Is your projected balance sheet ready?

 

Balance Sheet

 

Businesses are here to stay and so are the businessmen. To make this statement come true, businesses will have to shift their focus from day-to-day routine administration to working on strategies for profit making.

Demonetization and GST are over. Government is doing its bit to expedite the economy and business owners must participate. Centre elections in 2019 and state elections in 2018 should bring good news for the businesses. But are we ready to embrace what’s in store?

Come what may the show must go on is the spirit we business owners live our life with.

Financial year has begun and what every businessman must do is to prepare a projected balance sheet for the next financial year. Visualization business growth can create wonders make it real.

Assets, liability and equity must be planned meticulously. Most of us have grown up in a business scenario of hurrying up, postponing all the life events and critical business activities in the month of March. 31st March consumes up all our energy, focus and efforts. In that bargain, we often fail to forecast our profits in the upcoming financial year.

SMEs must be reminded that whole appeal of running an enterprise should be to earn profits. Your balance sheet must reveal the strength of the business.

A projected balance sheet communicates expected changes in future investments, outstanding liabilities and equity instruments required to meet the business targets. It provides the most relevant financial information needed in the business planning process. Following are the key points to be considered for a realistic projection of balance sheet:

Balance sheet forecast

A forecasting balance sheet is a useful tool for business planning and it benefits in arranging and bringing in additional financing. Using a projected balance sheet, entrepreneur can present to lenders and investors with detailed financial information about planned future asset expansion, making it easier to persuade the funding agencies to supply the required financing.

 

You need to learn making assumptions

To create a projected balance sheet, a business makes certain assumptions about how individual balance sheet items may change over time in the future. Business plans often focus on anticipated future sales. A projected balance sheet also starts with forecasting sales revenues. Certain balance sheet items, such as inventory, accounts receivable and accounts payable, exhibit relatively constant relationships to sales, and projections on those items can be made based on projected sales. Other balance sheet items, particularly fixed assets, debt and equity, change only in accordance with a business’s policies and management decisions, independent of future sales.

 

Projecting Asset Items

Most relevant asset items in a projected balance sheet include cash, accounts receivable, inventory and fixed assets. While the amount of cash expected to be generated from the forecast sales increase may accumulate at a comparable rate, cash balance shown on the balance sheet is not necessarily in proportion to the sales increase. A business may decide to reinvest part of the cash received, allowing cash holdings to grow at a lower projected rate. Both accounts receivable and inventory generally change in proportion to sales increase because more sales can leave more customers on the account and require more inventory in stocks. Future changes in fixed assets are not likely to be in proportion to sales and often depend on a business’s decision about future capital investments.

 

Projecting Liability Items

 

Accounts payable, short-term debt and long-term debt are the major liability items in a projected balance sheet. Accounts payable often are the result of accepting trade financing on inventory purchases. If more sales require more inventory, the increase in inventory likely leads to an increase in outstanding accounts payable. Thus, accounts payable likely change in proportion to sales. Projection on short-term debt, such as notes payable, often depends on a business’s financing policy. To accommodate a sales increase, a business may choose to increase short-term financing at a certain rate each year. Long-term debt usually is left unchanged in initial projections and may change later if additional financing is needed.

 

Projecting Equity Items

Owners’ equity and retained earnings are the two common sources of equity financing. Similar to projecting long-term debt, owners’ equity is also left unchanged in initial balance-sheet projections. Whether or not a business expects to issue additional equity depends on future financing situations. If a shortfall in asset financing through other means exists, a business needs to project an increase in either owners’ equity or long-term debt to make up the deficit. Projecting retained earnings essentially relies on the net-income projection in a projected income statement for the same future period.

 

 

 

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