more-arw search

Q&A Forum

Budgeting with balance sheet

I read your article below and have prepared a P&L before and have no problem doing this part. What I am trying to figure out is how I can get the items on my balance sheet to merge with my profit and loss. My boss thinks his profit is now truly the bottom line on his P&L- not the case. Where we used to have rent expense (which was budget for), we now have a mortgage note (which is now under loans payable on the balance sheet) and doesn't reflect on his P&L, yet those expenses do come out of his Operating account. In respect to the working budget and knowing how much you truly have left over at the end of the year, I would imagine you somehow have to account for those expenses on the balance sheet as well (i.e. Distributions, etc.), how is this done when it all does come from what you are spending monthly and what your bottom line is at the end of the year?


(C2C Specialist) |

To me this seems like the story of the blind men and the elephant. You've got the part(s) down but not the linkage to the whole.

Starting with the P&L is well and good but I'd consider sitting down and reviewing the linkages between the Income Statement, Balance Sheet and the Cash Flow statement.

I'm going to assume a very simple P&L:



I would start with the P&L and discuss how sales become AR and are collected in another period. All of this has an impact on the BS and the CF.

If you can show this and explain it in a way that is understood you should be good.

That said at most companies, a Cost Center manager has their own P&L but rarely ever has their own Balance Sheet. That is usually handled by the Controller's Team or another finance team.

Topic Expert
Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

In my opinion, based on many years of work in more than several industries I have learned that a budget that does not include the entire chart of accounts is an incomplete budget and is often useless when looking at the overall forecasted performance of the organization, or as I like to refer to as the future financial health of the company. This implies that a forecasted Balance Sheet and the forecasted Statement of Cash Flows must exist for every period (e.g., month) in the budget and must be available for every version of the budget and for every re-forecasting activity that takes place within the budget year.

Forecasting a periodic balance sheet and statement of cash flows that tightly integrate to the forecasted income statement (P&L) is nearly impossible using conventional tools such as spreadsheets because in order to do this accurately and completely a forecasted balance sheet must behave like an actual period balance sheet, which consists of beginning balances and all transactions (debits and credits) that flow though all balance sheet accounts.

All changes to forecasted revenue and expense items must properly affect balance sheet accounts in the right accounts, the right budget periods and in the correct amounts. Only then will you be able to deliver future period balance sheets (and statements of cash flows) that will correlate with the proposed budget. With forecasted periodic balance sheets you will gain insight into the future financial health of your company and be able to forecast key financial ratios, know whether or not you’ll be able to meet loan covenants and many other key data that will allow management to make sound decisions based on reality and not on intuition.

This can be done with purpose built software applications that are becoming more common in corporate finance and even available to smaller companies, including single user versions. I would urge you to do research on this and find the right software that will do exactly what you are looking for. I’m glad you realize that just putting together a P&L budget is insufficient at best and is probably misleading under most circumstances.

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

What article are you referencing in your opening comment?

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

I recommend that each budget contain a cash budget in addition to the P&L. You can create a fairly simple model that links your net income or EBITDA to a condensed balance sheet and cash flow statement.
Potential investors or lenders are likely to ask for balance sheet projections so you should get in the habit of including them in any budget or forecasting exercise.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

Can you present the P&L, BS and Cash flow to him together in summary? It really sounds like you need to provide a cash flow analysis to him. I have worked with a lot of owners/leaders who do not understand how the financials work. I always try to simplify as much as possible in those cases and present what they need to make decisions. Even currently, I supply the entire financials, but always include a summary of high level items so the owners can glance at that summary page and then go back to the detail when they have time.

(Tax/Business Consultant) |

Sounds like the boss already has a fixed mindset of what s/he wants to do.

Suggest you take a F/S approach instead of just the P&L approach when budgeting because focusing on just the P&L side isn't realistic.

Does management understand/comprehend the F/S?
I've met many in business who still don't know how to interpret the basics of a F/S which is not uncommon. Also, each person has their own interpretation of what they get out of financials.

Products and Companies

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.