The balance sheet forecast is one of the three main statements for business plan financials, and is sometimes referred to as the statement of financial position.
The balance sheet forecast shows a financial snapshot of the business at a specific point in time, usually at the end of each accounting year.
The balance sheet is in effect a representation of the two sides of the accounting equation. On one side of the balance sheet are the assets (property, plant, equipment, accounts receivables, cash etc.), and on the other side are the methods by which those assets are funded, which can either be liabilities (debt finance, accounts payable etc.) or equity (shareholder capital, and profits retained within the business).
There are many balance sheet formats, the layout below acts as a quick reference, and sets out the most commonly encountered accounting terms when dealing with a business plan balance sheet forecast.
| Cash | 5,000 | Available cash |
| Accounts receivable | 28,000 | What customers owe you |
| Inventory | 2,000 | Inventory held |
| Current assets | 35,000 | Can be converted into cash in one year |
| Long term assets | 45,000 | Buildings, machinery etc less depreciation |
| Total assets | 80,000 | Assets = Liabilities + Equity |
| Accounts payable | 15,000 | What you owe trade suppliers |
| Other liabilities | 8,500 | Amounts owed such as wages, tax, interest |
| Current liabilities | 23,500 | Amounts to be paid within a year |
| Long-term debt | 14,500 | Loans and debt owed to banks and others |
| Total liabilities | 38,000 | Total amount owed |
| Capital | 15,000 | Money put into the business by the owners |
| Retained earnings | 27,000 | Profits kept within the business |
| Total equity | 42,000 | Total invested |
| Total liabilities and equity | 80,000 | Assets = Liabilities + Equity |
As an example, the annual report for apple shows a typical balance sheet layout.
Use of the Projected Balance Sheet Forecast
The business plan financial section for most businesses tends to concentrate on the income statement and fails to get to grips with the accounting balance sheet. Our financial projections template always includes the balance sheet template.
Balance sheet forecasting is important for many reasons:
- Management should use the projected balance sheet forecast to help identify whether the need for working capital (inventory plus accounts receivable less accounts payable) is growing, and how that need is being funded (cash, overdraft, loans etc).
- They are used by trade suppliers to decide on whether credit is given as they identify the net assets and cash position of the business.
- Bank managers utilise the balance sheet forecast, as they base their lending ratios on certain aspects of it, for example the current ratio = current assets / current liabilities is used to determine liquidity and the risk of non repayment of a loan.
- Balance sheet forecasts are used by investors to decide whether to invest or not and at what price. For example they will look at the debt / equity ratio to determine the level of risk involved
Any number of people could be using your balance sheet forecast to make decisions about your business. It is important that you have an understanding of what information the balance sheet forecast is providing and what that information is telling you.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.