5 Tips for Accurately Forecasting Your Balance Sheet

There’s no denying that we live in turbulent times. It is truly a time of unprecedented change - social, economic and technological.

Forecasting your balance sheet can become a troublesome task accordingly, but here to help Finance Monthly readers is Ed Gromann, CPO at Centage Corporation, with some top tips.

Within all this uncertainty, businesses that want a steady path to growth are forced to ebb and flow with the changing nature of the world. This can feel like an insurmountable task, especially for a CFO that relies on consistency to meet the board’s expectations. As CFO, you can hardly throw up your hands and exclaim, “what is to be done?” All eyes are on you to even out the peaks and valleys as much as possible so that the organization may continue to operate without too much distress.

One way to detect the kid of crises that can upend the best-laid business plan is by forecasting the balance sheet on a regular basis. I realize that many CFOs don’t undertake this exercise because (let’s be honest) it’s not an easy task. This is a mistake. Forecasting the balance sheet can reveal critical details you’d easily miss in your P&L forecasts. Case in point: let’s say your VP of sales decides to offer a “buy now pay later” deal to stimulate sales — a great way to build the sales pipeline. The company will certainly face all the upfront costs of registering and servicing new customers upfront, but without immediate revenue to defray those expenses. This sales tactic could lead to a cash flow issue later on in the quarter if not properly planned for.

Tips for Accurately Forecasting your Balance Sheet

As I mentioned, forecasting the balance sheet can be a bit of a bear, but these five tasks can make the task more approachable:

  1. Continuously monitor your deferred revenue

Look at your deferred revenue on a monthly basis to ensure it’s not getting too high, which can lead to cash flow issues later on. If you see that it’s getting high, take steps to correct it. For instance, you may need to restrict deferred payment terms offered by your sales team, or rollout a pre-paid product or service that will generate cash upfront. The sooner you spot a potential issue, the better you can plan for it.

  1. Monitor your accounts receivables

Monitor your accounts receivable to assess whether or not you have some wiggle room. For example, you may incur some expenses in January that may not come due until later in the year. Monitoring them monthly will help you assess how much cash you actually have to get you through lean times. If you see an issue early enough, you may be able to renegotiate terms with vendors.

  1. Create multiple scenarios for your income statement forecast

CEOs often ask, “what happens if?” and as CFO, you want to have answers. The best way to do that is to create multiple scenarios for your income statement forecast, specifically sales projections that meet, fail short of, or exceed the sales projections for 2019. Not only will this increase the accuracy of your balance sheet, but it will help the organization create and implement timely contingency plans.

  1. Don’t forecast too far ahead

Although I’m a firm believer in projecting what might occur, it’s important that you don’t forecast too far ahead. Although economic indicators are still strong, the stock market has dipped and we continue to live with the potential of trade wars, and so on. It’s wise to limit your balance sheet forecast for the next month or two ahead, as each new month will bring new changes that can affect the accuracy of your forecasts.

  1. Do sensitivity analysis on your actuals

Sensitivity analysis is the quickest and easiest way to predict how change will affect your financial statements (I say quick and easy because it tests just one variable at a time, meaning you don’t need to change your underlying model). For instance, experiment with sales and expenses within your P&L to see how they flow through to the balance sheet. This exercise will help the management team make better and more accurate decisions.

No doubt as a CFO you’re pulled into many directions, and the last thing you want to take on is additional tasks. That said, forecasting your balance sheet is one of those tasks that will save you a lot trouble.

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