BALANCE = CLOSING LIQUID ASSETS
3.5.7. Making the balance sheet plan
It is known that the balance sheet shows the possessions of the company in a given time from two aspects in money. The assets reflect the function and the presence, while the liabilities reflect the origin of the possessions. The balance sheet plan reflects the common effect of the investment and funding related decisions of the company. We will review the related knowledge based on the detailed planning method of the balance sheet. When making the planning we cannot use a general planning method for all the balance sheet items. However, as a basic principle it can be accepted that we can select the most expedient planning method for the planning period only if we have detailed information for that particular balance sheet item.
Based on our knowledge acquired so far it is quite reasonable that the balance sheet plan cannot be a separate item. During the planning process of the different items the most frequently used planning method is the balance sheet method, which has the below general relation:
Certainly, we have to consider both the specialities of the different items and the company itself. We have to avoid using the balance sheet method mechanically. Henceforth, we will cover only the most typical variations in stocks; we are not aspiring to get the entire picture.
Planning the assets
The reasons for the change in stock of the intangible assets are uniqe typically for the given company. The planned economic transactions (e.g. extraordinary depreciation, asset disposal due to the obsolescence of software, capitalised costs of R&D activities etc.) serve the basis for the planning.
The increase in the tangible assets appears in the investment, development plan of the company. The title of the decrease in their value could be e.g. depreciation, asset disposal, sales, free delivery etc. The title also determines the part of the plan, where it had to be planned e.g. in case of a free delivery the recorded value has to be stated as an extraordinary expense.
Financial investments can be planned in view of the management decisions. Due to the decisions made we can review the increases and decreases.
When making the balance sheet plan the inventories can be divided into two main parts of purchased and self-manufactured inventories. The required information for planning both categories is represented in the sales, production and material needs plan of the company.
Closing balance = Opening balance + Increase in stock – Decrease in stock
Among the balance sheet items of the receivables the biggest part is represented by the account receivables (trade debtors). The account receivables can be planned based on the circulation time and by use of the empirical matrix. The planning of the other receivables is quite difficult due to its heterogeneity. Based on the available information for the planning year and the data of the base period we can estimate the closing balance of it.
Variations in the value of securities are also determined by management decisions. If the stock of securities decreases, we have to handle the amount of accounted impairment with a special consideration in line with the operative statutory requirements.
The variation of the liquid assets can be followed up in the liquidity plan. If there is no calculation mistake in the liquidity plan and the context between the different parts of the plan is ensured, the closing balance of the liquid assets in the liquidity plan should equal with the closing balance of the liquid assets in the balance sheet plan.
The accrued and deferred assets can be planned based on the planned economic transactions and by taking the relating requirements of the accounting law into consideration.
Planning the liabilities
The changes in shareholders’ equity are caused by those economic transactions, which partly appear in the P&L plan and in the liquidity plan. In addition to that we also have to consider the frames provided by the accounting law. In most cases the reasons of the change are to be seeked in e.g. the increase of the share capital, transfer government subsidies to capital reserve etc.
During the planning of the provisions we use the prudence concept by taking the relating risk-factors and statutory requirements into consideration. During the planning we take the data represented in the production and sales revenues plans as bases. (It is important to know that the its planning does not attend with the flow of money.)
During the planning of the long-term liabilities we have to consider the opening balance and the repayment instalments in the current year. The relating basic data can be found in the development-, investment- and liquidity plan.
The planning of the advances received from customers is made by the previously mentioned balance sheet method.
We can make the planning of the accounts payable as described in the liquidity plan (balance sheet method).
The short-term credits and loans can be planned by the balance sheet method. On the one hand it can be planned by knowing the opening balance, on the other hand based on the turnover-data, which appear under the category of credit borrowing and credit repayment in the liquidity plan. Based on this:
The other short-term liabilities have also got several parts. Among the more significant items we can mention the following: The planning of the liabilities tothe employee is based on the plan of the utilisation of the labour-force. The liabilities for social contributions can be planned based on the former item. The tax liabilities have to be planned according to the rules of taxation. We can plan the other short-term liabilities by taking the data of the base year and correct them by the effects of the more significant changes appearing in the planning year.
When planning the accrued and deferred liabilities, reasonably we have to use the planning tools mentioned at the accrued and deferred assets.
