21 May Budgeted Balance Sheet
What is a Budgeted Balance Sheet?
Definition: A budgeted balance sheet is an estimate of a company’s balance sheet at some future date. A projection is made for each account that appears in the balance sheet based on the company’s plans for the year. The accuracy of a budgeted balance sheet depends on the correctness of the assumptions that are used in the budgeting process.
What does Budgeted Balance Sheet mean?
At the end of every year, companies prepare their financial projections for the next period. This exercise involves budgeting for:
- Manufacturing costs
- Raw material costs
- Employee costs
When preparing the next year’s budget, the company will also have to estimate its funding requirements. It will need to work out how it will raise the money that it needs and estimate the interest costs that it will have to bear.
After the entire budgeting exercise is over, the final step is the preparation of the budgeted balance sheet. It provides the management of a company with an idea of what the company’s balance sheet will look like at the end of the next accounting period.
A review of the budgeted balance sheet may reveal that the company’s plans for the next year may not be in its best interests. For example, if a business is planning to raise a large amount of debt to finance its expansion plans, it may result in the debt to equity ratio shooting up to an unacceptable level.
A budgeted balance sheet allows the management to carry out a reality check and take corrective action if it is required.
Example of a Budgeted Balance Sheet
Johnson Engineering, an automotive parts manufacturer is preparing its budget for the next year. This is a time-consuming exercise as it involves preparing a projected income statement and estimates for the next 12 months for:
- Cash balances at the end of each month.
- Inventory balances (raw materials and finished goods).
- Machinery and equipment balances.
- Accounts payable.
- Common stock.
- Retained earnings.
Preparing the budgeted balance sheet involves a great deal of work. However, Johnson Engineering’s top management finds it to be a very useful exercise as it allows them to plan their activities for the year.
Johnson Engineering follows the practice of preparing the budgeted balance sheet on a monthly basis. This ensures that the management is in a position to review the company’s financial position on a consistent basis.
The budgeted balance sheet presents a complete picture of a company’s assets, liabilities, and shareholder’s equity. It estimates a company’s financial position at a future date and helps the management to take corrective steps during the course of the year.