The Ultimate Balance Sheet Forecast Guide (Example + Tips)

April 8, 2022 by Adam Hoeksema

For startups, the future always feels uncertain. But the reality is that every company is vulnerable to changes in the market and the long-term effects of poorly-made decisions in the early stages of the project. 

Conscientious business owners will often adopt a continual improvement approach, and as part of this, good record keeping plays a major role, but records are only half the picture. It’s possible to use historical data to glean some insight into what might happen, say, three years from now, if you hire more staff next month. Or how taking on another loan might affect your liabilities in a year. 

This isn’t magic. On the contrary, it’s actually quite a simple extrapolation. A balance sheet forecast is a common document for anyone wanting to know where their business will be in five years. If that sounds like you, then you’re in the right place.  

What is a Balance Sheet Forecast?

Every small business should have a balance sheet as part of its accounting financial statements. If this is something you’re lacking, there are plenty of online templates to get started, but for this article, we’re going to assume you’ve already got one. 

As part of a robust business plan, a balance sheet forecast aims to produce a prediction output based on historical data in the balance sheet to describe the company's financial position over a period of around five years. 

This information can then be used to direct business decisions and suggest targets or expected outcomes of business operations. 

The forecast becomes a document called a projected balance sheet: a detailed prediction of the company’s future condition, including elements such as future revenue, assets, and liabilities.

It’s essentially the same principle as any forecast: you’re taking historical data on various factors and using it to estimate the condition of these factors in the future. 

Note: A financial forecast differs from a budget in that budgets contain a plan for the company’s direction, and financial forecasts state realistic expectations of the future based on previous data. While a forecast can affect policy, it’s not a plan in and of itself. 

The Importance of a Projected Balance Sheet

For startups, getting an idea of what the future holds can bring much-needed confidence and stability to your business practices. A forecast lets you figure out what you’ve got, what you’re going to get, and what you need to give back. This information leads to designing budgets, reinforcing business models, and adjusting trajectories.

One of the major ways a balance sheet forecast helps is to get a handle on your debts and other liabilities. Having accurate projections for these helps reassure lenders that their contributions will be returned and increases funding opportunities. 

A well-made projected balance sheet allows you to explore multiple possibilities in your projections. By changing the values in the projection formulae based on optimistic, realistic, and worst-case estimates, you can get an idea of the outcomes of multiple strategies and create plans accordingly. Want to invest in more equipment next year? Tweak the value in the table and see how the consequences play out in the prediction before ever committing. 

This same mechanism allows you to test out various business model elements, the consequences of growth, the long-term effects of cutting expenditures, or really any variable involving your ins-and-outs that you can think of. You’re essentially running simulations on your ideas before realizing them without risking any losses.  

Types of Balance Sheet Forecast

So, with all these advantages, it’s about time you learned how to make one. There are three main methods for predicting future outcomes, and they vary in complexity and objectivity. Different methods are suitable for different circumstances, so it’s handy to know the difference before deciding. 

A balance sheet forecast typically spans five years and can use qualitative, time-series, or causal methodologies, depending on the data available. 

  • Qualitative Forecasting is often chosen when the company is in its infancy, and there isn’t much historical data available to extrapolate. These are subjective forecasting methods and rely on analysts’ or customers' opinions to form an ‘educated guess’ as to how the company will look in the future. 

Since this method relies on very little hard data, it’s prone to bias and errors in judgment. As such, it’s the least reliable and should only be used when real data isn’t available. However, there are some advantages to it. 

The flexibility of the method can gather valuable insights from the opinions of industry experts that don’t need to fit any structured numerical format. Further, at the early stages of a startup, it’s a much better option than having no balance sheet forecast at all. 

  • Time-Series Forecasting is a quantitative approach, and as such, it appeals to investors and other stakeholders. 

Time-stamped, historical data is analyzed and used to build future policy and business direction models. It’s recommended that you start with at least two years of historical data for this, so it’s unsuitable for early start-ups, but if the data is available, it becomes a powerful and useful forecasting method. 