We have all the data needed for creating the balance sheet of the Ltd. Based on the mentioned correlations and the received planned figures we can create the balance sheet of the company.
The balance sheet of the Ltd can be found in table 57.
3.5.8. The cash flow plan
When making cash flow plan it is necessary to draft its theoretical background, related most important theoretical connections, which are interpreted on the basis of liquid assets – the quantification of the change in liquid assets occurred in the period of review. What is the purpose with this? To calculate the effect of the cash flow factors and classify them in accordance with the professional aspects. This information is required to the financial analysis and the structure of liability.
Essentially we do not need new knowledge. We examine the earlier learned knowledge from the point of view of the effects on the cash flow. The starting point is balance sheet. The task is the explanation of the effects of balance sheet items on the cash flow. Therefore let us classify the balance sheet items. On the basis of compulsory similarity of the balance sheet:
ASSETS (A) = LIABILITIES (L)
In accordance with our purpose let us divide the assets and the liabilities into their items. We carry out the classification on the basis of the relation of the items to the liquidity.
ASSETS (A)
Fixed assets (FA)
Current assets not liquid (NLCA)
Current assets (CA ) Liquid assets (LA)
Accrued and deferred assets (ADA) Let us make the same in case of the liabilities.
Table 57. The balance sheet of the Ltd
Description t 0 t1 t 2 t3 t4
closing opening closing closing closing closing
A. FIXED ASSETS 268111 268111 243044 219324 256739 232374
I. INTANGIBLE ASSETS 279 279 142 0 0 0
I/1 Trade-marks, patents and similar assets 279 279 142 0 0 0
II. TANGIBLE ASSETS 267832 267832 242902 219324 256739 232374
II/1. Land and buildings and rights to immovables 91674 93674 91098 88522 85946 83370
II/2. Plant and machinery, vehicles 124535 152135 129990 107845 85700 63555
II/3. Other equipments, fixtures and fittings, vehicles 8023 8023 6261 4499 2737 2634
II/4. Breeding stock 14000 14000 15553 18458 22356 22815
II/5. Assets in course of construction 29600 60000 60000
III. FINANCIAL INVESTMENTS
B CURRENT ASSETS 64099 64099 97518 133023 111859 156380
I. INVENTORIES 41439 41439 52567 52553 49048 52217
I/1. Raw materials and consumables 814 814 814 821 814 814
I/2. Work in progress, intermediate and semi-finished
products 34229 34229 40364 38764 36509 38298
I/3. Animals for breeding and farrening and other livestock 3473 3473 6871 9042 7519 8075
I/4. Finished products 2923 2923 4518 3926 4206 5030
I/5. Goods
II. RECEIVABLES 3368 3368 25068 24855 24961 25084
II/1. Trade debtors 1124 1124 564 640 714 763
II/5 Other receivable 2244 2244 24504 24215 24247 24321
III. SECURITIES
IV. LIQUID ASSETS 19292 19292 19883 55615 37850 79079
C. ACCRUED AND DEFERRED ASSETS
TOTAL ASSETS 332210 332210 340562 352347 368598 388754
D. SHAREHOLDERS’ EQUITY 289452 299312 322282 337102 354415 375508
I. SUBSCRIBED CAPITAL 102500 102500 102500 102500 102500 102500
III. CAPITAL RESERVE 107999 107999 107999 107999 107999 107999
IV. ACCUMULATED PROFIT RESERVE 61995 88813 88813 111783 126603 143916
VII. PROFIT OR LOSS FOR THE YEAR 16958 22970 14820 17313 21093
E PROVISIONS
F. LIABILITIES 32898 2098 18280 15245 14183 13246
II. LONG-TERM LIABILITIES 10149 8458 6767 5076
I1/4. Investment and development credits 10149 8458 6767 5076
III. CURRENT LIABILITIES 32898 2098 8131 6787 7416 8170
III/2. Other short-term loans 498 498
III/4. Accounts payable 30800 30800- 1812 1965 2101 2163
III/8. Other short-term liabilities 1600 1600 6319 4822 5315 6007
G. ACCRUED AND DEFERRED LIABILITIES 9860
TOTAL LIABILITIES 332210 301410 340562 352347 368598 388754
LIABILITIES (L)
Profit or loss of the year (PL) Shareholders’ equity (SE)
Other shareholders’ equity (OSE) Provisions (PR)
Subordinated liabilities (SL) Long-term liabilities (LTL) Current liabilities (CL)
Accrued and deferred liabilities (ADL)
After the classification of the balance sheet items let us outline the compulsory similarity of the balance sheet use herein above introduced marks.
