)

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The biggest advantage of a pro forma balance sheet is that it allows a business to make specific predictions about the future.  For planning purposes, this is very important.  Businesses need to project more than just earnings.

 It is good to know what you think the company will make in the future, of course, but you can’t really make decisions based on that information without having the company’s entire future financial picture.  Let’s say you think profits are going up 15%, but then you also realize that expenses are going to go up 30%.  You can’t make information just on the project profits, it would be disastrous!  A pro forma balance sheet gives you the bigger picture.

The disadvantage of using a pro forma balance sheet is that it is really just a prediction.  You may be off, in one area or in all areas.  Sometimes being off in one area can affect the whole company’s financial health.  So you should continue to be cautious making decisions based on a pro forma balance sheet.

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