The budgeted balance sheet is a statement of forecasted/predicted balance movement. It contains expected numbers and financial information related to forecasted business performance.

Forecasting is applied to balance sheet items like assets, liabilities, and equity. These balances are adjusted in line with expected business activities, changes in capacity, capital expenditure budget, cash budget, inflation, factoring, budget sales (receivable movement), business plan to raise finance, pay dividends, raise loan financing, and many other factors.

Purpose of budgeted balance sheet

The following stands as the purpose of the budgeted balance sheet.

1. Set the working direction of the team—The Budgeted balance brings clarity to setting the working direction. Each department gets a clear target in terms of doing work and achieving the desired financial performance.
2. Ensure departmental coordination—The Budgeted balance sheet gives a summary of forecasted financial performance. It helps understand that no item can be analyzed in isolation, as all figures are dependent on other figures/numbers. Hence, departmental coordination is encouraged and enriched when analyzing, discussing, and comparing the budgeted balance sheet.   
3. Helps assess forecasted financial performance—Startups and businesses facing fierce competition may be worried about facing trouble in the near future. Generating a budgeted balance sheet helps understand how future performance is expected to look. Hence, it’s helpful in making decisions and taking pro-active corrective actions.
4. Helps in decision making—Weak financial areas can be proactively identified and corrected on a timely basis. This helps ensure informed decisions are made in the best interest of the business.
5. Stakeholders’ requirement—Investors, banks, financing companies, and other stakeholders may request a budgeted balance sheet as part of their vetting process.
6. Regulatory requirements– The regulator may require a budgeted balance sheet for procedural formalities/compliance.  

The given list is not exhaustive, and there can be multiple other reasons why companies may need budgeted balance sheets.

Limitations of budgeted balance sheet

Following are some of the limitations of the budgeted balance sheet.

1. Full of assumptions – A major portion of the budgeted balance sheet is driven by assumptions and judgments not backed by benchmark/standard procedures. Hence, it can be challenging to sort the assumptions with malefic intentions.
2. Complex structure—To reach a reasonably budgeted balance sheet, a high level of inter-department communication and coordination is expected, which may not always be feasible.

How budgeted balance sheet is generated?

Following is the standard procedure for generating a budgeted balance sheet.

1. Collect recent financial statements- Collect recent & real financial statements. This information is used to understand current business aspects and related financial performance. Simply put, this financial statement is used to generate a budgeted one. 
2. Collect departmental budgets—Collect departmental budgets, such as capital expenditure budgets, cash budgets, investment budgets, sales budgets, cash forecasting, revenue forecasting, expense budgets, and financing details.
3. Estimated changes/modifications- Review departmental budgets and underlying assumptions to predict the balance movement. Test the reasonableness of underlying assumptions and adjust them to align with your market understanding and business trends.
4. Finalize the budgeted balance sheet—Construct a logical flow of balance movements and final outlook. Analyze the overall forecasted balance sheet and ensure all figures are reasonable and in line with recent trends.

Conclusion

A budgeted balance sheet is a financial document enlisting forecasted balance sheet items. Reviewing this financial document gives an idea of how business finance is expected to look in the near future.

The purpose of the budgeted balance sheet is to set working direction, enhance departmental coordination & cooperation, help in decision making, and may be a regulatory requirement.

The problem with this forecasting practice is the large number of assumptions used and the complex structure of the budgeted balance sheet.

The standard procedure for generating a budgeted balance sheet is to collect recent and real balance sheets, departmental budgets, make modifications, and generate a budgeted balance sheet incorporating rational and trending movement.