Balance Sheet Archives - ProjectionHub

How to Create a Projected Statement of Financial Position

June 10, 2018 by Jesse Sanders Leave a Comment

We are ProjectionHub, a software designed to help entrepreneurs generate customizable and easy-to-read financial projections that they can share with potential lenders or investors in order to allow the entrepreneur to raise capital to make his/her business a successful one. By utilizing our web application at ProjectionHub.Com, entrepreneurs are able to view three-to-five years of income statements, statements of cash flow, and balance sheets, otherwise known as Statements of Financial Position.

What is a Statement of Financial Position?

The statement of financial position is another name for the balance sheet, which is a financial report showing the assets, liabilities, and the owner’s equity amounts at any one period of time throughout the life of the business. “It lists the resources, obligations, and ownership details of a company on a specific day”.

Here is an example of a balance sheet, or statement of financial position, that the ProjectionHub web application has generated. As you can see, it exhibits the amount totals for each month and each month the total asset amount is equal to the total liabilities and owner’s equity amount.

This is your number one goal when creating this financial statement–ASSETS MUST EQUAL LIABILITIES PLUS EQUITY.

The beauty of our software–it does it for you! All you have to do is follow these next few steps.

How do I create a Statement of Financial Position?

Once you have signed up at ProjectionHub.Com, selected a business model, and added in your revenue and expenses, you are ready to add your business’ assets–which, is the beginning of creating your statement of financial position.
- If you need assistance with adding the business model, revenue, and expenses, see this blog post.
Click the “edit” button next to the asset category you wish to add an asset to.

Here, you can add the details of your asset such as its initial value, useful life, and date purchased.

Repeat these two steps for however many assets your business owns.
- Also, you can click the “Add An Asset” button at the bottom of your screen to add another asset category.
Next, you are ready to incorporate your liabilities.
Click the “Add Liability” button and pick “Loan”.
- Then, enter the details of your loan such as the amount, the length of the loan, and the interest rate.

Repeat this process for however many loans/liabilities you have acquired.
Then, you will input any investors into the software.
First, decide which type of investor they are from the following list:

Next, enter the investor details such as the amount invested and the percentage of ownership that person will receive in return for their investment.

Again, repeat this process for however many investors you have for your business.
Finally, click on the “Dashboard” icon to the left of your screen to view the reports page where you will click on the Balance Sheet and view your statement of financial position.

How do I read a Statement of Financial Position?

The first two sections of your statement of financial position show the current assets and fixed assets. Your current assets are ones that can be converted to cash quickly, such as cash of course and accounts receivable. At the bottom of the second section, your current and fixed assets are totaled.

The next two lines of your report show current and long-term liabilities. Current liabilities are those that are not typically interest bearing and can be payed off rather quickly such as accounts payable. Long-term liabilities typically will have interest and cannot be paid off for at least one year. These two categories are totaled at the bottom of this section of the statement.

Finally, you will see your Shareholder’s Equity section. This section includes all of your investors, including your own investment as the business owner. The total liabilities and total equity will be summed to reach your Total Liabilities and Equity which must equal the Total Asset amount.

The Benefit of Using ProjectionHub.Com

ProjectionHub will monitor your cash balance based on your starting cash balance and your asset purchases and liability acquisitions. This will ensure that your statement of financial position ALWAYS balances!

You can get started by creating a ProjectionHub free trial account today.

As you complete your projections please don’t hesitate to reach out to us with questions at support@projectionhub.com

Good luck!

Top Photo by Yan Krukov from Pexels

Financial Projection Basics #3: What Should Financial Projections Include?

June 4, 2016 by Adam Hoeksema Leave a Comment

This is the 3rd blog post in my series of posts on financial forecasting modeling basics. You can check out the first couple of posts below:

In this post I want to discuss what should be included in financial projections.

What to Include in Financial Projections?

Financial projections should include the following:

3 years of Projections – Generally, an investor or lender will ask for 3 years of financial projections as a standard.
Projected Income Statement – Your projections should include an Income Statement, also known as, a profit and loss forecast. You can see examples of the 3 standard projected financial statements here.
Projected Cash Flow Statement – A cash flow statement will help you determine whether you will run out of cash. It is possible, even common, to be profitable but to run out of cash. For example, your customers might pay you well, but they might wait to pay for 90 days, that is a recipe for trouble if you haven’t planned well. Forecasting your cash flow will help with this process.
Projected Balance Sheet – A banker is going to be interested in your projected balance sheet. They will look to make sure that your balance sheet ratios show that you can afford to repay the loan and that you have sufficient collateral to cover the loan.
Key Assumptions – It is important that your financial projections are built on a set of assumptions that can be easily understood and changed if needed. I always recommend that you add a narrative document with your projections that just outlines a list of all of your assumptions and what those assumptions are based on. I wrote a blog post that outlines how to build realistic projections with bottom up based assumptions.

