Werner Seebacher - Management Accounting. Part 2 – Profit Plan, Finance Plan, Budgeted Balance Sheet

The connection between balance sheet and profit/loss account can be seen in the result of the profit/loss account – in the profit or loss.

A profit which has been compiled in the profit/loss account increases the equity in the balance sheet of the enterprise, a possible loss reduces the equity in the balance sheet of the enterprise.

1 Figure 3: Balance Sheet and Profit/Loss Account

2.4. Balance Sheet | Profit/Loss Account | Profit Plan | Finance Plan | Budgeted Balance Sheet

In the transition from the past-oriented to the future-oriented consideration of an enterprise, the elements mentioned before, Balance Sheet and Profit/Loss Account are replaced by the elements Profit Plan, Finance Plan and Budgeted Balance Sheet.

The Profit/Loss Account is replaced by the Profit Plan.

The Balance Sheet is replaced by the Budgeted Balance Sheet.

The Cash Flow Statement (which has not been presented here) is replaced by the Finance Plan.

Profit plan, finance plan and budgeted balance sheet present the future economic or financial development of an enterprise.

2.5. Profit Plan

The profit plan which is presented here based on the structure of a results statement or contribution margin costing respectively, represents the future-oriented consideration of the expected or planned profit situation of an enterprise. With reference to the contents or the result which must be compiled (profit or loss) the profit plan equals the profit/loss account which is used for assessing the profit situation of an enterprise in a past-oriented way.

The result of both calculating schemes leads to the profit or loss of the enterprise which is denominated with various specific terms depending on the structure it is based on.

1 Figure 4: Profit Plan and Profit/Loss Account

Detailed explanations concerning the profit plan follow in chapter 3 - Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.6. Finance Plan

The compilation of the profit plan is followed by the finance plan. Based on the planned profit/loss after tax from the profit plan, the development of the liquidity or solvency of the enterprise respectively is planned in the finance plan. The result of the finance plan is the planned surplus of cash or demand for cash of the enterprise.

The planned profit from the profit plan is converted into cash flows in the finance plan.

1 Figure 5: Finance Plan

Detailed explanations concerning the finance plan follow in chapter 3 - Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.7. Profit Plan | Finance Plan

Profit plan and finance plan are closely linked in various ways. There are links and connections in both directions, from profit plan to finance plan and also back from finance plan to profit plan.

The profit after tax from the profit plan forms the basis for the finance plan. The result of the finance plan, the surplus of liquidity or the demand for liquidity, must be financed or can be invested and so – through the resulting interest payment (interest paid or interest income) – affects the profit plan again.

1 Figure 6: Profit Plan and Finance Plan

2.8. Budgeted Balance Sheet

The same as the balance sheet, the budgeted balance sheet is a presentation of the enterprise at a certain point in time.

The budgeted balance sheet presents the planned amount of assets that are available to an enterprise at the end of a planned year and also reflects the planned financing of the enterprise at that moment – whether through equity or debt capital respectively.

1 Figure 7: Budgeted Balance Sheet

A presentation of the budgeted balance sheet follows in chapter 3 - Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.9. Finance Plan | Budgeted Balance Sheet

Under consideration of the items presented in the finance plan, the budgeted balance sheet – for the end of the planned year – is derived from the opening balance sheet at the beginning of the planned year. Each of the figures presented in the finance plan changes one item of the balance sheet from the opening balance sheet to the budgeted balance sheet.

1 Figure 8: Opening Balance Sheet, Finance Plan and Budgeted Balance Sheet

2.10. Profit Plan | Finance Plan | Budgeted Balance Sheet – The Big Picture

The combination of the two connections described: Profit Plan | Finance Plan and Opening Balance Sheet | Finance Plan | Budgeted Balance Sheet results in a totally closed planning system which represents the central overall connection in accounting/controlling of an enterprise – the Big Picture.

1 Figure 9: Big Picture