Dynamic Cash Flow Projections » Balance Sheet Projections

The Purpose Of The Balance Sheet Projections

After you have finalized the entries for the Projected Cash Flow Statement, begin working on the projected Balance Sheet. The projected B/S allows you to quantify and project debt levels and financial ratios. Furthermore, it gives managers a feel for how the company’s assets, liabilities, and equity will change over time. These changes are a result of various assumptions and decisions management made and go back to the Assumptions Worksheet.

Don’t forget that the Balance Sheet projection will feed formulas in the Cash Flow Statement projection and that the Cash Flow Statement will feed formulas in the Balance Sheet.

How To Project The Balance Sheet

Of all the projected financial statements, the B/S projections are the trickiest to do. The main reason is because you will need to cycle back and forth between to the projected Cash Flow Statement and the projected Balance Sheet. Changes in the Cash Flow Statement influence a number of the items on the Balance Sheet projections and vice versa. Also make adjustments to make sure that both the Total Assets as well as the Total Liabilities and Shareholder’s Equity are equal. This task is the main thrust of what you are trying to accomplish in the Balance Sheet projection.

For current asset and liability accounts other than Accounts Receivable, Inventory and Accounts Payable, you can simply “flat line” using the average for those accounts for the last couple of years.

If you feel that is not representative, then substitute what you know is a more appropriate value. It will be the changes in your A/R, Inventory and A/P accounts which will impact your company’s cash flow. You will want to focus your best efforts on projecting these using the best available information.

When you are done, review and balance the B/S projections to make sure everything fits. The most obvious place to look for errors is the balance sheet (i.e. Total Assets do not agree with Total Liabilities and Equity).

One important place to check for B/S error is to make sure that the Retained Earnings “roll forward” correctly. That is, add net income from the Income Statement projection each month and subtract shareholder distributions from the Cash Flow Statement projection.

Another place to double check is the assumption sheet and any formulas and/or links you have in the B/S.