Here is an excerpt from that blog post that gives an example of what your assumptions might look like:

“A bottom up approach for a coffee shop might look like this:

Our coffee shop is at the intersection of the 2 busiest streets in town with daily traffic of approximately 15,000 vehicles.

We know that only 15% of people purchase coffee at coffee shops

All of them already purchase from a different coffee shop, so we will have to convert them as customers

Because most customers are loyal to their coffee shop we estimate we might be able to convert 10% of the total number of coffee drinkers

We will start by running local tv and radio commercials as well as placing c0upons in the local newspaper.

We think these advertising efforts will convince (15,000 vehicles x 15% coffee drinkers x 10% potential customers) 225 customers to try our coffee during the first week.

Because we are a local store with high quality coffee at a convenient location we believe we can convert 50% of those customers into returning customers.

So our first month sales we estimate at (225 customers x 50% x $3 x 30 days) = $10,000 in sales month 1.”

That’s it! These are the key ingredients in a solid set of financial projections. Our software tool – ProjectionHub – can help you create these required documents to keep your banker, investor, or partner happy. Give ProjectionHub a try for free.

How to Complete the Form 1023 Financial Projections Section

March 9, 2016 by Adam Hoeksema Leave a Comment

I got a call today from a pastor who has planted a new church and is going through the process of becoming a 501c3 non-profit and just so happened upon my blog post – Creating a Startup Budget for a New Church Plant.

He was looking for some help in creating a set of financial projections as part of the process of completing IRS Form 1023 – which is required in the application process to become a non-profit. As I was looking at the Form 1023 I realized it was quite confusing for the “non-accountant” so I wanted to write this blog post to help other non-profits complete the financial data section of the 1023.

This blog post is going to focus on organizations in existence for less than 5 years. If you have been operating 5 years or more, the requirements are slightly different in terms of the financial data section.

Completing Form 1023 Financial Data for a New Non Profit

Step 1 – Determine How Many Years of Projections you Need

According to the IRS, you need 3 years of projections if you have not filed a tax return in the past, and you need 4 years of projections if you have completed at least on tax year. If you have been operating for 4 years or more, then you don’t need projections, you just need to show your last 4 years of financial records.

Step 2 – Using ProjectionHub to Create your Standard Financial Projections

To create your financial projections in the first place you will want to take a look at our non-profit financial projection template to help give you a head start. Here is a video demo to walk you through filling out the projection template for IRS form 1023:

Step 3 – Add Non Profit Revenue Forecast

Next you will need to add your revenue projections for your non profit. Our template in ProjectionHub has each revenue line item from the form 1023, I have listed those categories below and provided some explanation:

Gifts, grants, and contributions received – This would also include donations.
Membership fees received – Non profit associations or other groups will probably receive membership fees.
Gross investment income – For large endowments or foundations they will probably generate significant gross investment income.
Net unrelated business income – This is income that you generate that is not directly tied to your mission.
Taxes levied for your benefit – This would be if taxes are levied by the IRS and then given to you.
Value of services or facilities furnished by a governmental unit without charge – This is essentially in kind services that you receive and count as revenue, but will not actually receive cash for.
Any revenue not otherwise listed – This can be a catch all other revenue section.
Gross receipts from admissions, merchandise sold or services performed, or furnishing of facilities in any activity that is related to your exempt purposes
Net gain or loss on sale of capital assets – For example if you bought a building and sold it at a profit, you would record that gain on the sale as revenue.
Unusual grants – This is pretty straightforward, just grants that our out of the norm for the organization.

Step 4 – Add Expense Forecast

Now add your expenses for each month:

Fundraising expenses – This could be travel, fundraising salaries, and fundraising event expenses, etc
Contributions, gifts, grants, and similar amounts paid out – If your organization provides gifts or grants to others, those expenses would be included here. For example, a Church might provide gifts to members who need financial support, or a foundation might give grants to other non profits.
Disbursements to or for the benefit of members – This could be a disbursement to a church member for financial assistance.
Compensation of officers, directors, and trustees – Salaries and wages.
Other salaries and wages – All other salaries and wages for those other than fundraising salaries and salaries of officers, directors, and trustees.
Interest expense – Interest on any loans.
Occupancy – These are expenses like rent, utilities, etc.
Depreciation and depletion – Depreciation on buildings, vehicles or other assets.
Professional fees – Attorney or accountant fees.
Any expense not otherwise classified, such as program services – All other expenses.

