Report name: Sample Forecast

How Forecast Assets and Liabilities are Calculated

This is a working example of how your forecast analysis of assets and liabilities, including working capital and net assets are calculated.

Fixed Asset Values

Figurewizard calculates net asset values, applying them to the balance sheet forecasts using nothing more than your forecast figures for the year or years ahead.

That includes calculating both the net asset values for fixed assets after depreciation and their written down tax value (WDTV) after the deduction of capital allowances. Examples showing the step-by-step calculations to arrive at WDTV are shown in the sample corporation tax forecast.

The forecast illustrates how depreciation is replaced by capital allowances, which are then deducted from taxable profit. The first and most significant of the allowances is the annual investment allowance (AIA) for new main pool assets (fixtures, fittings, plant commercial vehicles and so on). 

The current (2019) AIA threshold for new main pool assets is £200,000, rising to £1 million from 2020.

Assets and VAT

Figurewizard calculates and applies VAT without any input called for from the user. This includes calculating and applying quarterly remittances or refunds.

As a result, everything is entered excluding VAT with the single exception of company cars. This is because VAT for cars cannot be set off as an input tax. By the same token, when a company car is sold VAT is not required to be added to the transaction.

None of this applies however to commercial vehicles, which are regarded by HMRC as main pool assets and therefore subject 100% annual investment allowance in the year they are acquired.

Current Assets

With two exceptions, forecast current assets only lists the values of assets that can reliably be expected to be turned into cash during the normal course of trade.

The most important of these are cash itself, accounts receivable and stock / inventory. The two exceptions are asset finance interest in suspense and loan interest in suspense.

Current Liabilities

Unlike current assets, current liabilities are not restricted to those incurred in the acquisition of current assets. All debt including that for borrowings, such as the bank overdraft, financing the acquisition of both current and fixed assets or dividends declared and outstanding for payment are included.

How the Working Capital Forecast is Calculated

Current liabilities less current assets returns net current assets which in turn defines working capital. That represents liquidity which is the source of cash flow from core trading operations.

A Figurewizard forecast showing a working capital deficit must be avoided at all costs therefore. It would be signifying an imminent cash flow crisis meaning that you will have to reconsider projected overheads and / or expenditure on fixed assets. The ideal way to achieve this is by using our unique What-If Calculator.

Interest Suspense Account

Unforeseen events can affect the liability for loans such as bank overdrafts, making forecast interest liability unpredictable. For that reason interest for such loans is only charged to the accounts as and when it arises.

Forecast interest liabilities for fixed term loans that are subject to fixed rates can be accurately calculated though, in which case their liability should be disclosed in the balance sheet. This job is done by the interest suspense account.

Fixed interest payables are allocated as current assets in the balance sheet. That is then cancelled out by allocating it in turn to current liabilities (payable within 12 months) and long term liabilities (payable beyond 12 months). This discloses the potential value of forecast fixed term interest debt in the balance sheet while preserving the rule of not charging it.

How Fixed Assets are Budgeted

Fixed asset purchases, their VAT, depreciation and financing are all budgeted. For example assets acquired at a cost of 6,000 in a given year are allocated by the system at £500 a month.

That means that depreciation will be charged on 500 in month 1, 1,000 in month 2, 1,500 in month 3 and so on. Financing and associated interest charges are allocated on the same basis. The sale of fixed assets are treated in the same way on a first in first out basis.

Forecast Short Term Liquidity

A more stringent measure of liquidity is the quick ratio; also known as the "acid test," which calculates short term liquidity by ignoring the value of stock / inventory.

Where this ratio is below 100% the business will be using borrowings to some degree to finance its trading. As the table above shows, the higher this ratio goes, the lower the need for borrowings becomes.

Balance Sheet Liquidity and the Solvency Ratio

Investment in fixed assets always comes at a cost to liquidity regardless of asset financing. Taken too far, excessive investment in fixed assets can also result in a threat to solvency.

This can be measured by the fixed assets to net worth ratio, one of the key solvency ratios. For example a company with fixed assets of 100,000 and a net worth of 150,000 has a ratio of 67%; well within the 75% acceptable benchmark.

A balance sheet forecast showing a fixed asset to net worth ratio above 100% will call for revising the acquisition and / or their financing.