block4 2balancesheetforecasting
TRANSCRIPT
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BALANCE SHEET Forecasting
E-LEARNING COURSE: ACCOUNTING & FINANCES
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Fixed assets
Now the important hypothesis to formulate is the amount of money to invest each period. This is possibly another parameter that you want to make explicit in the model.FAn+1 = FAn – Depreciationn+1 + Investmentn+1
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Inventory
Use the “days of inventory” ratio or days of stock, another parameter to include explicitly in the Excel sheet. We discussed this ratio in the lesson “Operational ratios” in Block 2 of this course.
Inventory = Daily c.g.s x Days of stock
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Account receivabes
Use the “collection period” ratio and make it explicit in the calculations.
Receivables = Daily sales x Collection period
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Cash necessary for operations
It is important to highlight that this is the cash that the firm “ought to have”. At the end of the day, the firm could be long on (or short of) money, but that excess cash or deficit will be the result of our forecasting.Use the “days of expenses” ratio as presented in Block 2.
Receivables = Daily expenses x Days of expenses
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Equity
The general rule will be that equity will increase with retained earnings (net profit – dividends). There could be extraordinary equity operations, as share repurchases or new emissions of shares.Equityn+1 = Equityn + Net profitn+1 - Dividendsn+1
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Long-term debt
Long-term debt maturity will be known by the firm at the time of debt emission. There could be new debt contracted during the period.LTDn+1 = LTDn – Maturitiesn+1 + New Debtn+1
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Short Term Debt
Use the amount of credit negotiated with the bank.You can also leave this figure at zero and calculate it at the end of the forecasting as a plug number to balance the balance sheet.
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Account payablesWe can distinguish between “supplier payables” and “other payables”.For supplier payables, we must go back to operational ratios in Block 2.
Payables = Daily purchases x Payment period
Warning: there may be differences between past effective payment periods and the agreed payment periods negotiated with suppliers. In forecasting, it is better to use the average agreed payment period.For “other payables”, it is usual to maintain the same proportion to sales as in past periods.
BALANCE SHEET Forecasting
Cash
Account Receivables
Inventory(or Stock)
Fixed Assets
Account Payables
Short-Term Debt
Long-Term Debt
Equity
Balancing the balance sheet
As we have independently forecasted each item on the balance sheet, not surprisingly assets and liabilities will not match.If there are more assets than funds to finance them, we have a deficit i.e. we need more funds, be it debt or equity.If there are more funds than assets, there will be excess cash.
© In
stitu
to In
tern
acio
nal S
an T
elm
o, 2
012