Financial modelling requires a depreciation schedule to predict the value of a company's fixed assets (balance sheet), depreciation expense (income statement), and capital investment (cash flow statement).
Property Tax Depreciation
occurs when economic assets are depleted. This includes different types of assets, plants, and equipment (PP & E). When these assets are used, they begin to deteriorate and lose value. Different assets lose value at different rates. The depreciation schedule helps to outline these differences. The program lists the different asset classes, the type of depreciation method they use, and the cumulative depreciation that has occurred up to that point.
Set up a depreciation schedule
You have a section on capital investment to refer to past capital investment during the available period. Predict future capital investment using Tax Depreciation Schedule
. Apply your intuition to determine the appropriate forecasting assumptions to use from:
Percentage of capital investment in sales
Reasonable "hard dollar" that business is expected to occur during business
This prediction depends on the type of operation.
When applying capital investment as a percentage of sales, divide capital investment by sales to obtain capital investment. Use these percentages to make assumptions about future capital investment as a percentage of sales. Multiply this by your forecast sales to find your capital investment forecast. Tax Depreciation Report is also needed in this schedule.
Prepare a section for depreciation for the available period and past reference depreciation. With depreciation, there is also room for interpreting which forecasting assumptions to use. Apply your judgment based on the industry and business you have implemented and choose from the following assumptions:
Depreciation as a percentage of capital investment
Percentage of depreciation costs in sales
Reasonable growth rate
If depreciation costs appear to remain constant, the company may be using a straight-line depreciation policy, such as the straight-line depreciation method. In such cases, it is convenient to use depreciation as a percentage of net PP & E or simply transfer the recurring depreciation amount.
Overview of depreciation schedule
At the end of the depreciation schedule, create a breakdown of PP & E changes. This begins with the start of your PP & E balance after deducting accumulated depreciation. From this beginning balance, add capital costs, deduct depreciation, and then deduct sales or depreciation. The final total must already be the final PP & E balance minus accumulated depreciation.
Depreciation schedule example
At this point, it may be wise to smooth the projection. If the future trend seems to be unstable, or if the relationship between future investment capital expenditure and depreciation is different, consider the forecast assumptions for each item. Real estate is a particular industry that requires heavy use of depreciation schedules.
The three core statements are the backbone of the financial model, but the depreciation schedule is one of many support programs that can help solidify the model.
The net working capital program