Forecasting the Balance Sheet

Welcome to this week’s installment on planning and forecasting! Head over to our Youtube channel or take a look at resources like Lumen Learning, eFinancialModels, and Brixx to learn more.

Have you ever done a forecast, including your sales, your expenses, and your beginning cash, but when you calculate it all down and then that month goes by and you’re wondering, “Where’s all my cash?” Perhaps that forecast wasn’t quite as detailed as it needed to be, because there’s this item called working capital.

What is working capital? Working capital is basically your net current assets. Your net current liabilities and your net current assets are things like cash, accounts receivable, and inventory that you expect to be turned into cash in the next 12 months. Current liabilities are simply the reverse of that; those are bills that must be paid within the next 12 months or shorter. Each one of these items needs to become a part of your forecast as well, because you may have your cash, but say you sell something and now have to buy or make inventory to replace the product, or you sell on credit and give 30 or 60 day terms to your customer, meaning you’re not gonna get that cash back for a couple of months down the road. Tt’s okay as long as it’s customary in your industry, but each one of those things has to be tracked and forecasted so that you can have a a predictable model of what your cash flow is going to be.

At the end of the day, your cash is what keeps you in business. There is bank financing centered around things such as receivables and inventory, which can help you get through a cash crunch that can be caused by growth. A growing company will use a lot more cash and have a far bigger demand than a company that is not growing or is actually slowing down, so that gets into the whole business cycle of things which we could talk about in the future!

As always, we want to remind you as you’re practicing your forecasting that there are other items that need to be addressed other than what’s just on your P&L. There are balance sheet items, debt payments, and other pieces of working capital that need to be addressed, and this is what we help companies do and plan for. If we can help you, please reach out and give us a holler.

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