Balance Sheet Forecasting
Balance sheet forecasting is an essential part of the overall financial planning, budgetary control and analysis. It gives future prospects of a company’s financial statement to make better decisions and plans in the future. This includes the determination of probable values of the diversified assets, and especially liabilities as well as the equity accounts, by analyzing trends of before periods, expected growth, and conditions of the market.
To support the balance sheet forecast there are other schedules created like depreciation schedule, working capital schedule and debt schedule. These schedules give the details of the working that is necessary to arrive at each of the line items on the projected balance sheet.
This guide will help you in the process of balance sheet forecasting and the related schedule’s part including objectives, methodology, advantages, disadvantages and some of the most common asked questions.
Aim & Objectives of Balance Sheet Forecasting
Financial Planning: Their help in a decision on the future capital needs as well as the funding of a company also plays a significant role.
Performance Assessment: Present an outlined plan for reviewing progress toward targets on the balance sheet.
Strategic Decision-Making: Particularly endorse management decisions that will concern investments and expansion or any other growth strategies.
Stakeholder Communication: Provide investors and creditors, special forms of financial reports which explain the future status of the company.
Risk Mitigation: A company needs to detect possible financial threats, including the shortage of funds, too much use of credit.
Central Factors of Balance Sheet Forecasting
Assets: Predicting the inquiry current assets such as cash, accounts receivables, inventory and other assets that are not due within the current period same as non-current assets compatible with property, plant and equipment.
Liabilities: Accomplishing current liabilities (such as, accounts payable, short-term borrowing) and estimating future liabilities (like, loans, bonds payable).
Equity: Using forecasts of net income and dividends to estimate retained earnings, common stock and other equity accounts.
Supporting Schedules: Schedules of depreciation, working capital, debt and equity to give details of computation for the balance sheet part.
The benefits of balance sheet forecasting
Improved Financial Visibility: Offers clearer information about future financial positions in order to make better preparations for available resources.
Risk Identification: Assists one to know when there is likely to be a liquidity or solvency problem in the future.
Enhanced Decision-Making: Serves as a crucial tool useful in decision making concerning investments, financing and operations management.
Stakeholder Confidence: Exhibits ability to commit financial resources in form of capital to investors, lenders and other stakeholders.
Integration with Other Financial Statements: Formatted in a way that will conveniently link with the income statement and projections on the cash flow.
Liabilities of Balance Sheet Forecasting
Dependence on Assumptions: The reliability of the forecast depends strongly on the assumptions on which the forecast is based.
Complexity: Consistency and the preparation of detail work and schedules involved in the preparation of financial statement require efforts.
Uncertainty: Exogenous factors tolerant to market conditions, governmental and economic changes result in lower levels of forecast accuracy.
Time-Consuming: The actual preparation of precise prognoses and timetables entails a lot of work and expense.
Inflexibility: Such a forecast may be accurately calculated, yet, using it in the wrong conditions may lead to a decision that is worse than any that could have been made.
Balance sheet forecasting: A step-by-step guide
1. Gather Historical Data
Prepare information in the form of balance sheet, income statement and cash flow statement for the previous period.
Examine trends and correlation between line items which in particular include accounts receivable to sales.
2. Define Assumptions
Revenue Growth: Forecast future revenues from its past performances and prevailing trends, strategic planning.
Expense Ratios: The spending profile of the project by revenue, that is the extend to which the project has spent money in comparison to the total revenue it generates.
Working Capital Ratios: Pin down assumption for days sales outstanding, days inventory outstanding, and days payable outstanding.
Capital Expenditures and Depreciation: Use a predictive model to maintain a scientific forecast of capital spending and use the previous years’ rates, or planned expenditures to estimate the depreciation.
Financing Activities: Forecast as to how much more debt a company is likely to issue, how much of the debt it is likely to retire, and how much dividend it is likely to pay in the future.
3. Forecast Revenue and Expenses
Revenue and expenses should begin with the income statement.
This will give you the net income that you need for putting on retained earnings on the balance sheet.
4. Create Supporting Schedules
Depreciation Schedule: Determine future depreciation costs by the capital expenditure and rates of depreciation of assets.
