What Is a Projected Balance Sheet and How Do You Create One?

Last Updated August 28, 2024

Planning for future growth is an obvious critical component of running a business, but how to do this effectively is not quite as obvious.

This is where a projected balance sheet comes into play. This document is a great tool for forecasting future financial position, anticipating financial needs, managing cash flow, and making more informed, strategic decisions down the line.

This guide will help you understand what a projected balance sheet is, why it’s so essential, and how to create a projected balance sheet as you ultimately learn how to build a reliable and accurate financial forecast.

What Is a Projected Balance Sheet?

A projected balance sheet, also known as a pro forma balance sheet, estimates a company’s future financial position. Unlike a standard balance sheet that reflects past performance, it forecasts assets, liabilities, and equity based on expected financial activities.

This balance sheet projection includes current and long-term assets (like cash and property), liabilities (such as accounts payable and loans), and equity (owners’ interest after liabilities).

Projected balance sheets help businesses anticipate financial needs, manage cash flow, and plan for growth. They provide valuable insights for investors, lenders, and management. Pro forma balance sheets are an essential tool for strategic planning, budgeting, and financial management. They offer a snapshot of a company’s anticipated financial health.

Why Creating a Balance Sheet Forecast Is Important

A balance sheet forecast helps businesses anticipate future financial conditions and prepare for potential challenges and opportunities. By projecting assets, liabilities, and equity, companies can better manage cash flow, plan for investments, and appropriately allocate resources.

A balance sheet forecast provides valuable insights for stakeholders, such as investors and lenders. It demonstrates the company’s financial stability and growth potential. The document assists in securing funding by showcasing the expected financial health of the business.

Moreover, forecasting supports strategic decision-making, which means management can set realistic goals and make informed choices. It identifies potential financial shortfalls and surpluses and guides corrective actions and strategic initiatives. Overall, a balance sheet forecast is a proactive tool for financial planning and sustainable business growth.

Considerations to Ensure Maximum Accuracy for Your Projected Balance Sheet

For a projected balance sheet to offer valuable insights, it must be accurate. Here are some key factors to keep in mind:

Historical Data Analysis

Start with a thorough analysis of historical financial data. This includes examining past balance sheets, income statements, and cash flow statements. These historical trends and patterns in assets, liabilities, and equity provide the needed information for making accurate projections. Use this data to establish a baseline for future estimates.

Integration With Financial Statements

A robust balance sheet forecast should not be created in isolation. Ensure your projections align with forecasts for the income statement and cash flow statement. The income statement influences net income, which affects earnings. Meanwhile, the cash flow statement shows changes in cash and cash equivalents.

Scenario Planning and Sensitivity Analysis

Conduct scenario planning to stimulate various strategic moves and market conditions. This helps assess potential impacts on your financial health. Additionally, perform sensitivity analysis to understand how changes in key assumptions affect your projections. This allows for adjustments based on different economic or business scenarios.

Incorporate Strategic Initiatives

Factor in any known future events such as acquisitions, divestitures, or capital expenditures. These strategic plans can significantly impact the structure of your balance sheet. Ensure these initiatives accurately reflect your projects to provide a realistic financial outlook.

Regular Review and Adjustment

Balance sheet forecasting is an iterative process. Regularly compare actual outcomes to your forecast to refine assumptions and methodologies. This review process ensures that your projects remain realistic and accurate over time.

Consistency and Reasonableness

Critically evaluate your projected balance sheet for consistency and reasonableness. This is an important key to maintaining credibility and accuracy.

What to Include on Your Projected Balance Sheet

When creating a projected balance sheet, include all relevant categories that reflect the company’s anticipated financial position. These categories are typically divided into assets, liabilities, and equity.

Below, we detail what each of these categories should include, along with examples.

Assets

Assets are resources owned by the company that are expected to provide future economic benefits. They are divided into current and long-term assets.

• Current Assets: These are assets that are expected to be converted into cash or used up within one year. Examples include:
  • Cash and Cash Equivalents: Liquid assets like cash in hand or bank accounts.
  • Accounts Receivable: Money owed to the company by customers for goods or services delivered.
  • Inventory: Goods available for sale or raw materials used in production.
  • Prepaid Expenses: Payments made in advance for services to be received in the future, such as insurance premiums.
• Long-Term Assets: These are assets that are expected to provide economic benefits beyond one year. Examples include:
  • Property, Plant, and Equipment (PP&E): Tangible assets like buildings, machinery, and equipment.
  • Intangible Assets: Non-physical assets such as patents, trademarks, and goodwill.
  • Long-Term Investments: Investments that the company intends to hold for more than one year, such as stocks and bonds.

Related: Fixes Assets vs. Current Assets

Liabilities

Liabilities are obligations that the company must pay in the future. They are divided into current and long-term liabilities.

