How To Prepare Projected Balance Sheet

How To Prepare Projected Balance Sheet – Cash and cash equivalents Negotiable security certificates of deposit (CD) Accounts receivable (A/R) Notes (A/R) Notes payable vs. receivables Prepaid expenses Restricted cash inventory Work in progress (WIP) Current assets Fixed assets Allowance for duplicate accounts and Equipment value (VPP and Property equipment) LIFO Average cost method Actual assets Straight-line depreciation Double-declining balance method

Accounts Payable (A/P) Accrued Expenses Accrued Expenses Vs. Accounts payable Deferred income Unearned income Receivables Accounts payable Notes Payable Dividends Payable Non-current liabilities Long-term debt (LTD)

How To Prepare Projected Balance Sheet

Book value Equity Retained earnings Additional paid-in capital (APIC) Treasury share retention ratio Plow-back ratio Book value per share (BVPS) Accumulated deficit Other Comprehensive Income (OCI)

Simple Financial Projections Templates (excel,word)

Imagine that we are responsible for building a 3-statement model for Apple. Based on analyst research and management advice, we completed the company’s income statement projections, including revenue, operating expenses, interest expense and taxes – down to the company’s net income. Now it’s time to go to the balance sheet.

Typically, the main balance sheet section of a template will either have its own dedicated worksheet or be part of a larger worksheet that contains other financial statements and schedules. Before we dive into individual line items, here are some balance sheet best practices (click here for a complete guide to financial modeling best practices):

We begin the balance sheet forecast by forecasting working capital items. (For a complete guide to working capital, read our “Working Capital 101” article.) Broadly speaking, working capital items are driven by the company’s revenue and operating forecasts. Conceptually, working capital is a measure of a company’s short-term financial health. Working capital items include:

Projecting Income Statement Line Items

The largest components of most companies’ long-term assets are fixed assets (plant property and equipment), intangible assets, and increasingly capitalized software development costs.

These line items are also largely driven by the company’s operations. In other words, more revenue, more capital spending and intangible purchases we expect to see. Unlike working capital, PP&E and intangible assets are depreciated or amortized (with some notable exceptions such as land and goodwill). This creates a layer of complexity in the prediction, as shown below:

Use stock research or management advice when available. In the absence of guidance, assume purchases are in line with historical trends as a % of sales.

Provisional, Estimated And Projected.

Most companies do not offload assets regularly, thus preventing specific advice, assuming no asset sales. That said, some industries (such as REITs) require recurring asset sales forecasts.

Companies typically disclose future amortization expense for current intangible assets in the 10K footnotes. Of course, if new purchases are expected, this will have an incremental impact on future amortization. In this case, apply the historical amortization/purchase ratio.

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Goodwill is usually the straight line in a 3-state financial model. In other words, if goodwill on the last balance sheet is $400 million, it remains at $400 million indefinitely. (For more on goodwill, read our quick start on how goodwill is created.) That’s because doing anything else means either:

It is difficult to reliably predict these things. An exception to this is when the private company model amortizes goodwill.

Deferred taxes are complex (here’s a primer on deferred taxes) and, as you’ll see below, either grow with income or are straight-line in the absence of a detailed analysis.

How To Prepare And Analyze A Balance Sheet

You will often come across items that are all simply marked “other” on the balance sheet. Sometimes the company will provide disclosure in the footnotes about what is included, but other times it will not. If you don’t have good details about what the line items are, the straight lines are the opposite of growth and revenue. This is because unlike operating assets and liabilities, there is a chance that these items are not related to operations such as investment assets, pension assets and liabilities, etc.

