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

Cost less depreciation defines the net book value of fixed assets. Calculated automatically by Figurewizard that represents their residual useful working life in the business.

That does not describe is "fair value". In .cash terms net book values are almost always less than that. Indeed in some cases certain types of expenditure such as improvements to leasehold properties may be capitalised and depreciated as fixed assets, despite them having no possible cash value whatsoever.

Unlike current assets such as cash, accounts recievable or stock on the shelf, the net book value of fixed assets play no part in assessing .net current asset value or working capital..

Fixed Assets - Written Down Tax Value

Not shown in the analysis of assets and liabilities is the written down value (WDTV) of assets after tax. This is again calculated automatically by Figurewizard.

The second valuation of fixed assets is their written down tax value, calculated as cost less capital allowances, which is important for calculating tax relief. Figurewizard automatically calculates those allowances and applies these to foreasts. You can see how that is done in the sample corporation tax account.

That 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, so for an SME it is likely that main pool fixed asset vales will be zero.

It is important to note that company cars are not regarded as main pool assets and therefore do not qualify for annual investment allowances.

Assets and VAT

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

As a result, when producing forecasts using Figurewizard, you will enter everything 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.

That does not apply to commercial vehicles, which are regarded by HMRC as main pool assets and therefore subject to 100% annual investment allowance in the year they are acquired.

Current Assets

Forecast current assets lists only cash and trading assets that are expected to be turned into cash in the normal course of trade within a year.

The pricipal trading assets are accounts receivable and stock. Auditors will check the progress of such assets against their year-end values and may reduce them if they are perceived to take more than a year to convert into cash.

Examples of other qualifying current assets are deposits and pre-payments, including letters of credit, issued for the purchase of goods whose documentation has not yet been accepted.

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. If so, you will have to reconsider projected overheads and / or expenditure on fixed assets. The ideal way to achieve this is by using Figurewizard's 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.