A cashflow forecast isn’t complete without considering what’s happening in your Balance Sheet accounts. It’s fairly straightforward to master the skills needed to put together a Profit & Loss budget, but movements in assets and liabilities are less familiar to many people. In this article, we’ll explain the principles involved in using balance sheet budgets, rather than all the technical details.
There are two key elements to keep in mind when creating balance sheet budgets:
When using a tool like Calxa, budget for the movement or change in the account, not the expected ending balance. Positive amounts indicate an increase, regardless of the account type. For example, when you add a new loan the initial receipt is positive (it increases the liability) but the repayments are negative (you now owe less).
The Easy Bits of Balance Sheet Budgets
When you budget with a spreadsheet, some of the hardest accounts to calculate are your bank, payables and receivables and GST/VAT. Each has its own complexities, being calculated from the movements of many other accounts and it’s easy to end up going around in circles. So, the first good news we have for you is that Calxa calculates those accounts for you. Any of the accounts nominated in the Cashflow Settings area (you’ll find that under Budgets & Cashflow) are worked out for you and you don’t need to set a budget for them.
Buying a new car or some equipment for the business? Simply add a positive movement to the relevant account in the month you’re buying it. Just remember that all budgets exclude GST or VAT.
Other Bank Accounts
If you’re using a cash management or investment account for surplus funds (or to stash some away for your tax bills), use a positive amount when you add something to that account, a negative amount when you move it back to your main account.
A good way to work out how much you might need to put in or out of the cash management account is to run a cashflow forecast without making any changes. See where you have surplus funds and where you will be short. Then edit the budget for your cash management account accordingly.
Credit cards can appear complex but they’re really simple. If you’re rotating funds through them and the balance doesn’t change much, don’t budget for anything – it’s the movement we care about. On the other hand, if you have plans to reduce the balance over time, put in a negative amount for the monthly reduction.
The simplest way to handle depreciation or amortisation of assets is to nominate the expense and asset accounts within your Cashflow Settings. If you do this, you then only need to budget for the expense side and we’ll calculate the asset side. We’ll allocate all of the Accumulated Depreciation to the first account nominated but you can easily group all of the accounts to a common header with an Account Tree.
If you choose to manage your depreciation accounts manually, don’t nominate any of them but be careful when making changes that you enter them on both the expense and asset side to keep your budget balanced.
Complex tasks in Balance Sheet Budgets
Other parts of the balance sheet are a bit harder to budget for.
Loans can be complex if you enter them manually but even then, it’s a matter of budgeting a positive amount for the receipt of the loan (because your liability increases) and then negative amounts for the principal repayments. Use the Loan Wizard (under Budget Tools) to calculate the repayment schedule that splits the principal and interest, and enters the reduction in the loan amount each month and the interest expense. For most flexibility, use a separate liability account for each loan and a separate interest account. This makes it easier to make changes later and you can easily group them for reporting in an Account Tree. Use a Header and make it Summary Only if you only want one line for interest.
Income in Advance
Some of you will receive your income in advance in lump sums and then allocate it to each month with a journal. We have a Help Note that will take you through this step by step so you get the right numbers in your monthly reports and on your cashflow forecast. The same principles apply to prepayments.
Don’t be intimidated by Balance Sheet budgets. They’re mostly quite simple to do but they can have a big effect on your cashflow forecast so you shouldn’t ignore them.
To better understand Balance Sheets, have a read of our article Analysing the Balance Sheet.