This method takes the subjectivity out of the assessment and helps to find straightforward patterns, but it is more simplistic than causal forecasting. 

Time-series forecasting assumes that present conditions are entirely determined by previous patterns, making it a simple trend projection. As such, it can miss out on other variables that affect future patterns. 

However, the strength of this approach comes from this simplicity. More complex assessments are available, but they require a lot more variables to be projected, and therefore data requirements are higher, leading most projections to use this method instead.  

  • Causal Forecasting can take into account multiple variables and is often the most detailed financial forecasting method. Like any quantitative method, it is stronger with more data, but it differs from time-series forecasting by considering the causal relationships between variables to make predictions. 

However, the more variables included in the forecast, the more difficult the forecast becomes. Another reason these models are complicated is that each independent variable also needs to be forecasted accurately to be able to predict how they will affect your business. As such, despite being the most detailed, this complex forecasting method isn’t suitable for many uses and is often less accurate than a time-series projection. 

Therefore, the best forecasts are usually time-series due to the optimal balance between the amount of data and simplicity. Time series uses no extra variables, and although this can be a weakness, it typically results in a more accurate prediction over the more complicated methods with more necessary calculations. 

Once you’ve decided on the suitable method for your needs, it’s time to learn what kind of data should go into a forecast. 

How to Forecast a Balance Sheet

As mentioned, there are various methods of forecasting that might be useful under differing circumstances, but for this example, we’ll assume you’re going to be forecasting using a time-series method. For this, the historical data should cover at least two years, and from these data, you’ll be able to build a solid forecast in an app as simple as Excel. 

Though the forecasting method will vary depending on the data available, on the whole, the line items should be the same, no matter which method you’re using.

The first step is to design a convenient format for the balance sheet forecast. This might involve changing the order of data from financial reports to make it easier to use – something that can be time-consuming and tricky but will save a lot of hassle in the long run. To make this process a lot simpler, there are templates for this like we have here at ProjectionHub for 57 different industries and business models.

Find a Projected Balance Sheet Template for your Industry!

There are many line items you can project, but it’s important for a balance sheet forecast to include line items covering assets, liabilities, and equity. These can be broken down in numerous ways, but here are some suggestions for what to include under each category: 

Assets 

  • Revenue – By aligning your revenue data behind five years of forecasting columns, you can take the average increase in revenue as a percentage over the previous years – let’s say it’s 10% on the previous year - and add a simple formula to project what this will mean over the coming years. For this example, it means multiplying the previous year’s revenue by itself plus 10%. 
  • Gross Profit – Data for these should come from the cash flow or profit/loss statement. Looking at these values, you can calculate a simple trend from the previous years, as you did in the previous stage. Convert your gross profit margin to percentages and incorporate that percentage increase into your projection formula. 
  • Property Plant and Equipment – Fixed assets need to be considered in terms of depreciation and expenditure to get an idea of what you’ll have in the future. Simply add your capital expenditure and then remove depreciation from the value of your fixed assets for the previous year to project future fixed asset value. This step can be very complicated when it’s tricky to identify the change in depreciation. 

Liabilities

  • Debt – This involves forecasting both short and long-term debt, including the interest accrued on them. Review the current debts you have and how long until they are paid off. Total net debt is total debt minus cash. Use this to establish the change in debt and project the outcome over the following years.

Equity

  • Shareholder capital – To calculate the change in this equity, you’re looking at the value added to stakeholders. In order to create your percentage figure for this, take your current return on shareholder capital and subtract the initial return from it. 

Divide the difference by the initial return on equity and multiply it by 100 to get that number as a percentage value. This percentage value can then be used for your extrapolation formulae. 

There are other line items that can be useful in a balance sheet forecast, but these are some of the common elements, and the process for all of them is similar: identify the measure of change and add it to the previous year to project onto the next one. 

