Check Projected Balance Sheet

If I would like to forecast a target's future balacne sheet, how can I make it balance?

Or based on your experience, which item on the balance sheet is the most difficult to estimate?

Many thanks,

Balancing Balance Sheet Projections

First let's review the major elements of the balance sheet.

Knowing that Assets = Liabilities + Shareholder's Equity balancing the statement is a matter of making sure that changes to each side are reflected - IE if you purchased an asset the funds for it needed to come from somewhere - either cash or a through debt or equity issuance. Such purchases and subsequent funding decisions will be reflected on the statement of cash flows which is why it is critical that the SOCF and Income Statement must be linked properly in the Balance Sheet.

With this in mind, balance sheet should be driven by projections that are made on the income statement, statement of cash flows, and the debt waterfall.

User @BepBep12" further explained:

BepBep12:
OP will still need to project line items on the BS i.e. anything in net working capital, accounts recievable, diluted shares outstanding, etc... but with respect to these items, I will freeze these values unless told otherwise by my deal team.

What's been communicated to me with regards to doing quick checks in balancing the BS is making sure all the simple links between the statements are working properly i.e. your debt schedule is calculating proper amounts for amortization and the BS are reflecting the payments, your revolver is functioning properly drawing/or paying down depending CFs, cash balance is linked in from SOCF, and your Goodwill calculation is correct as well.

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^^^Yeah if everything links together properly, it should balance. For example, changes on the balance sheet items will flow through in the cash flow statement and change the cash balance accordingly.

Debt plug means that changes in cash get deducted from the debt principal (not all models are built this way or make this assumption btw). This does not mean to just have the debt automatically change so your balance sheet balances, that would be wrong...

 

beginning projections with the balance sheet is one of the really old methods of modeling and died out ever since computing power came along that allowed for dynamic spreadsheets.

Typically you just look at how the assets grow and keep the percentage of total assets of each account flat. This is really useless now unless you are working with a commercial bank model since it'll actually makes more sense that way.

 
Best Response

-Couchy I might be misinterpreting you, but I don't think he's driving his model from the BS and I'm not sure why he would anyway (Someone that knows help me here...?), I think the OP might just be confused with regards to why his BS won't balance or what he can do maybe to make it balance

-OP will still need to project line items on the BS i.e. anything in NWC A/R, DSO, DPO etc... but you're right with respect to these items at least, unless my VP or Associate tells me to I'm freezing the values

-What's been communicated to me with regards to doing quick checks in balancing the BS is making sure all the simple links between the statements are working properly i.e. your debt schedule is calculating proper amounts for amortization and the BS are reflecting the payments, your revolver is is functioning properly drawing/or paying down depending CFs, cash balance is linked in from SCF, and your Goodwill calculation is correct as well....not the be all end all list to remedy BS issues, but something I do quickly quickly to spot check my BS if somethings not working properly I tend to make silly mistakes and spend and unnecessary amount of time looking for them... ahh the joys of being an intern and learning....

'Before you enter... be willing to pay the price'
 

I just tried to balance the forecasted bs by using cash as the plug. However, I don't know whether it is a usual practice in the real business world. Also, as we can use just cash flow statement and income statement to build up the DCF model. What's exactly the usage for us to forecast the balance sheet anyway?

Many thanks for all bros' helps.

Hi, I am sky. Nice to be there.
 

Probably just manually check each of your formulates on the balance sheet with hand calculations.

For example:

First thing's first - make sure your cash balance matches the beginning balance + the net cash flow listed on the cash flow statement. Calculate it by hand and then check your formula/result.

Then I would look at retained earnings as the beginning balance + net income - dividends.

You might have already done all that but it's real easy to make minor errors on these that mess everything up.

 

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