A balance sheet is a financial statement that shows your business’s assets, liabilities, and equity. Each company’s balance sheet will be tailored to meet their specific needs, but in basic terms the essence of the sheet is that it shows what a company owns and what it owes at a point in time.
Assets are everything the company owns such as cash or account receivables, liabilities are everything the company owes such as loans or deferred revenue, and equity is the value of your company after you subtract what you owe from what you own. Your balance sheet needs to follow one universal rule: Assets = Liabilities + Equity. As it is in the name, the balance sheet makes sure everything is balanced and in order.
Balance sheet forecasting is simply the projection of your company’s assets, liabilities, and equity in the future. The projection estimates the balance between what you own and owe based on your historical and current data.
Every company needs a financial model to assess a company’s financial position in the past, present, and future.The financial model consists of 3 financial statements:
You need all 3 of these statements to have an efficient model. In fact, the cash flow statement can be derived using your balance sheet and income statement. Essentially, the balance sheet shows just how liquid (how quickly assets can be converted into cash) your company is in the present and in the future and it's one of the most important factors potential investors look at. See why balance sheet forecasting is so important?
As a part of the financial model, a balance sheet helps you figure out how to finance your company. Balance sheet forecasting will let you know when your company will run out of cash under certain circumstances. Through your forecast, you will be able to understand how your present day business decisions will impact your company’s financial position in the future.
Especially for SaaS businesses, balance sheet forecasting is a crucial component. Because SaaS businesses have deferred revenue, your balance sheet will need to be able to track this deferred revenue. The forecast will allow you to understand how upfront payments will impact your business for your present day decisions.
However, it’s important to note that your financial model and forecasts are only as accurate as your data. Making sure your data is clean and correct is essential for dependable forecasts.
The logic and assumptions your financial model is based on is important, but it’s also just as tricky to create. But, good news: if you’re stuck, we can help you build a financial model you can trust and depend on.
Having a balance sheet should be the first thing on your list; creating the forecast should be the second. Not only can balance sheet forecasting help you track your liquidity, but it also makes sure all your other financial data points are in order and accounted for. The balance sheet serves as a good health check to make sure you aren’t missing crucial components.
Having a balance sheet early on in the life of your business will lead to more accurate predictions and will allow you to avoid running your business based on bad assumptions and habits. With a balance sheet, your business decisions will be both centered on and backed by data.
The deferred revenue component of SaaS adds on another layer of complexity for revenue recognition, but maintaining an accurate balance sheet will help keep your financial model and business in good condition. Tracking and projecting your deferred revenue at an early stage will ensure all your payments are correctly accounted for.
Long story short: a balance sheet is a central component to financing your business … AKA it’s responsible for keeping your company afloat. No matter the age or size of your SaaS company, do not hold off on balance sheet forecasting—it will save you time, headaches, and help you to put your best (and most accurate) foot forward.