- by Rhyan Walcott
Pro forma analysis forecasts the balances and cash flows over a specific period of time and is generated from the data in a long-term forecast. Long-term forecasts include an analysis of the economic environment during the life of the strategic plan, as well as information in regards to future sales and company plans such as a SWOT analysis and observation of historical trends and investments.
Pro forma analysis in forecasting can allow a company to successfully compare several periods and to observe the effect various assumptions would have on the plan. Negotiation processes during mergers can also be well handled as a pro forma analysis can assist with finding the right merger, if necessary.
Capital budgeting, on the other hand, basically utilizes costs and returns when measuring the outcomes of a long-term strategy. One of the ways this differs from the pro forma analysis option is that various assumptions cannot be measured as they can with a pro forma analysis. I believe comparing various assumptions and methods would be beneficial in finding and orchestrating the right strategic plan for your new company. However capital budgeting can help determine if certain projects can be funded in the company’s best interest by determining how much money would go in and how much would come out of the particular project.