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Accruals and Payables

How the Foresight models calculates accruals and payables

Accounting is the process of recording, analyzing, and reporting the financial transactions of a business, and among the many rules of accounting lies a fundamental question: when should you record a revenue or expense? Cash accouting records revenues and expenses when cash is received or paid, accrual accounting records revenue and expenses when they are earned and incurred, respectively. Cash accounting is fairly easy, accrual accounting takes more understanding of accounting principles and techniques, but is valuable because it can show a truer picture of company performance by aligning activity, revenues, and expenses, and reducing fluctuations in reports caused by timing differences between them.

More on accrual accounting at Essentials of Finance and Accounting for Financial Modeling.

The Foresight models can be used for either cash or accrual accounting. The models will assume cash accounting, but have a lot of details built into the revenue and expense forecasts to account for timing differences between when revenues and expenses are recognized and when the associated cash changes hands. The prebuilt structures for revenues, capital expenditures and depreciation, and inventory, taxes all have components that can handle accrual accounting principles, and there are a few additional assumptions that can be used to model accruals and payables.

How to use

There are a few inputs in the Balance Sheet section on Get Started in the Standard Financial Model and Starter Financial Model that can be used to model accruals and payables of expenses. If used, these assumptions will impact the relevant balance sheet accounts, and the changes in balance will flow through Changes in Working Capital on the Statement of Cash Flows on Statements.

The assumptions cover a few standard financial accounting accounts:

  • Accounts Receivable: Money owed to the company for goods or services that have been delivered but not yet paid for, the total balance is a current asset on the balance sheet
  • Prepaid Expenses: Money paid by the company in advance for goods or services to be received in the future. The total balance is a current asset on the balance sheet.
  • Other Current Assets: Current assets are assets the company expects to convert into cash or use up within one year or within the operating cycle of the business, and it includes cash, accounts receivable, and inventory. In the Foresight models this line is an "other" bucket to account for other assets that do not fit into the other prebuilt lines.
  • Accounts Payable: Money a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts payable are a liability on the balance sheet and represent short-term financial obligations to pay creditors.
  • Accrued Liabilities: Expenses that have been incurred but not yet paid. These typically include wages, interest, and utilities that are recognized under accrual accounting before the payment is made, reflecting the company's obligations that exist at the balance sheet date.

How it works

The inputs on Get Started that model balance sheet accruals and payables are:

  • Use automatic cash collection calculations? (yes/no) By default this is turned on (select "yes"), you can turn off (select "no") to enter in your cash collection schedule manually. In most cases you will want to leave this on, unless you want to create your own calculation of accounts receivable.
  • Days Accounts Receivable (in number of days). If select "yes" in the assumption above, the model allows you to assume the Days Accounts Receivable so that you can collect the cash later than recognizing the revenenues, if applicable for your business. Any period assumed <= 30 days means it is collected in same month as revenues.
  • Balance of Prepaid Expenses, as % of SG&A
  • Balance of Other Current Assets, as % of SG&A
  • Balance of Accounts Payable, as % of SG&A
  • Balance of Accrued Liabilities, as % of SG&A

Each of the last four will calculate the balance at the end of the period for each account by multiplying the assumed percentage by the SG&A in that period, and will show up on the Balance Sheet on Statements. The change in the balances represent a use of cash that is reflected in the Change in Working Capital line on the Statement of Cash Flows on Statements.

Using Actuals

The Standard Financial Model and Starter Financial Model are prebuilt to allow you to update the model every period with actual financials and create rolling forecasts and budget variances. The process for entering actuals is detailed at Actual Financials.

Important to note that the inputs for actual financials do not ask for the balances at the end of the period, but the change in balances each period. The model uses the inputs from the income statement and a few other accounts to recalculate the balance sheet and statement of cash flows, so the balances on the balance sheet are not direct inputs. Instead, the inputs in the Actuals section on Forecast ask you to input the change, so that the model can compile all the changes and recalculate the new balances. This process keeps the model consistent and aligned across all accounts on the consolidated financial statements.

Common Modifications

No common modifications to the calculation structure. As always, you can choose to not use the prebuilt calculations and create your own logic or forecast of interest income, and link it into the primary revenue and expense section on the Forecast sheet, select the appropriate "Changes in N" account, and the model will handle the appropriate treatment.