Creating a projected balance sheet for your financial plan

1. Projected balance sheet - explained simply

What is a projected balance sheet?

A projected balance sheet is a forward-looking balance sheet based on the forecasts and calculations of your financial planning. While a classic balance sheet shows the company's actual financial situation on a given reporting date, the projected balance sheet provides a preview of the expected financial situation in the future. It covers the planned tangible and intangible assets that the company is likely to hold.

The projected balance sheet is especially relevant for corporations such as GmbHs and AGs, since these companies are legally required to prepare a balance sheet on a regular basis. In financial planning, a projected balance sheet helps you compare the actual value (current figures) with the target value (planned figures), making deviations and funding needs easier to identify. This is particularly relevant in a bank-approved business plan, when the projected balance sheet serves as the basis for financing discussions with banks or investors.

2. How can a projected balance sheet be calculated?

The calculation of the projected balance sheet is based on existing company data and expected developments. Various aspects of the planned corporate strategy and financial planning are taken into account:

• Planned investments: These include, for example, planned purchases of machinery, land, or software. Such investments affect the assets side of the projected balance sheet over the long term.
• Planned personnel costs: The development of personnel costs is based on growth targets and the planned number of employees. Wage and salary increases as well as the creation of new positions must be taken into account.
• Planned revenue and costs: Revenue forecasts are based on market analysis, sales projections, and pricing strategy. These figures form an important basis for estimating expected cash flows and, consequently, future assets and liabilities.
• Additional financing and provisions: The planned uptake of new loans or the creation of provisions (e.g., for future tax payments) also feed into the liabilities side of the projected balance sheet.

A projected balance sheet can be drawn up on the basis of the projected P&L (planned profit and loss statement), since the P&L provides essential assumptions for revenue and costs. These figures then feed into the balance sheet items and influence assets and capital structure.

3. How do you draw up a projected balance sheet?

There are two main methods for creating a projected balance sheet:

• Extrapolation of past performance: A common method is to project past trends forward, continuing past cost structures, revenues, and investments. This approach assumes that the company will develop similarly to how it has in the past.
• Adjustment for planned changes: If significant changes are planned – such as scaling up the business or entering new markets – these factors must be incorporated into the projected balance sheet. Planned investments, changes in revenue structure, and personnel expansions are then realistically reflected. Changes in ongoing cost factors, e.g. due to new supplier contracts or additional rent, should also be considered.

Excel templates and specialized software are available for creating a projected balance sheet. These tools make it possible to transfer existing data from the P&L and other financial reports into a projected balance sheet. Based on the input values, the software automatically calculates the future balance sheet structure.

4. Who needs a projected balance sheet?

A projected balance sheet is required above all as part of the business plan of corporations such as GmbH, UG, KG, and GmbH & Co. KG. Since such companies are legally obliged to prepare an annual balance sheet, a forward-looking projected balance sheet is also expected from them when applying for loans. The projected balance sheet helps banks and investors better assess the company's planned development by disclosing expected changes in assets and financing.

5. What data appears in a projected balance sheet for the business plan?

Structurally, a projected balance sheet is built similarly to a regular balance sheet and contains the following items:

Assets:

• Fixed assets: Long-term assets such as buildings, machinery, and vehicles are listed here. Fixed assets remain in the company for years and form the backbone of business operations.
• Current assets: These include short-term assets such as cash, receivables, and inventory. These items can be converted into liquidity within a year and are therefore more flexible.
• Prepaid expenses: These items capture payments that have been made in advance but will only become expenses in the future.

Liabilities and equity:

• Equity: Equity reflects the company's financial base and includes the owners' contributions as well as profits retained in the company.
• Provisions: Provisions are obligations expected at a later point in time, such as pension provisions or tax payments.
• Liabilities: These include all loans and debts the company has taken on and must repay.
• Deferred income: This covers revenue received before the reporting date but only recognized as income in the future.

Example of a projected balance sheet for a business plan

Suppose that "Example GmbH" plans to invest in a new production facility over the next three years and to expand its inventory in order to better meet demand. The company also plans to take out a loan to finance the investment. The expected revenue is set to rise significantly as a result.

Projected balance sheet in three years:

Assets:

• Fixed assets: 500.000 Euro (incl. the new production facility worth 200,000 euros)
• Current assets: 200.000 Euro (incl. increased inventory and receivables)
• Prepaid expenses: 10.000 Euro
• Total assets: 710.000 Euro

Liabilities and equity:

• Equity: 300.000 Euro (from retained earnings and shareholder contributions)
• Provisions: 20.000 Euro (for expected tax obligations)
• Liabilities: 380.000 Euro (incl. a loan of 180,000 euros to finance the production facility)
• Deferred income: 10.000 Euro
• Total liabilities and equity: 710.000 Euro

In this example, the projected balance sheet shows that the investment results in a balanced asset and financing side of the company in three years. The new debt (loan) and the expanded equity base form a stable foundation for the planned growth.

Conclusion

The projected balance sheet is a valuable tool for illustrating the future development of a company and helps to identify potential financial bottlenecks and funding needs at an early stage. With the projected balance sheet, companies can not only develop their own financial strategy but also give investors and banks a well-founded picture of the planned financial situation of the company. Especially in the start-up and growth phase, the projected balance sheet is a decisive building block of strategic financial planning.