| forecast for year beginning the 1st. | May 2017 | May 2018 | May 2019 |
| Fixed Assets | 56,624 | 54,081 | 77,791 |
| Current Assets | 217,675 | 261,733 | 506,750 |
| Total Assets | 274,298 | 315,813 | 584,540 |
| Current Liabilities | 154,652 | 125,407 | 181,409 |
| Long Term Liabilities | 13,878 | 4,095 | 11,648 |
| Total Liabilities | 168,530 | 129,502 | 193,057 |
Net Current Assets (Working Capital) | 63,022 | 136,326 | 325,341 |
| Net Assets | 105,768 | 186,311 | 391,483 |
| Capital | 5,000 | 5,000 | 5,000 |
Retained Profits Bfwd | 20,000 | 100,768 | 181,311 |
add: Profit / Loss after Tax | 80,768 | 80,543 | 205,172 |
less: Dividend | 0 | 0 | 0 |
Retained Profits C/Fwd | 100,768 | 181,311 | 386,483 |
Capital and Reserves (Equity) | 105,768 | 186,311 | 391,483 |
More than a list of assets and liabilities, the balance sheet forecast is the most important element in the business plan.
It describes the level of a company's working capital and solvency. However positive equity does not always signify solvency in a balance sheet whose net assets are carrying a high proportion of fixed assets.
For banks, senior creditors and potential investors, the most favoured interpretation of solvency is always going to rest upon the strength of working capital. Because that defines liquidity, that is going to be scrutinised closer than ever following relaxation of the coronavirus lockdown..
Shareholders funds represent paid up capital and profits after tax that have been retained in the business.
In law, a company has an identity that is completely distinct from its shareholders. The funds represent investments in the company made by its shareholders and which are therefore due to them. That is why shareholder funds are shown in the balance sheet as a liability.
Net current assets (current assets less current liabilities) defines working capital which in turn describes liquidity; the sole source of cash flow from core trading activity.
"Net current" means core trading assets such as accounts receiveable and stock that will reasonably be expected to be turned into cash within a year (plus cash) less debt scheduled to be paid within a year.
Cost less depreciation describes the net book value of fixed assets in the balance sheet. That represents the residual value of their forecast working life in the business, not their estimated fair market values.
This is an important distinction. Depreciated net book values for fixed assets are invariably significantly lower than the prices they could reasonably be expected to reach if put up for sale. In the event of a forced sale (which is how bank managers will assess their value) those sale prices will be lower still.
Fixed assets play no part in defining liquidity other than depleting it upon their acquisition; regardless of asset financing.
It is possible for some fixed assets to have never possesed cash value from the day they were entered into the balance sheet.
These are genrally expenditure that has been capitalised; in effect creating a notional fixed asset the sole purpose of which is to spread such expenditure against profit and loss over the number of years of their perceived useful working life.
Capitalising expenditure in this way is only appropriate in the case of a going concern with positive working capital.
One example of this was Jamie Oliver's restaurant chain, Jamies Italian ltd. where £63 million had been spent on improvements to leasehold properties over seven years and capitalised. By 2016 the depreciated value in the balance sheet was down to £52 million but as all such improvements reverted to landlords when lease terms come to an end, this item was actually worthless.
As result the company's filed balance sheet net worth of £24 million was actually £28 million in deficit in pure cash terms.
The What-If Calculator and Planner makes it possible for you to update / change forecasts in real time. Here it has been used to improve working capital and cash by reducing forecast wages and fixed overheads - Each by increments of 5%
| Year 1 less | Fixed O/Heads & Wages | Pre-Tax Profit | Equity | Working Capital | Increase / Decrease Borrowings | Bank Year End |
| 0% | 430,000 | 94,381 | 105,052 | 59,993 | 53,854 | -35,439 |
| 5% | 408,500 | 116,779 | 123,911 | 81,165 | 33,488 | -13,261 |
| 10% | 387,000 | 138,712 | 141,677 | 98,931 | 9,962 | 8,452 |
Cash flow problems can always be temporarily resolved by increasing borrowings but all that does is buy you time. In the long run increased external debt cannot cure cash flow insolvency.
Improved working capital and cash flow are also affected by investment in new fixed assets. Their cost plus any new debt associated with financing always reduces balance sheet liquidity.
For example, in this sample forecast £30,000 of new main pool assets (e.g. plant and machinery, fixtures, equipment, trucks and vans) and £25,000 for company cars have been entered, a total of £55,000. Seventy percent of that is financed over 24 months.
The table below shows how that £55,000 will affect liquidity (working capital) and cash flows, followed by what happens to these if first the £25,000 for new cars is removed followed by the £30,000 of new main pool assets.
Despite these assets being 70% financed, the liquidity and cash flow improvements are significant.
| Fixed Asset Acquisitions | Fixed Overheads | Interest Charges | Equity | Working Capital | Increase / Decrease Borrowings | Bank Year End |
| 55,000 | 430,000 | 5,062 | 105,052 | 59,993 | 53,854 | -35,439 |
| 30,000 | 408,500 | 3,104 | 127,097 | 100,956 | 5,616 | -691 |
| 0 | 387,000 | 1,488 | 143,371 | 135,789 | -48,780 | 69,719 |
Negative equity, also known as negative net worth occurs when the value of net assets are in deficit.
This defines an insolvent balance sheet. If your Figurewizard balance sheet forecast shows negative net assets / equity you must change the plan for your business. Using the What-If Calculator Planner is recommended for this.
Increasing borrowings while continuing to trade with an insolvent balance sheet carries the very real risk of action for wrongful trading if the company subsequently goes into liquidation.
Resolving cash flow problems by delaying payments for current liabilities only makes a bad situation worse.
Financial penalties for late payment of taxes are bad enough but the inevitable loss of confidence in your business that goes with late payment to suppliers will be worse still by putting commercial credit and therefore operating cash flows at risk.
No intervention by a user is called for to calculate this balance sheet forecast. Figurewizard will automatically produce it just from your forecast sales, margins, overheads, investment and simple cash ratios.
With your first attempt at forecasting with Figurewizard there are likely to be areas of profit, cash, and balance sheet value that you will want to change. This is what the What-If Calculator and Planner is for.
For example it allows you to address deficits for profits, working capital and cash flow by amending your original figures such as profit margin, overheads, year-end stock, investments and financing , all with single clicks of the mouse.
As you do so, the calculator, which displays the key features of your forecasts such as operating profits, profit after tax, cash flow, bank balances, working capital and net worth all change too, again in real time.
You can also use the What-If Calculator to select factoring / supply chain financing. Once again all this takes are single clicks to select the percentage of invoicing to be factored and the rate of interest to be charged. Once more as you do so, everything changes in real time.
Subscribing to Figurewizard costs just £30 a year. There are no extra charges.