Debt Factoring - The Budget Process - Part 4. What? (cont.)
In part 4 of of our series on the budget process we discussed exactly what we should be projecting for our business as part of the budget process. Today's post will continue that discussion with a focus on balance sheet items.
You may ask why we need to spend time projecting what our balance sheet will look like over the year when we have already spent time projecting our profit and loss statement that will show the financial performance of our business.
Projecting balance sheet items is valuable because it will give you an idea of what assets and liabilities your business will need in order to produce the financial results outlined in your profit and loss. Will you need to increase your line of credit with your debt factoring company? Will you need longer terms from your vendors? Will you have to increase the size of your facility to support the increase in sales you are projecting? These are just some of the questions that a good balance sheet budget will help answer for you.
Just like your profit and loss you want to spend the bulk of your time projecting the largest items on your balance sheet. Unless you have information to the contrary a balance sheet projection can be as easy as increasing each balance sheet item as a percentage of the increase in your profit and loss. When we put together the budget for our debt factoring business we know that the largest items on our balance sheet will be the accounts receivable that we purchase and the equity and liabilities we need to purchase them. If we expect our gross revenue to increase by 50% for the year and our gross profit to be stable it is safe to assume that the largest items in our balance sheet will grow linearly with the increase in gross revenue.
If we start the year with $10,000,000 in accounts receivable on our balance sheet we know that at the end of the year we will have accounts receivable of $15,000,000. Please keep in mind that your balance sheet projection could be affected by things like seasonality and other things that could cause the growth to not be as linear.
If we expect accounts receivable to increase by 50% then we know that the assets and liabilities will increase by a like amount. For our firm what is important is that once we account for an increase of 50% revenue we have to be sure that the financing we have in place with our funding sources will be able to accommodate that kind of growth. The most important balance sheet items will be different for each firm depending on what type of industry they are operating in and where the company is in its life cycle.
Look for our next article in this series later this week.
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