Question

Suppose that you constructed a pro forma balance sheet and a cash budget for a company for the same time period and the external fi-nancing required from the pro forma forecast exceeded the cash deficit estimated on the cash budget. How would you interpret this result?

Answer 1

External financing required is the amount that should be raised by a company from external sources to finance any increase in assets that may be required by the company.

A Cash Deficit estimated on the cash budget indicates an excess of estimated disbursements of cash over cash receipts or cash revenue.

This cash deficit will also indicate the extent to which External Financing will be required to fund this deficit in the cash budget for a given time period.

This means that the External Financing required should be equal to the cash deficit estimated on the cash budget.

If the external financing required from the pro forma forecast exceeded the cash deficit estimated on the cash budget, then this can be interpreted to mean that an error has been committed in making the forecasts in the Pro Forma Balance Sheet and/or the estimated Cash Budget. The error(s) have been made in either or both of these forecasts.

The forecasts should be checked for accounting errors and arithmetical errors.