A = L
FA + NLCA + LA + ADA = PL + OSE + PR + SL + LTL + CL + ADL Let us express the liquid assets:
LA = ( PL + OSE + PR + SL + LTL + CL + ADL ) - ( FA + NLCA + ADA )
Let us order this formula - because of the contents of the factors - in the way that the investments and their sources form a group. The other factors are the components of the net working capital. This rearrangement satisfies the basic principle that the cash flow induced by the investments has to be planned real. The liquid assets calculated on the basis satisfy this requirement. In accordance with aforesaid statements:
LA = ( PL + OSE + SL + LTL - FA ) + ( PR + CL + ADL - NLCA - ADA )
Investments and their sources Assets and liabilities of continuous work
If this formula is true - that is the liquid assets are equal with the sum of the items, then it is required to be true in case of change ().In accordance with aforesaid statements:
LA =(PL+ OSE + SL + LTL - FA) + (P + CL + ADL - NLCA - ADA ) The change means the change of the stock that is the difference between the opening and the closing stock. Generally by the items the change between t0 and t1 has to be calculated. As we are interested in how the change of the above-mentioned items has an effect on the cash flow it is suitable to examine their effects more detailed. Classification outlined as follows (Figure 4.) do justice to this.
The interpretation of the two sides of the balance sheet as mathetatical equation is necessary but not sufficient condition to catch the real cash flow. Change of the stock of the items is not always joined to cash flow that is there is no incoming, no outcoming payment.
Description Effect of the change of
the balance sheet items on liquid assets
1. Profit or loss for the year (PL)
2. Depreciation (DEP) +
3. INTERNAL RESOURCE (1+2)
4. Inventories (I) increase decrease 5. Receivables (R) increase decrease 6. Sequrities (S) increase decrease
7. Accrued and deferred assets (ADA) increase
decrease
8. Change of NLCA (4+5+6+7)
9. Provisions (P) increase decrease 10. Current liabilities (CL) increase decrease 11. Accrued and deferred Liabilities (ADL) increase decrease
12. Change of CL (9+10+11)
13. LIQUID ASSETS FROM OPERATION(3+8+12) 14. Liquid assets from other source
FA decrese
SL increase +
LTL increase +
OSE increase
decrease
15. TOTAL LIQUID ASSETS FROM OTHER SOURCE (14)
16. TOTAL AVAILABLE LIQUID ASSETS(13+15) 17. Utilization of liquid assets
Investment
Repayment of LTL
Repayment of SL
Dividend
18 TOTAL UTILIZATION OF LIQUID ASSETS 17)
19. NET VARIATION IN LIQUID ASSETS (16-18)
Figure 4. Conceptual model of the cash flow calculated on liquid assets basis
The “+” and “-“ signs in figure 4. indicate the required corrections, which are necessary to be used due to the settlement of accounts in order to eliminate the “distorting” effect of accounting from the aspect of the cash flow.
Let us interpret it by a given example. It is known that the first item of the income statement is the sales revenues. It may happen that a certain proportion of the revenues is not realised financially. As it is not revealed in the P&L, from the aspect of the cash flow the correction needs to be done through the variation of the relating balance sheet item, the Receivables. It is always important to consider the “counterpart” of a balance sheet item, revealing its connection to the P&L from the aspect of the cash flow. The necessary correction has to be done accordingly.
The basis of making the cash flow plan is the balance sheet and the income statement. It is, however, to be emphasized that when we are indicating the changes in the actual financial status we also have to consider other aspects. We are underlining the effect of some items – without attempting to be comprehensive – to be simpler to understand the theoretical context.
The first element of cash flow is the depreciation, which has to be considered relating to the assets part of the balance sheet. It is known that depreciation is a cost – decreasing the P&L – which is not an expense. From the aspect of the cash flow it increases the value of the liquid assets.