• Current Liabilities: These are obligations that are due within one year. Examples include:
  • Accounts Payable: Money owed to suppliers for goods or services received.
  • Short-Term Debt: Loans or borrowings that need to be repaid within a year.
  • Accrued Expenses: Expenses that have been incurred but not yet paid, such as wages and utilities.
  • Deferred Revenue: Money received for goods or services that have not yet been delivered.
• Long-Term Liabilities: These are obligations that are due beyond one year. Examples include:
  • Long-Term Debt: Loans or bonds payable over a period longer than one year.
  • Deferred Tax Liabilities: Taxes owed in the future due to temporary differences between accounting and tax treatment of assets and liabilities.
  • Lease Obligations: Long-term lease agreements for property or equipment.

Equity

Equity represents the owners’ residual interest in the company after liabilities have been deducted from assets. It includes:

• Common Stock: The par value of common shares issued.
• Additional Paid-In Capital: The amount received from shareholders in excess of the par value of the stock.
• Retained Earnings: Accumulated net income that has been retained in the company rather than distributed as dividends.
• Treasury Stock: The value of shares that the company has repurchased and holds in its treasury.

How to Make a Projected Balance Sheet

There are several key steps to creating an accurate and comprehensive projected balance sheet. This process helps businesses anticipate future financial positions and plan accordingly.

Here’s a step-by-step guide to making a projected balance sheet.

1. Gather Historical Data

Start by collecting historical financial statements, including past balance sheets, income statements, and cash flow statements. Analyze these documents to understand trends and patterns in assets, liabilities, and equity. This historical context forms the baseline for your future projections.

2. Forecast Revenue and Expenses

Next, project future sales and expenses based on market research, industry trends, and internal data. Consider factors like seasonality, economic conditions, and competitive landscape. Accurate revenue and expense forecasts impact many balance sheet items, including accounts receivable, inventory, and accounts payable.

3. Estimate Future Asset Values

Forecast the values of current and long-term assets. For current assets, such as cash, accounts receivable, and inventory, use projected sales and production levels. Adjust long-term assets, like property and equipment, for depreciation and anticipated investments.

4. Predict Liabilities

Estimate future obligations by considering expected business activities and financial commitments. Project accounts payable, short-term debt, and accrued expenses based on historical trends and anticipated changes. For long-term liabilities, factor in repayment schedules for existing loans and potential new debt.

5. Calculate Shareholders’ Equity

Determine changes in shareholders’ equity by forecasting retained earnings, additional capital contributions, and dividends. This involves projecting net income from the income statement and deciding on dividend payouts based on historical patterns or strategic goals.

6. Review and Adjust

Finally, critically evaluate your projected balance sheet for accuracy and consistency. Regularly compare it to actual outcomes and adjust assumptions as needed. Conduct sensitivity analysis to understand how changes in key variables affect your projections. This iterative process helps refine your forecast and maintain its reliability.

In-Summary: What Is a Projected Balance Sheet?

An important aspect of business accounting is not just reviewing past and current performance but planning ahead.

A projected balance sheet, or pro forma balance sheet, forecasts a company’s future financial position, detailing expected assets, liabilities, and equity. It differs from historical balance sheets by focusing on anticipated future performance based on assumptions and financial projections.

Essential for strategic planning, it helps businesses manage cash flow, secure funding, and make informed decisions by providing insights into their future financial health. This tool integrates with the other essential financial statements to ensure a comprehensive view of the company’s projected financial status.

Projected Balance Sheet FAQs

What is the difference between a projected and an estimated balance sheet?

A projected balance sheet is a detailed financial statement that forecasts a company’s future financial position based on specific assumptions and planned activities. In contrast, an estimated balance sheet approximates future financial conditions using simpler, less detailed calculations. The projected balance sheet is generally more precise and is used for strategic planning, while the estimated balance sheet provides a rough approximation for immediate needs.

What is financial modeling?

Financial modeling involves creating a detailed representation of a company’s financial performance, often using spreadsheets. It includes forecasting future revenues, expenses, assets, liabilities, and equity. These models help businesses assess the impact of various scenarios and decisions on their financial health. Financial modeling is essential for budgeting, investment analysis, and strategic planning.

What factors should you consider when making financial projections?

When making financial projections, consider factors such as historical financial data, market trends, economic conditions, and business strategies. Account for potential changes in revenue, expenses, and capital expenditures. Incorporate assumptions about growth rates, cost structures, and external factors like regulatory changes. Regularly review and adjust these projections based on actual performance.

What are balance sheet forecast methods?

Balance sheet forecast methods include historical trend analysis, the percentage of sales method, and driver-based modeling. Historical trend analysis uses past data to predict future values. The percentage of sales method projects balance sheet items as a percentage of forecasted sales. Driver-based modeling links balance sheet items to specific business drivers, such as production volumes or market conditions.