Balance Sheet Forecasting, are you making these mistakes?
Balance Sheet Forecasting is often forgotten when people think about Business Forecasting. If you are one of the few that do forecast your balance sheet, are you making these common mistakes? We have identified three common mistakes that most business can make when forecasting their Balance Sheet.
First Balance Sheet Forecasting Error
The first Balance Sheet Forecasting error is that businesses simply forget their balance sheet from their financial model. The balance sheet for any company represents the most complex transactions of your company and sometimes is just left out of the model because the company lacks the expertise to adequately address and assemble this critical part of the model.
Second Balance Sheet Forecasting Error
The second Balance Sheet Forecasting error can be failing to understand the correlation of operating activities against operating assets and liabilities. Most businesses should already be aware of their major operating assets and the major operating liabilities. Naturally when sales go up your accounts receivables will also increase. But does your forecasting model capture that? Then as your sales increase are you allowing or adjusting your inventory level?
Then on the flip side of your balance sheet, the timing of your payments against your accounts payable is a major outflow in the cash flow puzzle that is called working capital. For your balance sheet forecast you need to define the relationship that payables have with your operating activities and implement this relationship in your forecast model.
Last Balance Sheet Forecasting Error
The last Balance Sheet Forecasting error can be forgetting about and debt or equity transactions. So when completing your balance sheet forecast ask yourself these questions. Are you bringing in any more equity investments during the period? What is your dividend policy for shareholders? These are important as these will have a significant impact on cash flow, although none of them show up on the P&L. Obviously these items can seriously change your cash flow, and they need to be included in the financial model so you can correctly forecast your cash flow.
These are the 3 most common Balance Sheet Forecasting errors we have found. To be honest the best way to eliminate is with budgeting and forecasting software, but that is for another blog.