My last two blogs “Determining your sales budget to be included in your annual budget” and “What expenditure needs to be included in the annual budget?” showed what needed to be included in the profit and loss account to calculate the profitability of the business.
To calculate the profitability we took:
Sales – Cost of sales = Gross profit – Expenditure = EBITDA
EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation.
Please note that as the profit and loss account is being compiled remember to list the assumptions used to calculate the figures at the same time as they may have to be referred to.
To start building up the trade debtors (accounts receivable), trade creditors (accounts payable) and stock (inventory) in the balance sheet we now have to feed figures into the balance sheet from the profit and loss account.
VAT is added to the sales from the profit and loss account and sales + VAT are put into the balance sheet as trade debtors. If the customers’ terms are 30 days then the trade debtor is translated to cash in the next month and the trade debtor is removed from the balance sheet.
Cost of sales where there is no stock and expenditure with the exception of salaries (to be discussed later) will be treated in a similar way. VAT is added to the expenditure from the profit and loss account and expenditure + VAT is put into the balance sheet as trade creditors. If trade creditors are paid on 30 days terms then the trade creditor is removed from the balance sheet in the next month.
Stock is included in the balance sheet net of VAT. To calculate stock purchases:
Closing stock + Cost of sales (profit and loss account) – Opening stock = Stock purchases
NB You will need to determine what the level of closing stock should be.
The purchases are treated in the same was as expenditure as discussed above by adding VAT and including them in trade creditors.
So far I have shown how to calculate the trade debtors, trade creditors and stock on your balance sheet. There are other areas of the balance sheet which still need to be looked at and these will be discussed later.