Balance Sheet Planning in CPM
Most companies will plan for the Income Statement as most people want to see how the business is doing. They do not pay much attention to balance sheet planning as they overlook the importance of Balance Sheet planning. Balance sheet planning is as important as Income Statement planning. Balance sheet planning will provide the cash flow projection, decision on investments, meeting on bank coverage ratio as well as the overall financial health of the company.
Many companies face challenges to produce accurate balance sheet forecasts. You may consider following this approach to start on balance sheet planning.
1. After the Income Statement planning, using the opening balances of the Balance Sheet accounts as the starting points.
2. Group the balance sheet into four major categories, net working capital, fixed assets, financial debt, and equity
3. Create a continuity schedule for each category.
4. For Net working capital (current assets – current liabilities), make assumptions and drivers for DSO (Days Sales Outstanding) and DPO (Days Payable Outstanding) for receivables and payables create supporting schedules like inventory and prepaid and accruals.
5. For fixed assets, use last year Fixed Assets, add the Capital Expenditure, and deduct the depreciation.
6. For financial debt, use last year’s financial debt to adjust the change in debt (pay down the principal payments and increase in new debts).
7. For equity, use last year’s equity, add net income, deduct dividends, and add the change in equity (increase/retire in stock).
8. For balancing the balance sheet, plug the difference into a cash account to ensure the balance sheet is balanced.
Three basic types of forecasting methods can be used such as qualitative, time series method, and casual. The qualitative method is obtaining expert opinions, special events with or without using the past into consideration. The time series method is on patterns and pattern changes entirely driven by historical data. The casual method is highly refined and specific information using historical data analysis projection.
A number of CPM platforms can help to automate balance sheet planning to store detailed and aggregated values and linking to the main or consolidated module. These platforms will usually have standard sub-modules like fixed assets, receivables and payables are common for balance sheet planning. However, some balance sheet accounts are unique to the client’s business, and depending on the CPM platform could require customization.
Our team has years of planning experience and offer vendor-agnostic CPM platform evaluations providing recommendation on CPM platform suitable for your needs.