How To Create Projected Balance Sheets
What are projected balance sheets?
Projected balance sheets, or proforma balance sheets, are the statements that show estimated changes to a company’s financial status, including investments, other assets, liabilities and financing for equity. Company owners or accounting professionals perform projections to understand more about the business and anticipate income and expenses for a future period of time. Here are the descriptions of the main line items you’ll likely find on a projected balance sheet:
- Forecasting Balance Sheet A projected balance sheet, also referred to as proforma balance sheet, lists specific account balances on a business’ assets, liabilities and equity for a specified future time. A forecasting balance sheet is a useful tool for business planning in general, and it particularly benefits those individuals responsible for arranging and bringing in additional financing. Using a projected balance sheet, financial personnel can present lenders and investors with detailed financial information about planned future asset expansion, making it easier to persuade capital providers to supply the required financing.
- Making Forecast 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.
- Projecting Asset Items Common asset items that are most relevant 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.
- Projecting Liability Items Major liability items in a projected balance sheet may include accounts payable, short-term debt and long-term debt. 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.
- 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.
- Projecting Discretionary Financing A projected balance sheet may not be balanced upon initial projections of various balance-sheet items. Total projected assets may exceed total projected liabilities and equity, resulting in a fund shortage in future financing. On the other hand, if total projected assets are less than total projected liabilities and equity, a fund surplus exists.