Pro-Forma...
Computer Modeling is taking a computer and using it to generate a model, usually financial, of the business. By making key assumptions, the model then can be changed to see what changes will occur if certain assumptions are changed. Most common among these models are the “What if Scenarios”, i.e., what would happen if I changed the material in product A to a cheaper material, and thereby reduced the cost, but also reduced the quality and length of the product’s life.
Computer Modeling can be accomplished by various assumption categories, such as
- Sales Models that are strictly concerned with the sales of a product, the quantities sold, and the revenue brought in by the various alternatives
- Income Models that incorporate the sales models, but also add to it any other income that is associated with the entity such as dividends, commissions, extraordinary income, etc.
- Cash Flow/Financing Models that display the alternatives of various decisions made that affect cash flow. It is very near to a Source and Uses of Funds Statement that give alternative for various financing models, and is particularly useful in making capital budgeting decisions.
- Expense Models that do for expenses what the income models do for revenue. It is a way to see the various effects of the certain expense levels, as well as the effect of inflation on costs.
- Profitability Models that include all of the above models and will give the profitability of the entity given the various assumptions being made and tested.
Computer modeling can literally be based upon any assumptions that the client wishes to see. For example, all models can be based upon product, region of sale, or any other detailed category that the client desires, as long as the data is available.
