The accounting equation may be expressed as Assets = Liabilities + Equity and is the basis for all accounting using the double entry bookkeeping system. One side of the equation shows the assets of the business whereas the other shows how those assets are funded. The basic accounting equation underlies all financial projections based on the three statement financial model.
The financial projections template produces an income statement, balance sheet and cash flow statement for the business. These 3 financial statements appear initially to be unconnected; however, closer investigation shows that they are linked and a change in one statement substantially impacts the other statements. The entrepreneur need to understand these connections in order to be able to understand the financial performance of the business.
As part of the process of producing financial projections for a start-up business it may be necessary to undertake a simple financial statement analysis of competitor businesses. This process will help the entrepreneur understand what drives the financial model and assist in generating reasonable assumptions for the business plan.
For the purposes of the financial projection template other liabilities are defined as amounts owed by a business at the year end arising from operating expenses, finance costs, and income tax expenses. The year end value of other liabilities is calculated using the other liabilities days assumption.
The opening day other liabilities balance forms part of the opening balance sheet of the business. For the purposes of the financial projections. other liabilities are amounts which are owed by the business in respect of operating expenses, finance costs and income tax expenses.
Financial projections are made up from three financial statements, the balance sheet, the income statement, and the cash flow statement. Here are sixteen things to know about creating financial projections which should give you a better understanding of what’s included in the three financial statements, and how they relate to each other.
The terms pro forma financial statements, financial projections, financial forecasts, and financial budgets are often used interchangeably, but they are not the same thing.
Pro forma financials simply refers to a set of financial statements in the usual format (balance sheet, income statement, and cash flow statement), which have been prepared in order to show the effects of a transaction on the historical financial statements prior to the transaction actually taking place.
The financial projections checklist can be used at any stage, but is particularly useful for startup businesses preparing financial projections for first time. The checklist provides a listing of some of the most common items to check for when reviewing financial projections.
Debt finance is normally evidenced by a note or document which specifies the amount, interest rate, and date of repayment. The date of repayment will dictate the payment term for the debt, for example a debt might be payable in five years time.
In the previous step the opening balance sheet debt was entered, and in order to allow for this debt to be repaid, an opening debt payment term needs to be entered.
Inventory or stock as it is sometimes referred to, is the total of raw materials, work in process, and finished goods that a business holds for the purpose of resale.
If the value of the inventory is divided by the value of the average daily cost of sales, then the resulting figure is the average number of days sales which the business is holding. This number is referred to as inventory days, days inventory outstanding, inventory turnover days, or stock days.
A business which purchases on account from its suppliers will at any point in time have amounts outstanding to them for unpaid invoices. The amount outstanding is referred to as accounts payable or sometimes as trade creditors.
If the value of the accounts payable is divided by the value of the average daily cost of sales, then the resulting figure is the number of days of payable which are outstanding. This number is sometimes referred to as days payables outstanding, accounts payable days or trade creditor days.
A business which sells on account to its customers will at any point in time have amounts outstanding from them for unpaid invoices. The amount outstanding is referred to as accounts receivable or sometimes as trade debtors.
If the value of the accounts receivable is divided by the value of the average daily sale, then the resulting figure is the number of days of sales which are outstanding. This number is sometimes referred to as day sales outstanding, accounts receivable days or trade debtor days.