Page 166 - DMGT521_PROJECT_MANAGEMENT

Unit 9: Financial Estimates and Projections

growth and how it may be supported by increased financing through both debt and equity. A Notes
projected balance sheet provides the most relevant financial information needed in the business
planning process.
1. Forecasting Balance Sheet: A projected balance sheet, also referred to as proforma balance
sheet, lists specific account balances on a business assets, liabilities and equity for a specified
future time. A forecasting balance sheet is a useful tool for business planning in general,
and it particularly benefits those individuals responsible for arranging and bringing in
additional financing. Using a projected balance sheet, financial personnel can present
lenders and investors with detailed financial information about planned future asset
expansion, making it easier to persuade capital providers to supply the required financing.
2. Making Forecast Assumptions: To create a projected balance sheet, a business makes
certain assumptions about how individual balance sheet items may change over time in
the future. Business plans often focus on anticipated future sales. A projected balance sheet
also starts with forecasting sales revenues. Certain balance sheet items, such as inventory,
accounts receivable and accounts payable, exhibit relatively constant relationships to
sales, and projections on those items can be made based on projected sales. Other balance
sheet items, particularly fixed assets, debt and equity, change only in accordance with a
business’s policies and management decisions, independent of future sales.
3. Projecting Asset Items: Common asset items that are most relevant in a projected balance
sheet include cash, accounts receivable, inventory and fixed assets. While the amount of
cash expected to be generated from the forecast sales increase may accumulate at a
comparable rate, cash balance shown on the balance sheet is not necessarily in proportion
to the sales increase. A business may decide to reinvest part of the cash received, allowing
cash holdings to grow at a lower projected rate. Both accounts receivable and inventory
generally change in proportion to sales increase because more sales can leave more
customers on account and require more inventory in stocks. Future changes in fixed assets
are not likely to be in proportion to sales and often depend on a business’s decision about
future capital investments.

4. Projecting Liability Items: Major liability items in a projected balance sheet may include
accounts payable, short-term debt and long-term debt. Accounts payable often are the
result of accepting trade financing on inventory purchases. If more sales require more
inventory, the increase in inventory likely leads to an increase in outstanding accounts
payable. Thus, accounts payable likely change in proportion to sales. Projection on short-
term debt, such as notes payable, often depends on a business’s financing policy. To
accommodate a sales increase, a business may choose to increase short-term financing at
a certain rate each year. Long-term debt usually is left unchanged in initial projections and
may change later if additional financing is needed.
5. Projecting Equity Items: Owners’ equity and retained earnings are the two common sources
of equity financing. Similar to projecting long-term debt, owners’ equity is also left
unchanged in initial balance-sheet projections. Whether or not a business expects to issue
additional equity depends on future financing situations. If a shortfall in asset financing
through other means exists, a business needs to project an increase in either owners’
equity or long-term debt to make up the deficit. Projecting retained earnings essentially
relies on the net-income projection in a projected income statement for the same future
period.

6. Projecting Discretionary Financing: A projected balance sheet may not be balanced upon
initial projections of various balance sheet items. Total projected assets may exceed total
projected liabilities and equity, resulting in a fund shortage in future financing. On the
other hand, if total projected assets are less than total projected liabilities and equity, a

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