Although this practice can be complicated at first, and you may need to re-write your spreadsheet a few times to get it perfect, once it’s set up, it’s a relatively simple exercise. If this seems easy enough, have a look at some of the ways you can improve your forecasting practices.

Improved Forecasting Practices

There are some handy tips for improving your organization and agility with excel balance sheet forecast sheets. 

  • When using formulas in Excel, it’s useful to have a ‘forecasting table’ from which you can reference metrics such as the % increase in revenue expected. This way, it doesn’t have to be written into each formula and can be altered to see what happens to the projection when the value is changed from optimistic to realistic to worst-case estimates. 
  • Some elements of Generally Accepted Accounting Principles (GAAP) are not optimal for balance sheet forecasts. If you’re receiving financial statement from accounting in order to collate your historical data, you might find that it’s not in the best format for forecasting and needs to be modified. 

For example, GAAP states that line items with the same drivers should still be separated, which isn’t useful for forecasting and can use up valuable space, complicating the process. Forecasting should be focused on the drivers rather than the items, and line items with the same drivers can be combined when forecasting to save time. 

  • The forecasting for all line items should be done in designated worksheets or tabs of the same worksheet. The final version of the balance sheet forecast will be a consolidated forecast from all of these calculations. 
  • Lastly, using pre-made templates is a huge timesaver. These templates can have tables and formulas already set up for everything you need to project and can be tailored to suit your specific business. They can also help you pick an appropriate projection model based on your available data and the needs of your projection. This option is great if you are starting up and not confident about designing the entire balance sheet forecast yourself. 

ProjectionHub offers all of this and the option to adjust their templates based on your requirements. Their templates allow you to enter everything you know about your revenue, expenses, assets, and liabilities, and the projections come from their in-built formulae. 

Balance Sheet Forecast Example

share capital

[source: https://corporatefinanceinstitute.com/resources/knowledge/accounting/share-capital/]

Taking the above example of a balance sheet forecast from the Corporate Finance Institute, it’s possible to identify the three main categories of line items; assets, liabilities, and equity. 

Looking at the historical data in blue, you can see the forecast extrapolates from previous entries to estimate the condition of these line items over the next five years of the forecast period. As you would expect, values like ‘cash’ that were increasing over the previous years continue to increase into the future, and values like ‘debt’ that have been decreasing are projected to continue decreasing. Values like equity capital, which are the same every year, remain the same. 

The three major categories are projected independently and then added together to create total assets, total liabilities, and total equity projections. 

In this forecast, as will be the case with many companies, equity capital remains the same. This is because it’s usually a permanent source of finance, with no need to return it when the business is still running. 

The specific formulae in this example aren’t shown and will take into account data not on this page; for example, for calculating accounts receivable, the formula for projecting will reference data such as sales revenue. These data can be placed in the reference table outlined in the previous section, allowing their values to be tweaked to project the effect of different possible inputs.  

Conclusion

Learning how to forecast a balance sheet is a great way to get an impression of the direction of your company’s financial future. Depending on your capabilities and your historical data, a balance sheet projection can be rough and ready – as in the case with a qualitative forecast – or exceptionally intricate, such as with detailed, causal forecasts. 

Most often, however, there’s a comfortable middle-ground in time-series forecasts, which are relatively uncomplicated and accurate enough for the needs of most. 

Designing a projected balance sheet yourself can be time-consuming, especially if you have little to no experience in doing it, but the process is ultimately rewarding, and if you do get stuck or have little time, there are well made, tailored templates available from ProjectionHub that have everything set up and ready to go. 

Making accurate projections as to the state of your company in the future isn’t just about your imagination; it’s about knowing how to use the data you’ve got, and from it, how to forecast a balance sheet. Using the appropriate assessment method and the right kind of information, you can peer well into your company’s future and design your business procedures accordingly. 

Not ready to make a full blown projected balance sheet yet? Check out our free balance sheet template in this video.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 40,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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