A Glimpse of the Future
While CPAs may not be able to predict the weather, they can prepare useful financial forecasts and projections. Prospective financial information is any financial information about The future. Prospective financial statements--including forecasts and projections--are one category of prospective financial information. They offer a glimpse into the future by forecasting potential business outcomes. Lenders, investors and management frequently have questions about a company's future that can be answered only by such statements. CPAs will find that preparing prospective financial statements is both an art and a science. Although the CPA's ultimate goal in producing prospective financial, statements is similar to historical presentations, the process is far different. A financial forecast represents what management expects to happen. It is more commonly used for an existing business, where the results are not contingent on a particular event. A financial projection, on the other hand, is based on one or more hypothetical assumptions. It reflects what could happen if certain events or circumstances actually occur. Examples include a start-up business that is contingent on investor financing, or a scenario in which sales triple each year. Although management may or may not reasonably expect to achieve these financial results, the projection shows what would happen if the assumptions came true. In my years as a CPA, I have prepared forecasts, projections, budgets and financial models for start-up companies, mergers and acquisitions, litigation support engagements and expanding businesses. The process includes planning, research, preparation and delivery of the completed report. It requires CPAs to understand business structure, taxation, computer spreadsheet applications, economic trends and financial reporting requirements. A good general business sense is also essential. Although CPAs may not be able to predict the weather, we have become good at preparing financial models that can be used in forecasts and projections. As more CPAs in public practice prepare prospective financial statements, they may benefit from some of the insight I have gained about performing this valuable service. ASK THE RIGHT QUESTIONS Prospective financial statements have several applications and benefits. For a business, they are part of the normal budget process. They help a company establish both short-term and long-term financial goals. Lenders often require them when a company is seeking to borrow money. Investors use them to assess the potential of a business venture. While particular companies will have other, more specific, questions they believe prospective financial statements can help them answer, in general such financial statements can help a company to decide * Does the idea for the start-up company have the potential to succeed? * Can the desired expansion of an existing business realistically be achieved? * Will a company's projected internal rate of return be sufficient for an investor? * Will a company's financial position at some future date make it a desirable acquisition candidate? * Will a company's projected operating results satisfy the requirements imposed by a lender? * Does the company have enough capital or financing to fund the growth in receivables or inventory that is likely to result from a proposed business expansion? RULES AND REGULATIONS The current authority on prospective financial statements is Statement on Standards for Attestation Engagements (SSAE) no. 1, Attestation Standards. The statement includes a description of its applicability, definitions, types of services provided, reporting requirements and engagement administration matters. The AICPA publication Guide for Prospective Financial Information expands on SSAE no. 1 and provides CPAs with practical advice. The flowchart in exhibit 1, page 37, shows the rules for the basic types of prospective financial presentations. …