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      Balance Sheet Planning Guide

      Balance sheet forecasting is a vital tool for predicting future financial health and enabling strategic planning. This guide explains how to use Jirav for accurate and insightful projections.

      Article Contents

      Balance Sheet Forecasting

      Balance sheet forecasting is essential for businesses to manage financial planning and decision-making effectively. It involves predicting future assets, liabilities, and equity to anticipate funding needs, assess growth capacity, and make strategic decisions. 

      When forecasting, it's not necessary to plan every balance sheet account in detail. Focus on the accounts with the most movement or those that significantly impact the business. Other accounts, with minimal activity or less relevance, can generally follow the default Jirav behavior of carrying forward the last month of actuals.  By concentrating on key accounts, businesses can make more informed decisions and achieve better financial projections. This guide specifically focuses on how to plan the most common key accounts, helping you to prioritize efforts where they matter most.

      Cash

      Cash is notably the most important part of a balance sheet plan, as it reflects the net outcome of all financial activities and directly impacts a business's liquidity and stability.

      In Jirav, cash is managed through the System Cash account, which automatically adjusts to reflect the net effect of all planned movements in P&L and balance sheet accounts. For instance,  planned revenue of $1,000,000 results in a corresponding automatic $1,000,000 increase in cash.

      In other words, cash acts as a balancing figure on the balance sheet; any changes to other accounts will trigger an offsetting adjustment to cash to maintain balance. This process is automated and as a result, drivers should never be added directly to cash.

      To configure the System Cash account, navigate to Settings > Company > Plans and select the appropriate cash account. The System Cash account is set globally and is valid across all plans.

      Learn more about configuring System Cash here.

      Accounts Receivable


      Accounts Receivable (A/R) is a key aspect of the balance sheet forecast as it represents the cash tied to revenue that may not be collected at the same time it is recognized. For example, a company may deliver services and send an invoice where payment is expected the following month. Or a subscription may be sold where a client pays upfront for a year of services, but the revenue is recognized over the subscription year. 

      Managing A/R efficiently involves understanding the timing of payments and the impact on cash flow. By forecasting A/R accurately, businesses can better plan for future cash needs and ensure a healthy balance sheet. Here are a few common ways to model A/R in Jirav:

      Option 1: Net Delayed Days for Collection

      This is the most popular method for planning A/R. The Net Delayed Days for Collection A/R planning method aligns cash with revenue by increasing A/R for current month invoices and reflecting payments received as a decrease to A/R in a subsequent period.  There are two ways to implement this: System A/R or Balance Sheet Plan Drivers.

      System A/R Net Delayed Days for Collection is typically best if the business's revenue aligns with invoicing and a Net 0, 30 or 60 Day collection pattern.  

      Apply this method globally to all plans from Settings > Forecast > A/R FORECASTING METHOD: Delayed days for Collection. Jirav will then forecast the selected Accounts Receivable account as the Previous Month Balance plus Current Month Total Revenue less Collections per the selected A/R Delay. Learn more about configuring Net Delayed Days for Collection System A/R here. 

      Alternatively, the Balance Sheet Plan Drivers approach is useful when the following apply to the business: 

      • Invoicing is not in line with revenue such as a subscription software that is billed upfront annually
      • Certain revenue accounts need to be excluded from impacting A/R
      • Different collection periods need to be applied for various revenue streams (e.g., 30 days for one, 60 days for another)
      • Analysis of different collection patterns is needed (e.g., what happens if we hold customers to 30 day collection terms vs 60 days?)
      • A non-standard collection period should be used, like 45 days

      Learn more about configuring a Net Delayed Days for Collection using Balance Sheet Plan Drivers here. 

      Option 2: Trended Percent of Revenue

      This method is especially useful when utilizing Auto Forecast for revenue as it can provide a more meaningful cash forecast for the business than simply relying on revenue alone.

      System A/R Trended Percent of Revenue is typically best if the business's revenue is growing at a similar rate to its historical performance. If the plan for revenue is significantly different than the historical trend, this method is not recommended.

      Apply this setting globally to all plans from Settings > Forecast > A/R FORECASTING METHOD: Trended Percent of Revenue. Jirav will then forecast the selected Accounts Receivable account by calculating the historical A/R as a percentage of total revenue, based on the selected trailing months' average, and subsequently multiply it by forecasted revenue. Learn more about configuring Trended Percent of Revenue System A/R here. 

