First, why bother with a projected balance sheet? There are two good reasons:
• Some bankers require them.
• It’s the only way to know if your bank lines or debt structure are adequate to support growth.
Here are the steps to create your balance sheet:
Step One – You will ignore cash and bank lines until the very last step. These are the two accounts that we use to make your balance sheet actually balance.
Step Two – Take the bottom-line profit from your projected income statement and add it to your last statement’s actual retained earnings. (Unless you plan a dividend or return of capital. In this case, subtract this money out from the profit before adjusting the retained earnings.)
Step Three – Calculate your future accounts receivable. Your accounts receivable amount will be equal to your average collection time multiplied by your average daily projected sales. To find out your current collection time (which will likely be your future collection time), divide your last actual accounts receivable amount by your actual average daily sales amount. Now multiply this number by the projected new average daily sales amount for the correct future accounts receivable amount.
Step Four – Calculate inventory. You will use your average inventory supply on hand in days, times your average daily costs of goods sold. To find out your existing inventory supply time, take the inventory dollar amount from your last actual balance sheet and divide this amount by your average daily costs of goods sold. Now, use this number, multiplied by your new projected average daily costs of goods sold, and you will have your inventory.
Step Five – Calculate your fixed assets. You will use the book value of your actual assets, plus any assets you intend to purchase during the projection period, minus the book value of any assets you intend to sell during the period, minus the depreciation amount for the period.
Step Six – List all other short-term and long-term assets you currently have on your balance sheet other than cash. For the most part, assume that the balances will be the same as your actual unless you know differently. You now have completed all your assets except cash.
Step Seven – Calculate your trade accounts payable balance. To do this, you will use your normal days payment time multiplied by your projected costs of goods sold. To find out your payment time, take your actual amount of accounts payable and divide by your actual average daily costs of goods sold. Use this number with your new, projected cost of goods sold and you will have an accurate accounts payable balance.
Step Eight – Calculate all debt other than your bank line. Begin with existing debt, subtract any principal that will be paid during the period and add any new loans. Correctly divide this debt into current and long-term portions.
Step Nine – Fill-in all other liabilities to the best of your knowledge. If unsure of amounts, use the same figure as the last actual balance sheet.
Step Ten – Make it balance. Add up all you assets (you have everything except cash). Now add up all your liabilities plus your net worth. Depending upon which is the larger figure, you will either add cash or a bank line to make your balance sheet come into balance.
If the assets are already larger than the liability plus equity, this means you will need a bank loan to make ends meet. If this is the case, make sure that the amount needed on the balance sheet is not more than your available credit line. Also check to be sure that if your projection called for new fixed assets, that you used new long term bank loans to support those assets purchases. We usually recommend 75% financing to keep you out of cash flow trouble.
Also, remember that if your balance sheet calls for more borrowing, this means you’ll be paying more interest expense than you likely have accounted for on your income statement projection. Go back and adjust your income statement, which means your profit and retained earnings will change, and you’ll have to readjust your balance sheet.
If you find your liabilities plus equity are more than your assets, you are in the lucky position of having at least some cash. If the cash balance appears to be excessive, however, go back and check your arithmetic. Any cash balance that appears too good to be true usually is!
