Pro Forma Balance Sheet Template – Dumbing It Down

If you read the Business Startup Page, you’ll know playing with financials is one of my favorite aspects of being a business advisor. So today, my first post, we’re going to talk a little about financials, the balance sheet specifically. Along with that, I’ll provide you with a pro forma balance sheet template, which you’ll find to the left, and walk you through completing it.

Before we do that, let’s talk put a definition on the word pro forma. Pro forma is a Latin term which means “for the sake of form.” In plain English, it’s a form that’s provided as a courtesy. You might hear lenders or maybe even your advisor mention preparing a pro forma for your business loan. Really, they’re just asking for a set of financial projections.

When I prepare a set of financial projections or a pro forma, I like to start with the balance sheet. That is after I’ve gathered all the pertinent information. The purpose of a balance sheet is to give an overview of a business’s financial status. It shows the overall health of the business. The template I provided shows two years, which allows one to see a bit of change over time.

Balance sheets are broken into 3 main areas: assets, liabilities, and equity. Assets refer to anything that the company owns of value. Liabilities are the obligations the company owes. Think of liabilities as the debt incurred to buy assets. Equity is the companies net worth. That is, after you subtract the liabilities from the assets, you end up with a net worth.

At the bottom of the form, you’ll see one more calculation, which I’ve labeled balance check. Keep in mind, a balance sheet is supposed to balance, which is why it’s called a balance sheet. If you’ve entered all your numbers correctly, your balance check should equate to 0. It’s calculated by taking the Total Debt & Equity and subtracting the Total Assets. If your balance sheet doesn’t balance, you’ve got a major problem.

So, let’s look at each section separately.

Assets – To have and to hold

Assets are divided into current, fixed, and intangibles. Think of current assets as those items that’ll be depleted within a year. For example, your inventory should be constantly revolving. You don’t want things sitting on the shelf for years at a time. In fact, the higher turnover for inventory, usually the better. Accounts receivables refer to money owed to you. It might be lines of credits you extend to customers. Other current assets might include prepaid items, such as insurance and cash.

Your fixed assets are those items you keep longer than a year… land, furniture, vehicles. Earlier I mentioned liabilities pay for assets. One important tip I want you to keep in mind. Pay for current assets with current liabilities and fixed assets with long-term liabilities. For example, you wouldn’t want to pay for a $30,000 piece of land with your credit card, which is short-term debt.

Intangibles are a type of long-term assets that are not physical in nature. They might come as patents, rights, goodwill, or other valuable forms. Intangibles are one of the most difficult items to try to finance. Often times the buyer is responsible for paying for intangible assets out of pocket.

Liabilities – How did you cover your assets?

On the upper right side of the template, you’ll find the liabilities. Like assets, current liabilities are those debts to be paid within a year. They can include short-term notes payable to the bank, lines of credits, accounts payable, loans from grandma… You would even classify tax debt as a current liability.

Long-term liabilities are those obligations that take longer than a year to pay. Ideally, you’ll use long-term liabilities to purchase fixed assets. Often times the item you purchase with long-term depreciates about the same rate as the terms of the loans. Debt to officers and shareholders also are accounted in long-term debt.

Equity – The bottom line

The last section refers to the business equity, which I mentioned briefly above. You arrive at the equity by subtracting the total liabilities from the total assets. Equities include money you’ve injected as owners, profits, as well as retained earnings. Retained earnings refers to a part of the net earnings not paid out to the owners. Retained earnings can represent a loss or gain. One thing to keep in mind, retained earnings don’t necessarily equate to cold hard cash in the bank.

So that pretty much sums up a balance sheet. I personally whipped up the balance sheet template specifically for this post. The template is free to use as you please. Nothing in it is protected, so fill free to change things to meet your needs.

What type of tools have you found useful in your business?

Download a copy of your balance sheet from the Resource Library. Use the link below.

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