      Option 3: Ratio Based

      A/R can also be planned using balance sheet drivers utilizing an assumption for Days Sales Outstanding (DSO) or Accounts Receivable Turnover Ratio.  While using drivers is a more advanced method, using this method can yield more realistic forecasting as there often can be a discrepancy between A/R balances in actuals and forecast in relation to the corresponding values for revenue. 

        • DSO Method
          DSO tells us the average number of days it takes for us to collect on an invoice after a Sale is made.  This can also be used to forecast AR. Learn more about the DSO method Here.
        • A/R Turnover Ratio Method
          The AR Turnover Ratio tells us how efficiently our company is collecting revenue by calculating the number of times AR is collected over a given period. This can also be used to forecast AR. Learn more about the A/R Turnover Ratio method Here.

        Accounts Payable


        Understanding the timing of payments and their impact on cash flow, businesses can better plan for their future financial needs and maintain a healthy balance sheet. Forecasting A/P in Jirav can provide valuable insights into managing payables efficiently.

        A/P is generally more straightforward to forecast than A/R since the principles of AP are the same across most businesses.  Nonetheless there are a few ways to forecast this liability account.Here are a the two most common ways to model A/P in Jirav:

        Option 1: Net Delayed Days for Payment

        This is the most popular method for planning A/P. The Net Delayed Days for Payment A/P planning method aligns cash with expenses by increasing A/P for current month expenses typically paid through AP and reflecting payments as a decrease to A/P in a subsequent period. 

        Apply this method globally to apply plans from Settings > Forecast > A/P FORECASTING METHOD: Delayed days for Payment. Jirav will then forecast the selected Accounts Payable account as the Previous Month Balance plus the selected A/P Accrual Accounts for the Current Month less Payments per the selected A/P Delay. Learn more about configuring Net Delayed Days for Payment System A/P here. 

        Option 2: Trended Percent of OpEx

        This method is especially useful when utilizing Auto Forecast for expenses as it can provide a more meaningful cash forecast for the business than simply relying on periodic expenses alone.

        System A/R Trended Percent of OpEx is typically best if the business's expenses are growing at a similar rate to it's historical performance. If the plan for expenses is significantly different than historical trend, this method is not recommended.

        Apply this setting globally to all plans from Settings > Forecast > A/P FORECASTING METHOD: Trended Percent of OpEx. Jirav will then forecast the selected Accounts Payable account by calculating the historical A/P as a percentage of total operating expenses, based on the selected trailing months' average, and subsequently multiply it by forecasted operating expenses. Learn more about configuring Trended Percent of OpEx System A/P here. 

        Inventory

        Inventory is not relevant to all businesses, but it is a critical forecasting tool for industries such as consumer packaged goods and manufacturing to maintain a healthy business.  There are two ways to plan Inventory in Jirav. 

        1. Days Inventory Outstanding (DIO)
        2. Inventory Turnover Ratio

        The difference between these two methods is that DIO is an assumption that allows inventory forecast to differ from actuals and Inventory Turnover Ratio is based on trended actuals to maintain a forecast that is similar to actuals, this is similar to Trended % of Revenue for A/R.


        Learn more about how to forecast Inventory in Jirav. (Coming soon!)

        Capital Expenditures 

        Fixed Assets, Depreciation, & Amortization 

        Forecasting fixed Assets and their corresponding depreciation and amortization is relevant to most business plans, however it will be more relevant in an industry like construction or manufacturing than SaaS or consulting.  Regardless of industry, the method to forecast these asset accounts is the same in Jirav.


        Learn more about building a Capital model here.

        Prepaid Expenses

        Forecasting prepaid expenses is crucial for cash and balance sheet planning as they reflect cash outflows, unlike the Income Statement which only displays monthly amortization. Accurately predicting prepaid expenses ensures that these costs are distributed to the correct periods, offering a more precise depiction of a company's financial status and cash flow.

        Learn more about how to use Jirav's Prepaid module.

        Debt 

        The forecast of borrowing and paying down debt is critical to an accurate balance sheet forecast and relevant to a majority of businesses.  Jirav supports forecasting payments on existing debt and forecasting future debt.  The most common example of debt forecasting is a fixed-term compounding interest loan, but Jirav can also forecast lines of credit and other versions of debt. 


