Business Blog No 19 Budget - Balance Sheet

Last week, you finalised phasing your Profit and Loss (P&L) budget for the next financial year.

This week, we will look at another key budget document: your budget balance sheet. This is an important component of your budget because it will drive one of your key strategic objectives as noted in Blog 7: Cash!

Refer Figure 1 below as an example of a simple fictitious Balance Sheet where Column A represents broad categories of your Balance Sheet, Column B is your current actual balance sheet values and Column C is your budget balance sheet for the forth coming financial year.

Working through each of the key balance sheet items in turn with your current actual balance sheet and ratios as a starting point:-

Accounts Receivable/Debtors – refer Row 1 below – you should budget an improvement in your debtors days outstanding of at least 50% and hopefully it sits below 60days.
Inventory – refer Row 2 below – as with the Accounts Receivable, you should budget an improvement in your inventory days held of at least 5% and hopefully it is below 90days.
Accounts Payable/Creditors – refer Row 3 below – the goal is to increase the number of days; which is opposite pattern to Debtors/Inventory. It should mirror the Debtors days as a target but for budgeting purposes let’s assume you increase payable days by 5% for your budget.

As an illustration, if your Working Capital (Debtors plus Inventory less Creditors) is $100k and you improve each of Debtors, Inventory and Creditors by 5%, that equates to an extra $5k in cash to your business.

Fixed Assets – refer Row 5 below starting with from your closing down written value of Fixed Assets, add your additions and subtract your disposals and subtract your depreciation expense to calculate a budget Fixed Assets values.
Leave provisions (Annual Leave and Long Service Leave) – refer Row 6 below. Using your closing actual leave provision values and assuming that the budget is for all employees to take their 4 weeks Annual Leave, the Budget Annual Leave provision will only increase by pay rate increases. Long Service Leave is a little more difficult as the entitlement and taking of long service leave needs more detailed analysis, sometimes at an individual level.
Company Tax Payable/GST – refer Row 7 below. These amounts payable to the government should be estimated for budget purposes.
Miscellaneous Provisions/Prepayments – budgeting for these general accruals and prepayments should be fairly straight forward, use closing values as a guide to calculate these.

Summing up all of the above gives you your Funds Employed values for both actual and your budget. Refer Row 9 below. Funds employed gives you the value your net assets excluding bank/loans, of the business. The way these net assets have been funded through shareholders equity, loans and bank balances is totalled up at Row 14 below. Note that as a Balance Sheet principle, it needs to balance whereby row 9 is to equal row 14.

The Shareholders Equity section of your Balance Sheet is where your accumulated profits and capital amounts reside. Your P&L Budget Profit After Tax will transfer into this section Refer Row 10.

The ‘magic’ number/s that drops out to balance your budget balance sheet are your loan/bank balance (Rows 12 and 13 below). This will give you the picture of where the financing of your business is projected to be based on your P&L Budget and the components of your budgeted Balance Sheet.

The question/s might be, do you need to organise additional funding? Will you have excess funds available for investment? Do you need to review your capital expenditure?