Balance Sheet Forecast: How-To

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The balance sheet forecast shows the assets and liabilities of a company that are expected in the coming years.

The balance sheet forecast shows the assets and liabilities of a company that are expected in the coming years. This helps companies to make strategic decisions more easily. As part of the business plan, the balance sheet forecast is also important when applying for a loan from a bank. Learn how to prepare the forecast here.

The balance sheet forecast model explained

The balance sheet forecast is a forecast of the assets, equity and liabilities at a certain point in the future. The forecast is used to estimate what assets and liabilities a company will have in the future and thus represents the future financial position of the company.

The balance sheet forecast is one of three forecasts that companies make to get an idea of their future financial situation. The other two forecast components are the profit and loss account and the cash flow forecast. The balance sheet forecast depends on the assumptions of the income statement.

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The balance sheet forecast contains the following components:

  • Assets: All assets of the company, e.g. receivables, inventories, current assets, tangible and financial assets.
  • Liabilities: The company's liabilities are divided into trade payables and debts. The difference between these two items is that interest payments have to be made for debts.
  • Equity: Equity is the portion of capital for which the company does not incur any liabilities, for example through interest payments. Retained earnings and shareholder capital, for example, belong to this category. Equity is what remains when debts are deducted from assets.

Balance sheet forecast example

Let's break the top three components down to their individual components to take a closer look at how to calculate and forecast the individual items:

Assets

  • Cash
  • Accounts Receivables (AR)
  • Inventory
  • Property, plant & equipment

Liabilities

  • Accounts Payables (AP)
  • Long-term debt

Equity

  • Shareholder capital
  • Retained earnings
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The corresponding amounts are calculated for all these sub-groups. The period under consideration on which the balance sheet is based is important here. This is usually one year.

Cash

Cash includes all liquid funds, e.g. bank balances and cash in hand. The value is obtained from the cash flow forecast.

AR, AP & Inventory

The following formulas are used to calculate Accounts Receivables, Accounts Payables and Inventory:

  • AR = Average AR / Sales Revenue x 365
  • AP = Average AP / Costs of goods sold x 365
  • Inventory = Average Inventory / Costs of goods sold x 365

To project these values into the future, one can use comparative values from previous years and adjust them based on the expected business development.

Property, plant & equipment (PP&E)

At this point, one needs to include depreciation of fixed assets in the projection, as buildings and other fixed assets lose value over time due to wear and tear. For this purpose, a depreciation schedule must be prepared, which can then be used for the PP&E projection. One thus calculates this item on the balance sheet like this:

Closing balance = Opening balance + Capital expenditures - Depreciation expense

Opening balance is the balance sheet total from the previous year's balance sheet.

Long-term debt

Similar to depreciation, one also proceeds with the projection of long-term debt. This is done with the financing plan, which shows which interest payments are to be made and when.

Closing balance = Opening balance + Interest expense - repayments

Shareholder capital

Often this point is the easiest to project because shareholder capital usually remains constant.

Closing balance = Opening balance + New Capital issued - Capital repurchased

Retained earnings

In order to estimate the retained earnings, it makes sense to first create the forecast for the income statement in order to have an expected value for the net profit. From this, one then subtracts the dividends and obtains:

Closing balance = Opening balance + net income - dividends

Balance sheet forecast template in Excel

Now that we know all the individual components of the balance sheet forecast and have the necessary formulas to calculate them, we can create a template in Excel where we can enter the corresponding values. In principle, this could look like this, for example:

2021 2022
ASSETS
Cash £50,000 £60,000
Accounts Receivables £30,000 £50,000
Inventory £40,000 £40,000
PP&E £150,000 £130,000
TOTAL ASSETS (Sum of the above) __£270,000 __ £290,000
LIABILITIES
Accounts Payables £40,000 £50,000
Long-term debt £80,000 £60,000
TOTAL LIABILITIES (Sum of the above) __£120,000 __ £110,000
EQUITY
Shareholder capital £100,000 £100,000
Retained earnings £50,000 £80,000
TOTAL EQUITY (Sum of the above) £150,000 £180,000

The balance sheet must be balanced. This means that if you subtract the liabilities from the assets, this difference must correspond to the equity:

  • 2021: £270,000 - £120,000 = £150,000
  • 2022: £290,000 - £110,000 = £180,000

Balance sheet forecast not balancing

If the balance sheet is not balanced, the source of the unbalanced deficit or surplus must be investigated. If there are no errors in the balance sheet, the cash flow forecast and the forecast of the profit and loss account must be checked again.

Often the error lies in the cash flow forecast. There it must be checked whether each individual item has an influence on the balance sheet, either on the assets, the liabilities or the equity.

Why is the balance sheet forecast for a business plan so important?

An integral part of the business plan is the balance sheet forecast, which shows how the company's financial situation is expected to develop. Banks and investors can use it to get a better picture of the company. This is particularly important for start-ups or for still very young companies that need a bank loan.

If the managers cannot show where they see their company financially in the coming years, this is a bad prerequisite, because it shows lenders that the managers do not have an overview of their finances. The preparation of a financial forecast, which also includes a balance sheet forecast, is therefore mandatory.


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