Below we see Apple’s 2016 debt balance. We observe that Apple has both short-term commercial paper and long-term debt (including a portion due this year):

Let’s focus on long-term debt for now and come back to commercial paper later. Companies will usually issue a note under disclosure about the future maturity date of long-term debt. In Apple’s 2016 10K, you can see a typical debt maturity disclosure that identifies all upcoming maturities of long-term debt (including the current $3.5 billion portion of long-term debt due in 2017):

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So we know these notes will be due – after all, Apple is contractually obligated to pay them off. This may lead you to believe that the debt forecast is just a matter of reducing the current debt balance with these scheduled due dates. But a financial statement model is supposed to represent what we think it will be

This is because most companies replace (or “refinance”) maturing debt with new debt. Companies do this to maintain a stable capital structure. This means that even when the footnote reveals that debt will be paid, it is more appropriate to assume that debt remains at current levels or will grow to reflect a fixed capital structure. Mechanically, we do this by either:

We have now identified forecasting techniques for all assets and liabilities except for cash and the revolver. Now we turn to forecasting line items in the statement of shareholders’ equity. The four most important line items in this section are:

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Companies provide stock-based compensation to incentivize employees with shares in addition to cash payment. Companies primarily issue stock options and restricted stock to employees.

Some companies buy back their own stock when they have excess cash. For example, if a company buys back $100 million of its own stock, treasury stock (a counter account) decreases (debit) by $100 million, with a corresponding decrease (credit) in cash.

Conceptually, a share buyback is essentially a dividend paid to the remaining shareholders in the form of additional ownership in the company. In our example, the 100 million dollars that the company wants to return to shareholders can actually be achieved in one of two ways: through a cash dividend or equivalently through a buyback of 100 million dollars. The per-share increase for each shareholder (all else being equal) should add up to exactly $100 million in total value. One of the advantages with the share buyback approach is that, unlike a cash dividend, taxes paid by shareholders on the buyback can usually be deferred.

Tips For Business Forecasting When Historical Data Doesn’t Cut It

From a modeling perspective, except for some management advice or thesis on future buybacks, if a company has historically engaged in recurring buybacks (the amount of buybacks can be found on the historical cash flow statement), the straight line is the amount in the forecast period. usually reasonable.

Stock issuances and repurchases that we forecast on the balance sheet directly affect stock forecasts, which are important for forecasting earnings per share. For a guide on how to use the forecasts we just described to calculate future shares outstanding, read our introduction to Forecasting a Company’s Shares Outstanding and Earnings Per Share.

Retained earnings is the link between the balance sheet and the income statement. In a 3-statement model, the net income will be referenced in the income statement. Meanwhile, except for a specific thesis on dividends, dividends will be forecast as a percentage of net income based on historical trends (holding the historical dividend payout ratio constant).

Sample Balance Sheet And Income Statement For Small Business

According to GAAP, there are many financial activities whose gains and losses do not affect net income: Gains and losses on foreign currency conversion, derivatives, etc. Instead, they are classified as “other comprehensive income” (OCI) and accrued in a separate balance sheet line item from retained earnings. You can see this in Apple’s balance sheet (note that the “accumulated other comprehensive income” line fell by $1,427 million during the year from an accumulated balance of $1,082 to a negative $354 million):

And in a separate schedule in the 10K, you can see a complete variance of $1.427 million in year-over-year changes in OCI (since the income statement is a year-over-year variance on changes in retained earnings):

OCI’s prediction is quite simple. Because the gains and losses flowing through this line item are difficult to predict, the safest bet is to assume no year-to-year changes going forward (in other words, the straight line from the last historical OCI balance on the balance sheet ) :

Understanding Financial Projections And Forecasting

Last but not least, we turn to forecasts of short-term debt and cash. Forecasting short-term debt (in the case of Apple commercial paper) requires a completely different approach than any of the line items we’ve looked at so far. This is a key forecast in a 3-state integrated financial model, and we can only quantify the amount of short-term financing required after forecasting the cash flow statement. This is because cash and short-term debt (the turret) act as a plug in most 3-state financial models – if the model, after accounting for everything else, predicts a cash deficit, the turret will grow to finance the deficit a. Conversely, if the model shows a cash surplus, the cash balance will simply grow.

Finally, any balance sheet forecast is incomplete if the balance sheet does not balance. While the reported balance sheet of the company will always show assets equal to liabilities plus equity, when forecasting the balance sheet, any number of errors can cause the model to be out of balance. In fact, the strength of a 3-statement model is that the three statements are connected.

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