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In the business world, pro-forma financial statements are financial statements that include projections into the future, and commonly used to analyze various hypothetical situations.  These “as if” situations based on forecasted, not real-world data and aim to help in decision making when considering different business options. Since pro-forma statements may be based upon numerous critical assumptions and used internally, within the business, one should practice cautious when analyze or rely on them.

Moreover, the General Accepted Accounting Procedures (GAAP), the main US uniform code of the accounting system doesn’t include estimates such as the pro-forma based statements. Therefore, pro-forma financial statements may include accounting methods that wouldn’t be practical or valid in the real world. Nevertheless, a business plan should include pro-forma statements because it relevance for forecasting and budgeting planning aspects of the new business opportunity.

Pro-forma financial statements are mainly part of budgeting and planning tools.  Budgeting is part of master plan; must have an objective & goals. Businesses also make use of pro-forma statements when presenting data on future revenue concepts which would result from mergers, acquisition and new business partnerships. This information could be use in trend analysis (after the business partnership put in practice) to evaluate the business result.

The main reasons for developing of pro-forma:

1. Forecast demand and prices.
2. Estimate variable expenses.
3. Establish fixed expenses

By: Oren Gulasa

A small business owner has a number of withdrawal methods available when seeking to minimize the amount of vulnerable assets within the entity by withdrawing funs from the business. One common practice option is the tax code concept of “guaranteed payments” which applies to the multi-owner limited liability company (LLC).  Whether payments for salary, loans and leases constitute guaranteed payments will affect the tax business of each owner, and exactly how the information return of the LLC will report the payments.

Specifically, payments to an owner, on account of his ownership interest, reduce the owner’s tax basis in the LLC. In contrast, payments to an owner for guaranteed payments do not cause a reduction in tax basis, because these payments are made to an owner other than in his capacity as an owner (i.e., as an employee, lender or lessor). If one of the owners also work for the company, guarantee payment would be the best way to agree on funds transfer. A lower tax basis will mean higher taxable gain when the equity interest is later sold. Thus, usually, it is better for the business owners to structure salary, loan and lease payments as guaranteed payments.

In addition, guaranteed payments are deducted, along with other expenses, on the LLC’s information return filed with the IRS. In general, guaranteed payments are payments made to the owners other than in their capacity as owners and without reference to the LLC’s earnings. Hence, payments for salary (if owner work within the company, loans (for other owner or shareholders and leases will usually qualify as guaranteed payments.

Guarantee payment would need to be stated as $ annual amount and may contain benefits and bonuses. If an agreement provided that one owner in a two-owner LLC was to receive a “salary” of 50 percent of the LLC’s earnings, with the other 50 percent allocated to the other owner, this “salary” would be unlikely to constitute a guaranteed payment. But if one owner receive $50K salary, than the LLC will report on its filing to the IRS information return  an income of $X-50K as the business income.

Oren Gulasa

Process of value creation:

1. Anything that increase operating cash flows, increase value.
2. Anything that decreases operating expenses, increase value.
3. anything that decreases variability, reduce risk associated with future development
4. Increase cash flow, due to an increase in revenue, decrease in expenses, or both.

How to increase cash flow: Increase entry berries, Reduce variability; Increase Return on Equity:

2. Opportunity Cost Concept:

An investment in business should yield a return to owners. Giving dividends it is consider being an opportunity cost decision. If the board of directors take owner’s money and retain it (not giving dividends in a certain year);

• Retained Earnings: increase the value today of future dividends: value must be greater than current dividends. This is known as Required Return On Equity.
• Thus, the return on investment (ROI) should yield higher future value then the current value.

• The required rate of return is the opportunity cost.
• Required Return On Equity: RROE

Net Present Value: the present value of cash flow – minus – the present value of cash out-flows; if the result is greater then 0, we will accept the investment decision.

• Formula: One year, at 8% interest = cost of capital 1.08 value of according to numbers of years (life of project) X Cash Flow at end of year – Cost of project.
• It is worthwhile to invest funds today, considering the return we expect to receive in future.
• Example: step by step
• 1. Cost for buying the business = $ 1,000,000,
• 2. If we put this in the bank, we get 1,065,000
• 3. Interest offer in current market condition (on investment) = 6.5% for one year = 1.065
• 4. Life of project = estimated number of year = 30
• 5. Cash flow end of year from business = $150,000
• 6. 1.065 X 30 x 150,000 – (1,000,000) = 4792500-1,000,000 = 3,792,500

After how many years we get investment back?

1.065 x N (years) X 150,000 – (1,000,000) = 0

159,750 X N – 1,000,000 = 0

159,750 X N = 1,000,000

N = 6.259 (under the assumption that interest remain 6.5%) After 6.25 years we will cover investment.

By: Oren Gulasa

In tough economic times hotel companies looking to reduce costs eventually have to face the tough decision of lay-off.  Managers, however, would like to check other options before sending home their best employees. Mr. Chrisitian Anklin from HVS International offer other steps, beside lay-off. In article in Hospitlaity Trends (hospitalitytrends.com) Chrisitan claim that the following steps, or a cobination of the following could get the same financial impact. That include hiring freeze, reduction of bouneses,  paying out bonuses in a form of company stock, cut in base salaries and unpaid leaves as well as avoid redunduancies.

On the other hand, people who are looking for job in the industry will notice a not only less open positions posted, but also longer time period for getting reply. That actually means that companies proposed a hiring freeze. Executives from top hotel companies who support this option say it’s better to refuse to hire a talented applicant and say “No” now rather then submit a termination letter in four months.

In a personal note, I actually had to go through both lay-ff and saw the hiring freeze in practice as well. People who lost their job can’t fit into another system although there is an open position posted at the same time. This is the deepest slople in the cycle, and I guess we have to carry through.  By Oren Gulasa