Working Capital Schedule: In the case of turnover ratios, calculate the forecast of the accounts receivable, inventory and accounts payable based on the turnover numbers employed in the company.
Debt Schedule: Provide schedules of future debt, issuing, repayment, and interests expenses.
Equity Schedule: Explain how retained earnings translated to the current balance, how shares were issued or bought back during the period.
5. Forecast Assets
Current Assets:
Cash: Predict ending balances of cash by using the cash flow statement.
Accounts Receivable: You may better forecast using DSO or as a percentage of your revenues.
Inventory: Based on DIO or using the historical inventory turnovers.
Non-Current Assets:
Uses of capital expenditure and depreciation to forecast property, plant, and equipment (PP&E).
Other non-current assets that may need adjustment in this case include goodwill or intangible assets where they exist.
6. Forecast Liabilities
Current Liabilities:
Accounts Payable: Forecast using DPO or as a percentage of the actual cost of their goods sold (COGS).
Short-Term Debt: When forecasting short-term borrowings, turn to the debt schedule.
Non-Current Liabilities:
Estimate long term borrowings and how this long term will be managed through planned borrowings and repayments.
7. Forecast Equity
Use the balance of equity at the beginning of the period.
Net income as per income statement plus non-dividend income, minus dividends.
This will be if and only if there are changes in accounts IVERY that is within the common stock or other equity accounts.
8. It is also important to maintain Balance Sheet Consistency.
Make sure that the total of assets is equal to the total of all liability and equity.
Always make changes to the assumption or the schedule whenever there is an imbalance.
9. Validate and Review
Make sure that the assumptions to be made are consistent with each other and the calculations that will be made also.
Discuss the forecast with the management and other strategic partners in the organization so to conform with organization strategy.
Conclusion
Forecasting balance sheet and schedules: Balance sheet forecasting and the schedules that are associated with it are one of the integral elements of planning for any organization. Even though there are some nuances and specific.
API calls imply assumptions, the analysis helps to make the right decisions in the company’s direction. If you’re ready to take your next company step and embrace CIO#=CENT$, then follow the step-by-step of CIO#’s, highlighted within this article, and apply the most secure reliable tools and techniques as a basis for financial foresight, use of which will help you to create reliable forecasts, and thus, guarantee further successful financial activity.
Here the most answers to the Frequently Asked Questions (FAQs)
1. What are the benefits of balance sheet forecasting?
It is essential for the business to know how the balance sheet will look like in the future to determine the available liquidity; what capital may be required and make strategizing for strategic decisions.
2. How can I make a prediction of the balance sheet?
Some of the familiar tools are excel spreadsheets, Google spread sheets, and other financial modeling tools like Anaplan, Quantic, etc.
3. How frequent should one make changes in the forecast?
Review your forecast at least once every three months or review it at the close of every financial year.
4. What Is Forecasting In Balance Sheet And What Do You Consider To Be The Largest Obstacles?
Accurate assumptions that underlie the evaluations making process or the decision-making proess.
A requirement of consistency in preparing and presenting the financial statements.
Reactive measures arising from external influences elsewhere.
5. Is balance sheet forecasting possible to automate?
Probably, automation is feasible by employing financial planning and analysis (FP&A) software compatible with accounting applications.
6. What can be done in the case of horizontal imbalances of the forecasted balance sheet?
It is common for balances to change owing to computational or assumptive discrepancies. Reconcile supporting schedules that have been used in preparation and make sure that they match the various statements.
7. In balance sheet forecasting, how does retained earnings affect the figures?
Earnings retained are an interconnectivity between income statements and balance sheets and equal net income accumulated less dividends.
8. External forces into consideration and how they are incorporated in the conducting of the forecast?
External conditions like economic trends, market conditions and changes in regulation are liable to affect the assumptions thereby; the forecast must therefore be reviewed frequently.
9. What if after preparing my balance sheet I realized that my company’s liquidity position is not good?
The two common approaches to manage this include identifying a cost-cutting opportunity, restructuring debts, or issuing additional equities.
10. Must all the balance sheet account before casted?
Of course, when it comes to budgeting it is best to forecast all line items as it were, but for rough planning major accounts such as cash balance, accounts receivable, accounts payable and amount of debts will suffice.