Step 5 – Convert Projections from Template to Form 1023

Next, you will be able to take your non-profit or church financial projections from our template and then enter those numbers into the form 1023.

Step 6 – Add your Current Balance Sheet to Form 1023

You will also need to add your current balance sheet to Form 1023. Our free balance sheet template could be a great starting point along with this video tutorial to help you fill it out.

Once you fill out your balance sheet template, you can enter in your current balance sheet into the form 1023 as seen below:

Form 1023 Balance Sheet

Once that is complete you should be well on your way to completing the financial data section of your Form 1023. If you have any questions at all please don’t hesitate to reach out to me to ask specific questions about your application to become a non-profit. I would be happy to help – Adam Hoeksema – support@projectionhub.com

#StartupChats

July 14, 2015 by Adam Hoeksema Leave a Comment

We’ve been MIA for awhile, but we promise it’s for a very good reason. (More details to come on that later.)

If you’ve been away for as long as we have, here’s something you might have missed. We were honored to be asked by Startup Canada to join their biweekly Twitter #StartupChats. Our session, repped by our awesome Adam, was about Balancing Finances and Cash Flow for Entrepreneurs (sponsored by Scotia Bank). The chat also included Elaine Orr, CEO of Balancesheets, a Quickbooks expert, and Bplans – a website that provides excellent resources (many of which are free) for entrepreneurs and business owners.

But what’s more exciting than reading about the chat? Reading the actual chat. Find the whole thing here at Storify:
http://bit.ly/1CEiMn6

Also, if you’ve been waiting for a sign, here it is! Sign up for your 7 day free trial now, because we’re back in full swing with some awesome changes up our sleeves.

Why Banks Must Standardize the Financial Projection Process

September 17, 2014 by Adam Hoeksema Leave a Comment

Standardization. Banks have standard forms for everything. Standard loan applications, standard personal financial statements, standard credit release forms, etc, etc. But for some strange reason, banks do not have a standard for financial projections. When it comes to financial projections, banks will accept just about anything. I have seen a projected income statement that shows expenses on top and revenue on the bottom, I have seen annual projections, monthly projections and even weekly projections, I have seen Excel templates with 50 or more tabs, and 1 tab Excel templates, I have seen projected balance sheets that don’t balance!

Why is this acceptable?

Why in such a standardized industry like banking, do bankers continue to put up with such a messy process when it comes to financial projections?

I think there are a few reasons:

Financial Projections are Just a Check-mark on the List – For the average business banker it can be like pulling teeth to get a loan applicant to put all of their documentation together, so once you finally have a set of financial projections in hand, the last thing you want to do is criticize them, you now have a full packet to send to underwriting, so just let them deal with it.
There is a Gap Between Sales and Underwriting – The previous point really represents the fact that there is a gap between sales and underwriting. Sales, aka the business banker, wants to get complete packets to send to underwriting. The underwriting team wants quality projections that they can analyze quickly and efficiently with their spreading software. Underwriters don’t want to have to go digging around for the numbers they need to produce for their spreading software.
Because Projections are Typically So Bad Lenders Don’t Give Them Any Weight – Finally, I think because projections are typically so far off, lenders don’t really care what they say, they don’t have time to educate the business owner on how to create realistic, data driven financial projections. So the easiest thing is to simply give the projections a 50% haircut right off top line revenue and see if they can still handle the debt service.

Despite these issues, there are several reasons why banks large and small should standardize the financial projection process.

Save time – I can not fathom how much time is wasted in underwriting departments around the world each year because there is no standard format for financial projections. Somewhere in a dark room there are underwriters clicking through 50 tab Excel templates looking for the numbers they need to enter into their spreading software or credit memo. If there was a standard format, underwriters could find those number immediately.

Make better comparisons between businesses – If you don’t have a standard format for financial projections how can you compare one business to another? How do you know whether the business owner “get’s it” or not. If you can’t complete a set of financial projections for your business, and you don’t have anyone else helping you that can, then you probably don’t deserve a loan. When you have a standard format, it will be much easier to compare a good set of forecasts to an unrealistic forecast.

Push their clients forward – Finally, lenders should be pushing their clients forward. Push them to grow, push them to imagine how to be more profitable and to plan their growth. If the business grows, so does their need for capital, their deposit base, and their need for other bank services.

So at ProjectionHub we are at the very beginning stages of determining how we can help banks benefit through the standardization of financial projections. We have a solid tool in place now, and we continue to iterate and improve. In Q1 2015 we will launch Version 2.0 of ProjectionHub which will support white label versions of the tool for banks to implement into their loan application process and customers will never have to leave the banks website.

