Question

What are the basic benefits and purposes of developing pro forma statements and a cash budget?

Short answer

Level of assets and finance need by the company determined on the basis of pro forma statements and cash budget. Actual and projected events and data also compared with help of them.

Step-by-step solution

Cash budget

A cash budget is a projection of a company's cash flows over a given time frame. The budget can be for a week, month, quarter, or year. This budget determines whether the entity has enough money to keep running for the specified period.

Benefits of cash budget and pro forma statements

Advantages of pro forma statements are following:

1. Determine the financial and operating criteria that are assumed to produce the scenarios.
2. Create various revenue and expense predictions.
3. Compile the findings into profit and loss estimates.
4. The resulting balance sheets can be compared.

Any occasion there might be a cash shortfall can be detected using Cash Budget. Spending can be controlled with its aid. It will unmistakably demonstrate instances where a company has more or less cash than anticipated.