Balance Sheet Assumptions

Days Outstanding Formulas

The following balance sheet accounts are estimated using a "days outstanding" formula:

• Accounts Receivable,
• Inventory,
• Accounts Payable.

These balance sheet accounts are derived from amounts in the income statement and a days outstanding number which you enter.  The balance sheet accounts are automatically updated each time amounts on the income statement change. So once the "Days" are set you can spend your time making changes to the income statement without worrying about the balance sheet.  Rather than enter an amount for each balance sheet month, you only need to enter 1 days number for each balance sheet account. 

The days outstanding formulas are simply rearranged turnover ratios.  Below are turnover ratios.

• Accounts Receivable Days = Sales / Accounts Receivable
• Inventory Days = Cost of Goods Sold / Inventory
• Accounts Payable Days = (Cost of Goods Sold + Expenses) / Accounts Payable

Rearranging the formulas we can estimate the balance sheet accounts.

• Accounts Receivable = Sales / Accounts Receivable Days
• Inventory = Cost of Goods Sold / Inventory Days
• Accounts Payable = (Cost of Goods Sold + Expenses) / Accounts Payable Days

An example is as follows.  Assume a Company's Income Statement has sales of $30,000 for the Month ended January 31, 2007 and the Company's terms are 30 days (1 Month) for all sales. The Company would enter an "Accounts Receivable Days" of 30.

The Company's Balance Sheet As of January 31, 2007 would show an accounts receivable balance of $30,000 (or 1 month times $30,000). If your company's terms are 10 days (or 1/3 month) then its January 31st accounts receivable balance is estimated at $10,000 (or 1/3 month times $30,000).

Estimating Days outstanding is not allows straight forward. For instance you may offer terms of 30 days, but that doesn't mean customers are going to pay after exactly 30 days. Some customers may pay after 35 days and some will pay immediately. Rather than spending a great deal of time estimating these numbers, you should just come with a conservative average. You get conservative numbers by over estimating Accounts Receivable and Inventory Days and under estimating Accounts Payable Days. I would over or under estimate each number by about 30%.  Being conservative will help insure that you don't run out of cash.

Accounts Receivable Days

If you are not sure about "Days Outstanding" see Days Outstanding Formulas above. If your Company does not offer any terms simply enter 0. If your company does offer terms you will need to estimate your Accounts Receivable Days.  If your terms are net 30 days and you expect all customer will pay according to your terms then simply enter 30.

Inventory Days

It's normal for companies to keep a certain number of days of inventory on hand. A new car dealer may keep 30 days of inventory on hand; this way customer's can test drive and browse a large selection of cars before making a purchase. However, a restaurant may keep 2 days of food on hand; the food must be fresh and it doesn't get test driven like a car.

If your Company does not stock inventory simply enter 0. If your company does stock inventory then estimate average number of days you will keep the inventory on hand before it is sold.

Some suppliers will allow you to sell inventory on consignment (with no additional terms), if this is the case then the inventory is on their books and not yours so you should not add these items to you inventory.

When calculating inventory days do NOT consider accounts payable days. For example if you believe you need 20 days of inventory on hand and your inventory vender offers you terms of 7 days, do NOT enter 13 (20-7) days for your inventory days enter 20 days. The "7 day terms" is part of the Accounts Payable Days only.

Accounts Payable Days

Some of your venders may offer you some credit. If they do and you decide to use it then you will need to estimate you company's average Accounts Payable days. The Accounts Payable Days is based the Cost of Goods Sold and on all the expenses (excluding Depreciation Expense and Interest Expense).

Other Balance Sheet Accounts

Other balance sheet accounts are forecasted in the following sections:

Page	Account
Fixed Asset Purchases	Fixed Assets Accumulated Depreciation
Equity Investments	Owners Equity
Other Balance Sheet Accounts	Other Short-Term Assets Other Long-Term Assets Other Short-Term Liabilities Other Long-Term Liabilities
Loans Payable	Loans Payable