Budgeted Balance Sheets: What They Are and How to Use Them

by Adarsh Raj Bhatt in November 1st, 2021

Image credit: Pexels

Key Takeaways

  • A budgeted balance sheet is a financial document that presents the estimated value of a startup's assets, liabilities, and equity in the foreseeable future. This predicted value is calculated by factoring in inflation and, possibly, increasing/decreasing capacity.
  • There are several reasons why a budgeted balance sheet is needed. It may reveal some unfavorable financial circumstances that the leadership/management would prefer to keep hidden. It acts as an important verification of all of the other schedules' mathematical accuracy and it assists founders in the computation of a variety of essential financial ratios. Lastly, a budgeted balance sheet stresses the examination of future resources and responsibilities.
  • When thinking about the structure of the budgeted balance sheet, each of the line items must be analyzed individually. This includes non-current assets, accounts receivable, inventory, cash, accounts payable, shareholders’ equity, etc. 
  • A budgeted balance sheet is a tool for the leadership/management of a startup to conduct a reality check and, if required, deal with the situation accordingly.

You've undoubtedly heard the word "balance sheet" tossed about a lot when establishing your first startup. For those who do not have a degree in finance, the word can be somewhat daunting. If you're looking for a loan or wooing investors, you ought to know not only what a balance sheet is, but also how to create one for your startup. Creating a balance sheet is not as difficult as you think.

What is a Balance Sheet?

A balance sheet is a financial statement that is created at the completion of each accounting cycle and shows the startup's current holdings, liabilities, and equity. It's also known as the "statement of financial position" because it shows the startup's financial position. 

What is Budgeting?

A master budget is developed at the conclusion of each accounting cycle. It consists of a number of smaller budgets, like the cash budget, sales and production budget, expenditure, and so on. Your startup's budget serves as a roadmap to follow all year round in order to maximize profits

What is a Budgeted Balance Sheet?

A budgeted balance sheet is a financial document that presents the estimated value of a startup's assets, liabilities, and equity in the foreseeable future. This predicted value is calculated by factoring in inflation and, possibly, increasing/decreasing capacity. Overall, this estimated financial statement determines if the existing budget proposal will be beneficial to your startup or if a new one should be developed.

Why Create a Budgeted Balance Sheet?

The budgeted balance sheet is created by amending the balance sheet for the previous fiscal year, taking into account all of the operations that are projected to occur during the budgeting phase. The following are some reasons why your startup needs a budgeted balance sheet.

  • It may reveal some unfavorable financial circumstances that the leadership/management would prefer to keep hidden.
  • It acts as an important verification of all of the other schedules' mathematical accuracy.
  • It assists management in the computation of financial ratios.
  • It stresses examining future resources and responsibilities alike.

Structure of a Budgeted Balance Sheet

Each of the line items that make up the budgeted balance sheet must be analyzed individually.

Non-Current Assets

When preparing a budgeted balance sheet, non-current assets (which usually comprise long-term and fixed assets/property) should be adjusted accordingly. Fixed assets, which are critical to the manufacturing process, usually appreciate/depreciate with time, which affects their values. Facilities, machinery, and equipment are among the assets included in this category. If a startup intends to acquire a fixed asset in the future, this could be included in the fixed asset category for the current period and adapted accordingly depending on your startup's policies.

Accounts Receivable

Within a budgeted balance sheet, accounts receivable is also updated. These accounts comprise predicted revenue and accounts receivable turnover days. Credit sales are calculated in the preparation of accounts receivable and the turnover ratio is provided, outlining the day that clients will make payments.

To estimate accounts receivable, use the following structure:

(+) Opening accounts receivable balance xx

(+) Budgeted credit sales xx

(-) Cash received against receivables (x)

Closing accounts receivable balance xxx

Inventory

The value of the safety stock that the startup maintains annually to avoid stockouts will be the closing inventory.

Cash

Cash shall be reported according to the cash budget that was previously created.

Accounts Payable

Accounts payable and receivable are handled in a similar way. The predicted accounts payable ending balance is determined by the number of payable turnover days and the amount of credit purchases anticipated in the purchase budget. 

It may be computed using the formula below:

(+) Opening accounts payable balance xx

(+) Budgeted credit purchases xx

(-) Cash paid against payables (x)

Closing accounts payable balance xxx

Shareholders’ Equity

Retained earnings and common stock/shares are included in the equity section of the budgeted balance sheet. If there are any intentions to issue shares as a means of obtaining capital to support the startup, then they should be put in the master budget and the budgeted balance sheet also needs to be modified accordingly. 

The formula for calculating retained earnings is as follows:

RE = RE_{0} - NI - D

RE = retained earnings

RE_{0} = beginning retained earnings

NI = net income profit or loss

D = dividend

The opening retained earnings balance could be seen in the preceding year's accounting records, while the net profit pertains to the startup's anticipated net profit for the next year.

