Budgeted Balance Sheet

A budgeted balance sheet, sometimes called a pro forma balance sheet, is a projection of what a company's balance sheet is expected to look like at a future date, built from the company's other operating and financing budgets rather than from transactions that have actually occurred yet. It is typically the final piece assembled in a company's master budgeting process, since it depends on the results projected in nearly every other budget the company has prepared.

Starting from the current balance sheet, each line item is projected forward using information from the related operating budgets: the budgeted income statement projects retained earnings, the sales and collections budget projects accounts receivable, the purchasing and production budgets project inventory and accounts payable, and the capital expenditures budget projects changes in property, plant and equipment. The cash budget, built from all of these, projects the ending cash balance, and the resulting projected assets, liabilities and equity are assembled into the budgeted balance sheet itself.

Beyond simply projecting where the company expects to stand financially, a budgeted balance sheet lets management check whether the overall plan is financially consistent and achievable before the year even begins: it can reveal that a planned combination of sales growth, inventory buildup, and capital spending would require more financing than the company currently has available, prompting adjustments to the plan well in advance rather than discovering the shortfall only once it is too late to arrange financing calmly.

Lenders evaluating a loan request, or monitoring an existing loan's covenants, often ask to see a company's budgeted balance sheet alongside its budgeted income statement, since projected leverage ratios, working capital levels, and net worth all depend on the balance sheet, not the income statement alone. A budgeted balance sheet showing an expected covenant breach gives both the borrower and the lender advance warning to renegotiate terms before an actual violation occurs.

Like any budget, a budgeted balance sheet is only as reliable as the assumptions feeding into it, and because it sits at the end of the budgeting chain, it is particularly sensitive to errors or overly optimistic assumptions anywhere earlier in the process; a small miss in projected sales growth, for example, can compound through receivables, inventory, and cash projections by the time it finally shows up as a meaningfully different ending balance sheet than what was originally planned.

A company projecting $200,000 of net income for the coming year, combined with no planned dividends, would show its budgeted retained earnings rising by that same $200,000 on the budgeted balance sheet. If the budgeted balance sheet also shows cash falling to a level below the company's minimum required balance under a loan covenant, that signals a financing need the company can address in advance, before the shortfall actually occurs.

A budgeted balance sheet is not estimated on its own; it is the final output of the entire budgeting process, pulling its figures from the budgeted income statement, the cash budget, the capital expenditures budget, and the beginning balance sheet. Projected accounts receivable comes from the sales budget combined with expected collection patterns, projected inventory comes from the production or purchasing budget, and projected retained earnings rolls forward from the prior period's balance plus budgeted net income minus any planned dividends. Because it depends on every other budget being completed first, the budgeted balance sheet is typically the very last schedule assembled in a company's annual budgeting cycle.