We think there is an incredible opportunity for lenders to up their game when it comes to financial projections, and we want to be that gold standard for the future.

4 Reasons Why Your Balance Sheet Does Not Balance

February 27, 2013 by Adam Hoeksema Leave a Comment

The balance sheet can be the single most frustrating thing for a business owner. If you are having trouble with your balance sheet my first suggestion is to hire an accountant. My second suggestion is to use Quickbooks which automatically generates your balance sheet so that you don’t have to worry about it. But there are many early-stage companies and a little bit less sophisticated small businesses that aren’t using Quickbooks yet, and can’t afford a CPA. So if you are just using an Excel spreadsheet, or a piece of paper and pencil to do your accounting and someone asks you for a balance sheet, do not fret, you can create your own balance sheet with our free balance sheet template.

If you are trying to build a balance sheet on your own you will undoubtedly run into problems. Your balance sheet won’t balance. So now I just wanted to give you 4 things to look for if your balance sheet is not balancing.

1. Paid in Capital – Before I jump in to Paid in Capital mistakes, I just wanted to make sure that you understand the basics of a balance sheet. At the end of the day, in order for your balance sheet to balance, you need your Assets to equal your Liabilities plus your Owner’s Equity. Paid in capital is an owner’s equity account. The definition of paid in capital is “the capital contributed to a corporation by investors through purchase of stock from the corporation.” For most small businesses Paid in Capital is the amount of cash you personally invested in the business to get it started. You may have had other investors as well when you started, their investment plus your investment should be the total of Paid in Capital.

2. Loan Amortization Mistakes – Another common mistake for companies that have loans is to screw up the breakdown between principal and interest amounts for loan payments. A common mistake is to reduce your loan balance on the balance sheet by your monthly payment amount. Don’t forget that only a portion of each loan payment will go toward the principal on the loan! The rest will go to interest. Your interest will only show up on your income statement and cash flow statement, not the balance sheet.

3. Change in Inventory – Another common mistake that impacts the balance sheet is a change in inventory. You would think that it should be pretty simple. It is easy to determine how much inventory you have right now because you can just go make a physical count, but if you are working on a set of financial projections you will need to project future inventory amounts, and this will impact your balance sheet each month. The trick is that a change in inventory also impacts your cash flow statement, you actually have to take last month’s inventory and subtract this month’s inventory and then reduce your cash balance by that amount. Yes, it really is tricky that is why a good CPA is worth their wages.

4. Retained Earnings – Retained earnings is kind of a catch all. Retained earnings is supposed to be the sum of all your net income or net loss from the day you started your business. So if you were doing things right from the beginning you should be able to calculate retained earnings, but what I often see with small businesses is that they don’t have all the data needed to calculate retained earnings, so they just use Retained Earnings as a plug number. They make retained earnings whatever it needs to be in order for the balance sheet to balance. I am not suggesting that you do this, but just know that it is not an uncommon practice.

My suggestion, don’t waste another minute trying to figure out how to balance your balance sheet if it is not working. Hire an accountant, learn to use Quickbooks, or use ProjectionHub if that can meet your current needs. I have wasted many, many hours wrestling with a balance sheet, and I have a background in accounting. I hope this post either cleared some things up for you, or helped you make the decision to stop wasting your time and to call in a professional. Good luck!

Photo by Karolina Grabowska from Pexels

3 Deadly Pro Forma Balance Sheet Mistakes Entrepreneurs Make

February 4, 2013 by Adam Hoeksema Leave a Comment

Entrepreneurs are often asked to create a set of pro forma financial statements for their business during the process of securing capital through a loan or investor, or when they are about to experience a big change like a merger or acquisition, or a large new customer. Future financial projections can be tricky all the way around, but the balance sheet is particularly difficult for non-accountants. Before we get into 3 common mistakes that small business owners make when developing a pro forma financial statement, you can download our balance sheet spreadsheet template for free. Here are 3 of the most common and damaging mistakes that you can make when working on your balance sheet forecast:

1. Incorrect Accounting for a Loan – There are a few ways to really screw up your balance sheet if you don’t understand how a loan impacts the balance sheet. So let’s say you are applying for a loan, and you are creating a pro forma assuming you got a $100,000 loan. After you get the loan, obviously cash should increase by $100k, you should have a loan account on the liabilities side of the balance sheet for $100k, but what happens in the subsequent months? Let’s say you have a $1,000 monthly loan payment, so cash will decrease by $1,000, but your loan balance will not decrease by $1,000. A portion of the loan payment will go toward interest expense which will not decrease the loan balance, instead it would decrease net income which ultimately decreases your retained earnings line on the balance sheet.

