The final stage of the consolidated (or master) budget preparation process of the company is the formation of the projected balance sheet or the balance sheet budget (in Finnish, tase - ennuste). DEFINITION: The projected balance sheet is a form of the financial reporting, a separate type of budget, which contains information about the future position of the enterprise, its value at the end of the budget period.

During its preparation, it is worth considering the fact that almost all the data necessary for its calculation are presented in the Income and Expenditure Budget (IEB), as well as in the Cash Flow Budget (CFB). Forecasting is based on a thorough analysis of the current data on income and expenses, assets and liabilities, and the further planning of the forecasted values of these budget data taking into account the interrelation between them, as well as their possible future changes.

The reports used in the balance sheet forecast preparation should cover at least several periods. In such a way it is possible to track repetitive activity, which in turn is quite easy to predict for future periods.

The form of the forecasted balance sheet often corresponds to the standard form of the accounting balance sheet, but for the convenience of data analysis, it is converted into a generalized (aggregated, with less-detailed breakdown of categories) form. The forecasted balance sheet, as well as an accounting balance sheet, consists of two parts: active (asset) and passive (liability), both parties must be equal to each other. It should be kept in mind that in accounting - assets are the property of the enterprise and liabilities are its obligations; whereas in budgeting - assets are resources invested in a business and liabilities are obligations arising in the process of its business operations. When making a forecast, the balance sheet data at the beginning of the period for each of the balance sheet items are taken into account, as well as their possible changes. It is possible to calculate these changes using the following formula:

Balance at the end of the period = Balance at the beginning of the period + Accruals (IEB) + Receipts or Cash in (CFB) – Payments or Cash out (CFB)

ENDING BALANCE = INITIAL BALANCE + INCOME - EXPENDITURES

When creating a balance sheet budget, some of the balance sheet items are projected on the assumption that they will change in proportion to the change in sales.

Steps to draw up the balance sheet forecast:

ASSETS:

1. Asset planning: an increase in assets is associated with an increase in sales. So, if sales growth is planned in the budget, this will lead to an increase in assets.
2. The analysis of current assets depending on the increase (decrease) in sales volumes. At the same time, an assessment is made of such balance sheet items as: stocks of raw materials and consumables, work in progress and finished goods, accounts receivable, advance payments to suppliers (prepayments), cash, deferred expenses. The current assets of the enterprise are expected to increase by the same percentage as the projected sales.

3. The increase in the value of non-current assets occurs as a result of the acquisition of machinery and equipment, and its decrease is calculated based on the size of the planned depreciation costs. Non-current assets of the enterprise include: intangible assets, fixed assets, construction in progress and other non-current assets.

   The forecasted book value of non-current assets = Book value of planned fixed assets and intangible assets - Depreciation for the period - Book value of sold fixed assets

4. Intangible assets are not directly affected by the changes in the sales volumes, and fixed assets rarely change under their influence. The data on the fixed assets to be acquired are formed on the basis of the Investment Budget.
5. Data on stocks of raw materials, consumables and finished products are obtained from the stock budget of materials and finished goods, sales forecast and turnover rate taking into account changes in inventory turnover factors.

6. Calculation of the accounts receivable: with an increase in sales, accounts receivable usually also increase.

   Accounts receivable at the end of the period = Accounts receivable at the beginning of the period + Cost of shipped, but not yet paid products - Cash receipts for the products previously shipped

   The amount of counterparties' debts to the organization can be predicted by taking into account changes in the value of accounts receivable turnover in consideration of overdue and bad debts.

7. Long-term and short-term financial investments are not affected by the changes in sales volumes, data on these items can be entered in accordance with the changes in the Investment Budget.
8. The cash balance on hand and balances of banks' settlement accounts are formed on the basis of the Cash Flow Budget at the end of the period.



PASSIVE:

9. Calculation of the accounts payable: an increase in sales and, as a result, a growth in assets, leads to an increase in obligations to pay for raw materials, materials and components, which means that accounts payable also increases.

   Accounts payable at the end of the period = Accounts payable at the beginning of the period + Purchases for the period - Amounts paid for the period

   It is possible to create a balance sheet forecast based on the assumption that liabilities will increase in the planning period on average by the same percentage as the projected sales volume. The planned size of the company's debt can be calculated taking into account changes in the value of accounts payable turnover in consideration of overdue and uncollectible.

10. Taxes: As sales increase, income increases, and as a result, the growth in tax payments also takes place. Tax data can be represented in the separate tax budget. The calculation of taxes can be as follows:

    Accrued tax = Current tax balance + Taxes for the period - Tax payments

11. Equity capital:

    Equity capital at the end of the planning period = Equity capital at the beginning of the period + Profit (-Losses) after taxes for the period - Dividends paid

    Equity capital components: authorized capital, additional capital and reserve capital, as well as retained earnings (uncovered losses). The main element of equity capital is the authorized capital, for some enterprises this may be share capital.

12. The size of the authorized and reserve capital can be found out from the charter of the enterprise. The size of the authorized capital usually remains unchanged. Forward-looking data is noted according to the fact data, taking into account the expected changes.
13. Reserves, long-term liabilities, bank loans are included in the balance sheet forecast without changes.

14. Retained earnings (R.E.) is increased by the net profit (N.P.) remaining at the enterprise after taxation. Data on net profit can be taken from the Budget of Income and Expenses, from the balances of the previous years and the Profit and Loss forecast.

    R.E. planned = R.E. reporting + N.P. planned – Dividends

    Retained Earnings (R.E) = Beginning Period R.E + Net Income (Loss) – Dividends

What is the purpose of the forecast balance?

Based on the data obtained, the forecast balance determines whether the company will need additional financing. So, if in the forecast balance sheet, the assets exceed the liabilities, it is necessary to find out how many liabilities are missing, and this difference will represent the amount of additional funds required. Additional financing can be obtained by increasing equity capital, or by increasing long-term and current liabilities.

On the basis of the forecast balance data and the Profit and Loss Budget (or Budget of Income and Expenses), the main financial indicators are calculated in the planning period. The obtained financial ratios are compared with the corresponding indicators of the previous periods to obtain a notion of the company's financial position. For example, based on the forecast balance data, it is possible to calculate financial ratios:

Liquidity coefficients: quick and current ratio, which allows to assess the financial stability of the enterprise; Capital structure coefficients: equity and gearing ratio, to get an idea of the financial independence and solvency of the company.

The projected balance sheet of the enterprise is important for potential investors and creditors, since it can be used:

• to understand which assets are growing in dynamics and by what funds;
• to assess the position of the business as a whole;
• to see how the value of the company will change as a result of its business activities during the budget period.

Company's balance sheet, free download template in Excel format

English, Russian and Finnish versions

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