Most companies only plan the P&L, so why plan the balance sheet?
• Projected ratios for covenant purposes
• Asset/Liability planning for revenue and expense calculations (interest, depreciation, etc.)
• One of the main reasons is cash
Companies that plan their Balance sheet often do it because they want to know their projected cash flow position in any given period (liquidity, solvency, need for additional borrowing, capital injection, etc.
Traditional Approach Methods
• Basic Data Entry
• Ratios
Direct Approach Methods
• Basic Data Entry
• Detailed bottom-up Cash Flow Approach
Problems with the traditional method
• The Balance Sheet is an afterthought
• No detailed explanation for changes in account balances and cash (i.e. no linkage between P&L and BS)
• Indirect Cash Flow Statement doesn’t provide much insight into operations
• No collection of data from operational areas of the company
Data Entry – Direct Approach
• Create 2 nd set of Direct Cash Flow Accounts that mimics P&L
• Have users enter P&L and Cash Flow Data by account
• Create calculation logic to drive balance sheet accounts (excess of revenue over cash receipts increases the A/R balance, excess of expenses over cash disbursements increases A/P balance)
Data Entry – Direct Approach
Pros
• Provides greater linkage between P&L and BS
• Cash is no longer a plug but driven directly off cash flow inputs
• Inputs from operational areas of the company
Cons
• More calculation logic required to be set up and maintained
• Potentially large number of additional accounts are required
• Additional training and data entry effort required from end users
• Could be difficult for end users to track cash infows/outflows
History of Detailed Planning Manager
• Traditionally only used for Personnel Planning but expanded for more uses (CAPEX, Sales, etc.)
• Powerful calculation engine that allows you to model in a variety of ways
• And even more! You can incorporate BS and CF elements into your different models
Detailed Direct Approach
Pros
• Provides great linkage between P&L, BS and CF
• Easier for end-users to understand and less prone to errors (users just need to select payment terms
and selections are limited)
• Greater insight into data and ability for sensitivity analysis for better decision making
Cons
• More calculation logic required to be set up and maintained
• Potentially large number of additional accounts are required
• Additional effort required from Admin
Don’t necessarily have to pick a single approach, can use a combination – Not every account can be/needs to be planned using a direct approach (e.g. long term loans, share capital, prepaid expenses, or accounts that are centrally planned)
