Yes, the company was anticipating for a profitable year. The company had budgeted that the total expenses for the year would be 276,881,596 this was far way below its total revenues which it anticipated would be 542,686,558. This means that the company was planning to get a profit of 265,804,961 before tax and after payment of taxes that were to amount to 46,067,953 it was expecting that there would be a total profit of 219,737,008.
The company is still anticipating for a profitable year ahead this even comes after there was a drop in the expected profit. There was expected profit of 219,737,008 but the actual profit was 113,398,894. Although there was a variance of 106,338,114 which needs to be investigated, it can still be concluded that the company is still headed for a profitable year. However for the variance in budgeted profit not to be too high, the company should reconsider the source of the great variance which it is clear has been brought by large amount of unbudgeted expenses.
The company has identified various sources or revenue that it will receive
The main amount of revenues was projected to come from power sales. It was estimated that the total revenue from the sale of power would amount to 357,129,970. The figure was the highest amount of revenue that the company had budgeted that it would receive. It was in increase from the previous year sales revenue of 322,519,567 indicating an increase in 34,610,403 of the total expected revenue.
There is also revenue to be collected from other sources rather than the main operations of the business. These revenues are supposed to amount to 181,947,501.Compared to the previous earnings, this is a drop from the previous year of which the revenues amounted to 200, 647, 346. It is appropriate while making a budget take the lowest amount of revenues to be realized according to the conservative revenue recognition rather than taking the maximum amount.
Labor and benefits take the largest proportion of the expenses budget. The budgeted cost is 78,446,169; this is an increase in the amount that was used the previous year which was 77,611,667 and hence it shows there has been an increase in the budgeted of these expenses by 834,502.
Coal supply agreement also takes a large proportion of the budget taking 68,506,961. The total is a significant value in the budgeted expenses, and it represents an increased budgeted expense from the previous year, which was 66,798,402. Materials and supply also take a significant proportion on the budgeted expense list. These expenses are budgeted to take 24,248,367. The expense is an increase in the budgeted expense of 1,312,188 as the expenses for the previous year had amounted to 24,248,367.
No, there are no many non-operating expenses. Non operating expenses are missing because the previous year had a total of 12,229,820 in the non-operating expenses, but the current period the amount is projected to drop up to 4,224,714 this is a clear drop of the figure by 8,005,108 which is favorable. The company main agenda is to reduce its expenses and increase its revenues. This will be highly achieved if the company achieves in reducing the amount of the miscellaneous expenses.
Pros of the presented Pro-Forma budget
It will help predict future outcome. Using the data and taking into account the activities that took place on year 2009, it will be easier to predict what events will happen on year 2010. This is because it will be assumed that the activities that took place on the year will continue on the same trend and costs would not vary in any significant margin, and if it will, it is accounted for in the calculation.
The company will use the Pro-Forma to source for funding (Davis 2012). The business might need external funding in the future, and hence it will just present the statement to a money lending institution. The institution will use the Pro-Forma as a basis to establish profitability before giving out the loan. It will be used to attract investors. The company will need external investors. For the investors to be confident with the company, they must see the Pro-Forma. This will help convince them on the projected future profitability of the company. Only profitability will help attract potential investors and entrepreneurs.
Cons of the Pro-Forma
Values are based on speculations and estimates. The values of the consecutive year are not known and hence most of them are based on the judgment of the manager on the most likely values, but there are no fixed values (Sigel, 2010). This objectivity is purely based on one’s opinion and might at times fail to be exact the same. The main cause of variation will arise from the variation in costs from the estimated ones.
The Pro-Forma does not follow any GAAP’s. The Pro-Forma is purely based on estimates and hence there are no rules that govern the estimation. This makes it hard to regularize the preparation of the budget prepared and managers are given full responsibility for their preparation.
Siegel, Joel G and Jae K Shim. Accounting handbook. Hauppauge, N.Y.: Barron's Educational Series, 2010.
Davis, Charles E and Elizabeth Davis. Managerial accounting. Hoboken, N.J.: John Wiley & Sons, 2012.