We had been limited due to the absence of fresh yearly contributions to the general reserves; however, we can now source that information from the P&L and complete the reserves schedule.
We’ll move the reserves schedule data to the balance sheet, and the model should demonstrate how numbers can flow between sheets.
– Balance sheet projections
The balance sheet projection is quite analogous to the P&L projection. As in the case of net sales in P&L, gross block is substantially the most significant element in the balance sheet. Many of the balance sheet assumptions are derived from gross block. I shall omit a few line items which I consider straightforward and post a snapshot for your reference –
Current liabilities and provisions are expressed as a percentage of the gross block, with shareholders’ funds and loans calculated independently in different schedules. Additionally, deferred tax liability can be found by computing depreciation percentage from the asset schedule.
Next, let’s focus on the application of funds, starting with inventory. We should dedicate some attention to this item.
The value of inventory on the balance sheet is in Indian Rupees. We determined the ‘Inventory Number of Days’ by assessing the inventory data and including it in the Assumption Sheet. This figure represents the time it takes to convert stock into actual sales.
The inventory number of days can be useful in helping us form an opinion about management’s efficiency, the product’s appeal and market acceptance. Going forward, we use the average of that data for future years.
The balance sheet holds the inventory data in Rupee terms, and the assumption sheet shows the inventory number of days for present and future years. In order to ensure consistency between the two sources, we need to convert this information in the assumption sheet back into values in the balance sheet.
Once the balance sheet data is converted to the inventory number of days, a projection for averages can be made and the inventory number of days can be recomputed back into Rupee value.
To discover the Rupee value of inventory, a simple formula is used: days to Rupees.
Two*(Inventory number of days * (Material consumed/365))-Previous year inventory.
I won’t get into the details of how this formula is calculated; you can find more information online if interested.
I have put the equation to use on a balance sheet in excel, and this is what it looks like.
I’ll create the balance sheet projections in a snap. Making the estimates is easy – all I need to do is follow the balance sheet.
Congratulations – we now have a completed P&L balance sheet minus the cash and bank balance.
We will generate the cash and bank balance in the upcoming chapter by creating a cash flow statement, which is a vital step of our financial model. The resulting figures from this statement will be returned to the balance sheet. With these figures on hand, we can anticipate that the balance sheet would then be equal and balanced.
We’re finishing up this chapter and there are a lot of numbers and predictions at play. It’s inevitable that mistakes will be made – say, two months after constructing the model, I think the gross block number for Y6 is 700Cr instead of 588.77Cr; what should I do? Do I need to modify the entire framework?
Since we are making the model in an unified way, no extra work is required; any changes made will be mirrored across the model. So, don’t be too concerned with precision right now. We can experiement with it as much as desired.