2. Failing to Account for Depreciation – Let’s assume that you use the $100,000 loan to purchase a building. So again your liabilities will increase by $100,000, but your assets will also increase by $100k initially. Then you need to determine how long the building will last. Typically you can assume 30 years for a new building, and then calculate depreciation for each month of the 30 years. This means that each month the value of the building will decrease due to depreciation. In our example we can assume the building will be worthless after 30 years, so we will depreciate the building to 0 over 30 years. So to calculate monthly depreciation you will just take $100,000 divided by 30 years divided by 12 months which equals $277 per month. Each month the value of your building asset should go down by $277 and your retained earnings should also decrease by $277 per month.

3. Assets Do Not Equal Liabilities + Owner’s Equity – The worst mistake that you can make when creating your balance sheet pro forma is when your balnce sheet does not BALANCE! In order to keep your balance sheet balanced, you must utilize the equation Assets = Liabilities + Owner’s Equity. This equation must always work, it must always balance. If you change the value of an asset, you must change the value of either a liability or owner’s equity account. You really need to understand accounting to make sure you are getting this right, otherwise you are going to end up with an unbalanced balance sheet which could be pretty embarrassing when you bring your financials to a potential lender or investor.

Next time you are creating a pro forma financial statement make sure to keep this common issues in mind. If you feel uncomfortable with your own projections, but don’t want to spend $250 an hour for your CPA firm to review what you have created, feel free to shoot me an email at adam@projectionhub.com and I would be happy to review your pro forma financials for you.

How to Create a Projected Balance Sheet for a Startup

January 31, 2013 by Adam Hoeksema Leave a Comment

Creating a projected balance sheet for a startup can be an incredibly complex task. Do you know what the hardest part is? To get the balance sheet to BALANCE! I speak from experience because I spent hours and hours trying to get our financial projection model that is used with our financial forecasting tool – ProjectionHub, to balance and tie in with our projected cash flow and profit and loss.

Although you could just use ProjectionHub or other Excel templates that help you create a balance sheet, this post is to help those of you that want to create a custom financial projection model and need to build your balance sheet from scratch.

Steps to Create a Balance Sheet Forecast

1. Format Your Balance Sheet – The first thing you need to do is format your balance sheet. In the simplest form all you need to remember with your Balance Sheet is that Assets = Liabilities + Owner’s Equity. You can see the basic line items that make up a balance sheet in the image below.

2. Enter Starting Balances – The first thing you need to do is enter starting balances. I am going to show you an example of a fictitious business called Adam’s Lawn Care. When I started the business my balance sheet was pretty empty as you can see below. All I had was a bit of cash in the bank, a lawnmower, and some “Paid in Capital” which was my personal investment into the company to purchase the lawnmower initially.

You can also see that the $4,500 in cash that I have also shows up in the Paid in Capital section as my investment into the company.

3. How Sales Impact the Balance Sheet

So the next thing that will hopefully happen with the business is SALES! So let’s assume I get a contract with 5 local businesses to mow their grounds. I will do the work, and then invoice the company and expect to get paid in 30 days. Let’s say that I charge each company $1,000 for the first month of work, so I would have $5,000 in sales, but the day after I invoice that does not show up as cash on the balance sheet yet. Instead it shows up as Accounts Receivable.

4. How Expenses Impact the Balance Sheet

In the process of generating those sales I will have some expenses like fuel, oil, meals, etc. Let’s assume that I have $1,000 worth of expenses half of which I paid with cash, and the other half I paid with a credit card. So let’s see how that changes my balance sheet.

Now you will also notice above that Retained Earnings went up to $4,000. Retained earnings is all of your cumulative net profit or net loss. So as of right now I have $5,000 in income and only $1,000 in expenses so I have a $4,000 net income that flows through to retained earnings on the balance sheet.

5. How Does a New Loan Impact the Balance Sheet

Finally I want to show you how the balance sheet changes when I buy a small office for my business. I had to get a loan from the bank to purchase the building, so my liabilities increase by the loan amount of $75,000, and my assets increase by the price of the building, $75,000.

I hope this has been helpful to see how different transactions impact the balance sheet. As you are creating your own financial model, just remember that each transaction that impacts an asset, must impact a liability or equity account equally so that you always stay balanced.

If you have any questions please feel free to email me at adam@projectionhub.com and I would be happy to help.

Photo by RODNAE Productions from Pexels