The decrease in the variation of stocks of FA could be; sales, free delivery, assets brought into the business or decrease due to natural disaster.
So, the first question to be answered is how the above mentioned items influence the P&L for the year? Based on our accounting related knowledge we know that the decrease in stocks should be derecognised from the ledgers on its recorded value (net value). So, the decreases are other expenses, which are not accompanied by expenses in the current year, they decrease only the value of the P&L for the year. That is they do not affect the stock of liquid assets except for delivery against payment (sales). We take the necessary correction in account by indicating it with a sign of “+” within liqiud assets from other sources. These kinds of impacts can be found e.g. in the variations of cow stock, the livestock requalified from pregnant heifers, the value of culled cows. It is important to emphasize that if the balance sheet figures of the FA for instance cannot reflect changes that could be the root of an interaction between different factors with reverse effects. It can happen that the extent of decrease is accompanied with the same extent of stock increase (e.g. investment).
The impact of NLCA on cash flow can be easily defined based on the theoretical scheme. In case of the variations of stocks, the titles of the decrease can be:
- utilisation, - sales, - impairment.
The utilisation – decrease in stocks – is part of the production costs; however it is a cost, which does not mean an expense at the same time. Considering the sales and impairment, it requires a same correction like it was written down when discussing FA.
The increase in inventories fixes liquid assets; it does not have any impact on the current year P&L. From the aspect of cash flow in some certain cases – in case of redundant, dead stocks –
we have to take into account its unfavourable effect. The receivables have and also can have direct connection with the income. The decrease in the opening balance of receivables will be an increasing item, regarding the fact that it does not affect the P&L for the year and it directly affects the cash flow. If the stock of receivables increases, it should be a decreasing item, as the calculation of the P&L is not based on the principle of financial realisation. In cases of those a certain proportion of the P&L appear as a receivable.
SE should be treated similarly as inventories. The impact of ADA is more complex. If its creation is related to an expense, it will only be recorded as a cost – this is the impact on the P&L – in the following year, however from a financial aspective it appears as an expense of the current year. That is why the increase will reduce the liquid assets of the current year.
However, the correction deriving from the decrease offsets the impact on the current year P&L. The method will be similar, if its creation related to an income. It needs to be emphasized that the effect of these items is very complex and the flow of money indirectly connected to them appears in other lines. On the other hand, they have income and expenses made without money-flows, by which of them the P&L should be corrected during the calculation of the cash flow. (It is very important to pay attention to the pro rata accruals during the calculation of the cash flow.)
Regarding the liability side of the cash-flow we have to emphasize the consideration of the effects relating to SE. If the P&L for the year > 0 and no external resources have been involved (e.g. government subsidiy, founders’ payments etc.) then the only source of the changes in SE is the P&L for the year. The consideration of the external resources is important at the item deriving from the other resources. It is not needed to take the effects as correcting items – which come from the accounting of the other items “within each other” of the shareholders’ equity – into consideration, as the cash flow of these items has already been realised in the prior period. We can see a similar situation when we are posting the prior year P&L into the accumulated profit reserve when opening a new accounting year, independent of whether it is a profit or a loss. Thus, we have to proceed also carefully when we are defining the change in the SE.
Briefly we have to deal with those changes of the OSE, which will eventually mean money spent from the aspect of the company’s cash flow. In this case it means the involvement of the accumulated profit reserve in order to pay dividends. The involvement of the accumulated profit reserve into the dividend does not mean any changes on the assets side; it will cause liability and the increase of the CL. The increase and the decrease will offset each other.
Paying out the dividend will mean a final cash outflow and the cash flow will change at that time. Therefore, it is not enough to rely only on the data of the balance sheet and the income statement when making the cash flow. The change in the PR does not have any impact on the cash flow – we can also call it as an internal change – the correction is required because of its impact on the P&L.
In the case of the CL it can be easily understandable why the change in its stock has been considered as a correcting item. Part of the items of CL increases the liquid assets (short-term credit, loan etc.). Another group of them offset the effect of the asset increase. The third big group of the CL contains those elements, which connect to the items not realised financially, but recorded as costs. For example: social contribution, bank-interest recorded as a cost, but not transferred etc. Finally, we have to mention those type of items (e.g. VAT, consumption