Projected balance sheet challenge

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Permalink Reply by Chad Ellis on March 1, 2010 at 4:11pm

Just as balance sheet entries in accounting always include a credit and debit (and thus always automatically balance), a healthy financial model's balance sheet should always balance.

The most common method of building financial models (at least in my experience) involves using the Cash entry on the balance sheet as a "plug". That is, you program it with a formula equal to the difference in total liabilities and total non-cash assets, so that once it's added in the balance sheet balances.

This isn't just a fudge -- it essentially calculates the change in cash of your business and as a result will also tell you what your assumptions imply about the total investment necessary to get a new business to break-even.

Hope this helps!

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Permalink Reply by Werner Reisacher on March 3, 2010 at 1:57pm

I suggest that you approach your balance sheet forcasting as follows. Look at each individual balance sheet account and find the driver which influences these balances. Accounts receivables are calculated by assuming the avarage days outstanding and computing the expected receivable balance based on your forcasted sales. Fixed Assets should only be increased if aquisition of fixed assets is planned. Accounts payables can also be computed on the bases of the forcasted cost and expenses. In the equity account, the only change is the current and the retained earnings balances based on th P&L bottom line. (Unless you forcast dividend distributions or any planned changes that would affect the equity balance). When you are finished with computing each balance sheet line items, the difference between your total assets and your total liabiliies will be your cash (bank) balance.
Werner Reisacher

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Permalink Reply by Sachidanand (Sacha) Singh on March 5, 2010 at 1:26pm

Rather than using cash balance as an automatic plug, which may create problems at times, project cash flow statements each year after projecting income statements but before working out balance sheets. This I found a true life saver.

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Permalink Reply by Werner Reisacher on March 5, 2010 at 7:06pm

You are absolutely correct Sachidanand. Projecting a Balance Sheet before the P&L figures are known is not recommended. How would you calculate the receivable, the payable and the accrual balances if the corresponding sales, cost of sales and operating expenses are not known. Not to mention, the current year's profit which is an integrated part of the equity account. Thanks for pointing this out.
Werner Reisacher

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Permalink Reply by sase gbengs on March 9, 2010 at 12:16am

Thank you for your replies,i will upload the financial statement for help,thank you

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Permalink Reply by Ugo Umeh on March 11, 2010 at 2:43am

Pls upload the model. Would like to take a look at this.

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