Budgeted Balance Sheet Example

Assume that the production managers at ABC business wish to build additional plants to ramp up production. While increased output may result in a gain in income, there is always the risk of an increase in the balance sheet's total debt burden. This is especially important in cases when the firm has to take out a loan to expand its production capabilities. Similarly, these are some of the considerations that managers must make while reviewing a budgeted balance sheet.

Steps to Create a Budgeted Balance Sheet

I: Use the Actual Balance Sheet as a Foundation

To begin, replicate all of the line items from the previous year's actual balance sheet.

II: Gather Data from All Budgets

The next stage is to gather all of your startup's budgets that were created at the beginning of the year. Examples include production costs, sales expenditures, cash budgets, resources budgets, payroll budgets, operational and financial costs budgets.

III: Making Real Balance Sheet Modifications

We begin making modifications after we gather all of the data, including several budgets and the previous year's balance sheet. These modifications are applied to the real balance sheet by using relevant information from several budgets. For example, startups often adjust the previous year's sales depending on the present year's production and sales budgets.

A startup might have to produce schedules in addition to the three mentioned to deal with the difficulties of budget preparation, budgeted balance sheets, and income statements. Accounts receivable, inventory, income tax, and other calculations are simplified using these schedules. When concluding the budgeted balance sheet, a startup must also consider numerous rules such as tax, credit, dividends, and inventory.

Modifications:

The final phase of preparing the budgeted balance sheet is to make modifications. But, what changes should be made to the line items? Some of the modifications that a startup must apply to the budgeted balance sheet are listed below:

  • Cash-in-hand/Bank: We use the closing amount of cash from the previous year's balance sheet to implement the changes, and the cash budget is subsequently used to make the appropriate modifications.
  • Sundry Debtors: Startups use the closing balance as well as statistics from the profitability and cash budgets to calculate this. 

Formula used: Debtor’s opening Balance + Additional Credit Sales - Cash Received

  • Sundry Creditors: To calculate this, we use their ending balance and the purchase and cash budgets.

Formula used: Creditor’s opening Balance + New Credit Purchases - New Payments Made

  • Completed Stock: Use the previous year's final balance, and the Production, Sales, and Cash Budgets, to predict the finished stock. 

Formula used: Opening Finished Stock + New Production - New Total Sales (Cash + Credit)

  • Raw Material Stock: The previous year's closing balance and the material, production, and cash budgets are used to calculate the raw material stock. 

Formula used: Opening Raw Material Stock + New Purchases (both Cash and Credit) - New Consumption.

  • Fixed Assets: Startups use the closing balance from the previous year, and the Cash Budget, Predicted Plan Report, and Facility Utilization budgets. 

Formula used:  Previous year's closing balance + New Purchase - New Sale (cost price).

  • Loan/Debt: Use the previous year's closing balance, along with data from the cash budget to calculate loan or debt. 

Formula used: Previous year's closing balance + New Loan - Repayments

  • Consolidated Depreciation: Use the closing balance of accumulated depreciation from the previous year and the overhead budget. 

Formula used: Previous year's closing balance + New Depreciation

  • Paid-in-Capital: For this, use the previous year's paid-in-capital final balance as well as the cash budget. 

Formula used:  Previous year's closing balance + Extra Paid-in-Capital

  • Retained Income:  To calculate retained income, use the previous year's final balance as well as the cash budget and planned income statement.

Formula used: Last Year's Closing Balance + Estimated Profit - Estimated Dividends Paid

  • General Reserve: For this, we modify the closing amount of the general reserve from the previous year to account for any changes in the legislation in relation to reserve needs.
  • Taxation: We utilize the previous year's final tax balances, along with tax returns, cash budgets, and any legislative changes in tax rates or tax requirements for determining taxation in the budgeted balance sheet. 

Formula used: Previous Year's Closing Balance + New Payable Tax (Advance tax paid plus tax deducted at source)

Why Should Early-Stage Startups Have a Budgeted Balance Sheet?

There is a central equation for the balance sheet:

Assets = Equity + Liabilities

This equation must be balanced because when a startup's assets increase, its liabilities and/or equity must also increase for the startup's financial situation to remain balanced.

The balance sheet may not be as attractive to investors as other financial statements since it does not reflect revenue; however, this does not imply it is unimportant. The balance sheet describes how a startup's assets are sustained or funded for investors, and this tells a lot about the startup's financial health. Investors would often search for a higher equity value relative to the value of liabilities as an indication of a good investment. Having a lot of debt, on the other hand, might indicate that a startup is destined to fail in the future.

Summary

A budgeted balance sheet allows a startup's leadership/management to conduct a business reality check and, if necessary, deal with the situation accordingly. An examination of the budgeted balance sheet may reveal information about a potential startup's future performance. Similarly, this financial statement depicts the startup's assets, liabilities, and stockholders' equity in detail.

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