What is a Budgeted Balance Sheet?
The budgeted balance sheet contains all of the line items found in a normal balance sheet, except that it is a projection of what the balance sheet will look like during future budget periods. It is compiled from a number of supporting calculations, the accuracy of which may vary based on the realism of the inputs to the budget model. The budgeted balance sheet is extremely useful for testing whether the projected financial position of a company appears to be reasonable. It also reveals scenarios that are not financially supportable (such as requiring large amounts of debt), which management can remedy by altering the underlying model.
A budgeted balance sheet should be constructed for each period spanned by the budget model, rather than just for the ending period, so that the budget analyst can determine whether the cash flows estimated to be generated will be sufficient to provide adequate funding for the company throughout the budget period.
What Does Budgeted Balance Sheet Mean?
At the end of each period, management usually starts planning a master budget for the next period. The master budget is made up of a ton of smaller budgets for sales, cash, selling expenses, and general expenses. All of these budgets are combined to make one big, comprehensive financial plan.
Once the master budget is done, management has to see what the company financial statements will look like if the company can achieve their goals for the period. That’s when the budgeted income statement and balance sheet are made.
These two reports summary the impact the budget will have on the financial position of the company if the budgeted numbers are met. Think of it like a sanity check. Management wants to check their plans to make sure they are in the best interest of the company in the long run.
The budgeted balance sheet is developed by beginning with the balance sheet for the year just ended and adjusting it, using all the activities that are expected to take place during the budgeting period. Some of the reasons why the budgeted balance sheet must be prepared are:
- It could disclose some unfavorable financial conditions that management might want to avoid.
- It serves as a final check on the mathematical accuracy of all the other schedules.
- It helps management perform a variety of ratio calculations.
- It highlights future resources and obligations.
Budgeted Balance Sheet Components
Companies and businesses prepare financial projections at the beginning of each financial period. Likewise, the process involves budgeting for sales as well as manufacturing costs, expenses, and raw material costs.
Upon making estimates on all the assets, liabilities, and equity expected in a given period, accountants will move forth and start preparing the budgeted balance sheet. The financial statement will consequently provide management insight on how a company’s balance sheet would look like at the end of a given accounting period.
Being an estimate, the values in the budgeted balance sheet are arrived at by making inflation adjustments or by increasing or decreasing capacity. Likewise, adjustment is made at the beginning balances of long term assets, liabilities as well as stockholders equity.
Items Considered in Preparing Budgeted Balance Sheet.
Non-current assets, mostly made up of fixed assets or property, must be adjusted accordingly in the preparation of a budgeted balance sheet. The adjustments are made because fixed assets being crucial to the production process tend to appreciate or depreciate over time. Some of the assets taken into consideration include plants, machinery, equipment, etc.
If a company has any plans to purchase a fixed asset in the future, then it may be included in the current period’s fixed asset and adjusted accordingly based on the policies of a company.
Accounts receivable are also adjusted accordingly in a budget balance sheet. The accounts, in this case, include projected sales and the turnover receivable days. In the preparation of accounts receivable, credit sales are estimated and the turnover ratio indicated detailing the day customers will make payment.
The equity section comprises of retained earnings as well as common stock/ share. If there are any plans to issue shares as a way of raising capital to finance the business, such financial plans must be included in the master budget and adjusted accordingly in the budgeted balance sheet.
Need or Importance of Budgeted Balance Sheet
The following are the reasons why management will want to prepare a budgeted BS:
- It helps to identify any unfavourable financial transactions that a company may want to get rid of.
- It also ensures the mathematical accuracy of other schedules or inputs.
- A company can use it to calculate different ratios.
- For deciding future activities and actions, it becomes a guiding document.
- It can also trigger the areas where the company needs to work or change its strategies.
- It becomes the base for revisions or enhancements in the working capital limits.
Steps to Prepare Budgeted Balance Sheet
Following are the steps to prepare a budgeted BS:
1. Use Real Balance Sheet as Base
The first step is to take all the line items from the last years’ real balance sheet.
2. Collect the Data of All Budgets
The next step is to collect all the budgets that a company prepares at the start of the year. These budgets could be production budget, sales budget, cash budget, raw materials budget, salaries and wages budget, operating and financial expenses budget, and more.
3. Making Adjustments to Real Balance Sheet
Once we have all the data, including all the budgets and last year’s balance sheet, we start to make adjustments. These adjustments are made to the real balance sheet using data from different budgets. For instance, we adjust last year’s sales based on sales and production budget for the current year.
Apart from the above three steps, a company may also need to prepare schedules to overcome the complexities in preparing the budgets and budgeted BS and income statements. These schedules help with the calculation of accounts receivable, inventories, income tax, and more. Additionally, a company also needs to consider several policies such as tax, Credit, dividend, inventory, and more while finalizing the budgeted BS.