All business incur costs in relation to operating expenses, finance costs and income taxation. At the end of an accounting year the business will normally have amounts remaining unpaid in relation to these expenses. In the financial projections template the outstanding amounts are referred to as other liabilities, and are calculated based on the other liabilities days outstanding assumption.
Other Liabilities Days Outstanding Calculation
Our free Excel based other liabilities days calculator is available to help calculate a value for inclusion in the financial projections template.
Established Business Plan
For an established business, the other liabilities days outstanding can be calculated from the latest set of accounts. The figures to use are the value of other liabilities from the balance sheet of the business, and the value of the operating expenses, finance costs, income tax expense from the income statement.
For example, if the expenses are 60,000 and the other liabilities balance is 5,425, then the other liabilities days outstanding is given by 5,425 / (60,000 / 365) = 33.0 days. This means that on average it takes the business 33.0 days to pay its liabilities arising in respect of operating expenses, finance costs, and income tax expenses.
If the income statement is not for a full year, then divide the expenses for the period by the number of days in the period, this will give the average daily expenses over that period.
Startup Business Plan
The other liabilities days outstanding for your business will depend on the type of industry in which it operates. A predominantly cash based business will have a very low other liabilities days outstanding, in the order of a few days, whereas a non-cash based business might have a days outstanding in the region of 90 days or higher.
The figure to use should normally reflect the industry averages. If industry averages cannot be found, then use the published accounts of similar businesses or competitors, and carry out the calculation described above for established businesses.
Ultimately, the value of other liabilities days outstanding is the amount of credit your business is offered in relation to these type of expenses, and procedures need to be in place to ensure this is adhered to as part of the business plan. It is important to understand that a new startup business will usually not be given normal credit terms and might be expected to pay in cash until a trading history can be established.
Having entered the other liabilities outstanding, the template calculates the other liabilities at the end of each subsequent year by multiplying the days outstanding by the average daily expenses for the year.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to estimate the capital expenditure for inclusion in the cash flow of the business.
This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial projections for a business plans.
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 BSc from Loughborough University.