This “percentage of sales” approach is widely used to prepare a pro-forma or forecasted Income Statement and Balance Sheet. The basic steps are as follows:
1. Forecast your sales using techniques such as time series analysis, regression analysis and soliciting input from management on what they expect to sell in the next planning period.
2. Once you understand your forecasted sales, estimate your variable expenses.
3. Next estimate your level of investment in assets to support your sales. This is usually a percentage of sales. Adjust this baseline forecast for any new items. For example, marketing may need more funds for new product development or the Production Department may request upgrading aging equipment and facilities.
4. Prepare a pro-forma or forecasted Balance Sheet and any short fall between your Total Assets and your Total Liabilities + Equity represent external financing requirements.
The Supplemental Workbook included with this course includes Tab 1 – Forecasting. This tab provides an example on how to prepare a Forecasted Income Statement and Balance Sheet.
The purpose behind a set of forecasted financial statements is to identify external financing needs; i.e. we may need to invest in more assets to support our sales, but we currently have only so much in liabilities and equity to finance our assets. The excess of assets over the sum of liabilities and equity is the potential financing you will need. The following forecasted Balance Sheet indicates that we will need $ 134,600 of external financing to support our total assets.