        Here is a Help Center on forecasting debt.


        Fundraising

        Businesses that are either early stage startups or are experiencing negative cash flow often need to raise capital in addition to or instead of debt financing.  The most common way of forecasting fundraising is as a manual entry into the increase line of a specific equity account, such as “Series A.”


        Distributions

        Individuals in some forms of businesses are paid income through distributions of equity such as business owners and investors.  Distributions can be forecast manually entered decreases to the Distributions, which is most common, or by using drivers.  Often distributions are forecast last on the balance sheet as they can be dependent on cash balance from forecasting other parts of the balance sheet.  


        Suggested Advisory Conversation

        To add value and ensure meaningful client interactions, consider asking the following advisory questions during your consultations. These questions are designed to help understand the impact on the financial model and ensure appropriate adjustments in Jirav.

        Cash Flow and Liquidity

        1. What are your short-term and long-term cash flow needs?
          How should we adjust the cash flow assumptions in the model to reflect these needs?
        2. Are there any upcoming significant expenses or investments that we need to plan for?
          How can we incorporate these into our cash flow projections?
        3. How do you manage your working capital, and what improvements can be made?
          What changes should we make to the model to optimize working capital management?

        Accounts Receivable

        1. What are your current credit policies, and how do they impact your cash flow?
          Adjust the A/R forecast as DSO or A/R turnover assumptions in our model?
        2. Are there opportunities to shorten your collection cycle?
          How can we reflect these opportunities in the A/R forecast?
        3. How do you handle overdue accounts, and what strategies can we implement to reduce them?
          What adjustments should we make to the A/R aging model?

        Accounts Payable

        1. What terms do you have with your suppliers, and are there opportunities to negotiate better terms?
          How can we adjust the A/P payment terms in the model to reflect these opportunities?
        2. How do you manage your payables to optimize cash flow?
          What changes should we make to the A/P assumptions in our model?
        3. Are there any recurring payments that can be optimized or deferred?
          How can we incorporate these changes into our forecast?

        Inventory Management

        1. How do you currently forecast inventory needs, and what challenges do you face?
          What adjustments should we make to the inventory turnover or DIO assumptions?
        2. Are there specific inventory items that frequently cause stockouts or excess stock?
          How can we reflect these issues in the inventory forecast?
        3. What strategies can we implement to improve inventory turnover?
          What changes should we make to the inventory model to improve turnover?

        Fixed Assets and Depreciation

        1. What are your plans for capital expenditures in the near future?
          Have these capital expenditures been planned for in the model?
        2. How do you track and manage asset depreciation, and can we optimize this process?
          What changes should we make to the depreciation assumptions in our model?
        3. Are there any assets that need to be reevaluated or replaced?
          How can we incorporate these changes into our fixed asset forecast?

        Debt and Financing

        1. What is your current debt structure, and are there opportunities for refinancing?
          How should we adjust the debt assumptions in the model to reflect these opportunities?
        2. How do you plan to manage upcoming debt payments?
          What changes should we make to the debt repayment schedule in our model?
        3. Are you considering any new debt or financing options for future growth?
          How can we incorporate these options into our financial forecast?

        Fundraising and Investments

        1. What are your plans for future fundraising, and what milestones do you need to achieve?
          How should we adjust the equity and capital raise assumptions in our model?
        2. How do you allocate capital raised from investors?
          What changes should we make to the model to reflect these allocations?
        3. What strategies can we implement to ensure efficient use of raised funds?
          How can we optimize the financial model to reflect efficient capital utilization?

        Distributions

        1. How do you currently manage distributions to owners and investors?
          What changes should we make to the distribution assumptions in our model?
        2. Are there any tax implications we should consider in your distribution strategy?
          How can we adjust the model to account for these tax implications?
        3. What are your long-term goals for distributions and reinvestment in the business?
          How should we reflect these goals in our financial forecast?

        This playbook is designed to empower you to leverage Jirav's powerful forecasting tools, providing your clients with the insights needed for sustainable business outcomes. By mastering these techniques and asking the right questions, you'll be well-equipped to offer high-value advisory services and drive financial success for your clients.

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