This process refers to planning the business’s balance sheet over (5-10) years, and it involves estimating current assets, fixed assets, current liabilities, loans and equity balances. A balance sheet shows the networking capital, capital structure, and company’s net worth on a specific date. The net equity, which is the company’s net worth, is the residual asset value of the firm after covering the loans and current liabilities. The balance sheet provides rich information about the net worth value, short-term and long-term capital structure, working capital, and overall liquidity levels, along with analysing cash flows and performances. The balance sheet is a dynamic net balance document that changes due to variability of, for instance, working capital, depreciation costs, net profit/loss, investment decisions, and capital structure. You can estimate the initial balances of the working capital by assuming the days of coverage for account receivables, inventory, and payables, whilst the fixed assets are recorded by the historical purchasing values. Loans and equity’s initial balances are recorded as per the assumed leverage ratio, e.g., 50/50% or 60/40% loans to equity.
Step-By-Step Process
- Clarify income statements, fixed assets, depreciation expenses, capital structure, and capital budgeting.
- Obtain industry benchmarks and performance indicators, especially regarding the working capital coverage ratios, capital structure, and fixed assets.
- Estimate the networking capital, i.e., current assets minus current liabilities, by working out the initial balances of account receivables, inventory, and account payables.
- List out the balances of the fixed assets, including machinery, building, equipment, furniture, and vehicles, and project their values over (5-10) years by assuming variable factors like depreciation expenses, capital budgeting (e.g., additional capital), profitability/loss, and capital structure.
- List the initial balances of the capital structure accounts (% as loans and equity) and projection for (5-10 years) by considering repayment of loans, obtaining additional loans, issuing equity shares, and net profit/loss.
- Draft the initial balance sheet and projection of (5-10 years) for discussion with your team and experts.
- Evaluate and test the outcomes of balance sheet projection.
Example
Here is the projection of the balance sheet for a pharmaceutical manufacturing facility:
| Details | Yr. 1 ($) | Yr. 2 ($) | Yr. 3 ($) | Yr. 4 ($) | Yr. 5 ($) |
| Current Assets | 6,841,021 | 4,920,424 | 4,840,523 | 8,290,191 | 14,453,132 |
| Net Pre-Investment Costs | 200,000 | 150,000 | 100,000 | 50,000 | – |
| Net Capital Financing Costs | 140,000 | 105,000 | 70,000 | 35,000 | – |
| Net Fixed Assets | 17,483,085 | 15,000,022 | 12,516,959 | 10,033,896 | 7,550,833 |
| Total Assets | 24,664,106 | 20,175,446 | 17,527,482 | 18,409,087 | 22,003,965 |
| Current Liabilities | 944,786 | 944,786 | 963,867 | 1,209,786 | 1,399,761 |
| Net Loans | 21,316,626 | 22,316,626 | 20,084,964 | 17,853,301 | 15,621,638 |
| Equity | 2,402,694 | (3,085,966) | (3,521,349) | (654,000) | 4,982,565 |
| Total Liabilities and Equity | 24,664,106 | 20,175,446 | 17,527,482 | 18,409,087 | 22,003,965 |
Useful Tips
- Set reasonable assumptions about the net working capital, fixed assets, capital structure and income statement.
- Obtain sufficient information about the balance sheet indicators of the industry.
- Discuss the findings with your team and experts before you decide on the balance sheet results.
Things To Avoid
- Avoid guessing works and assumptions without evidence.
Final Note
This article is sourced from my new book- Your Guide For Preparing An Industrial Feasibility Study.
For more information about the book: https://growenterprise.co.uk/book-your-guide-for-preparing-an-industrial-feasibility-study/
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The author: Munther Al Dawood- Industrial Enterprise Expert
Grow Enterprise 