Balance sheet forecasting does more than just satisfy regulatory requirements. It can help finance leaders gain insight into future capital needs and liquidity levels. This enables them to make informed business decisions with confidence to capitalize on potential earnings based on financial health.
A reliable balance sheet can offer visibility into how current investment and lending decisions affect its position in the coming days, weeks, and months.
Many finance leaders today rely on manual processes, like Excel, that can be prone to errors, slow, and less effective in supporting broad business decisions.
As regulatory requirements become increasingly stringent and the business environment grows more volatile, the stakes for faster, more accurate methods have never been higher.
With the ability to have balance sheet projections feed directly into asset and liability management (ALM), budgeting, and profitability analysis, this unified approach enables teams to run scenarios more quickly while maintaining consistency across assumptions.
This guide walks you through the process of conducting balance sheet forecasting, including assets, liabilities, and equity. Various methods will be discussed, along with solutions to common challenges.
Below, you’ll also have access to a downloadable checklist designed to guide your process of evaluating budgeting solutions that support balance sheet forecasting.
Download the Budgeting Solution Evaluation Checklist to identify the tools that can streamline forecasting and improve decision-making.
Why Balance Sheet Forecasting Matters
If you’re a finance leader at a local community or regional bank, balance sheet forecasting can act as a crucial safeguard in volatile and otherwise uncertain markets.
With predictions of future assets, liabilities, and equity, leaders can anticipate potential liquidity pressures and risk to earnings. They can make strategic moves to ensure adequate capital, which is a critical step to maintaining investor and stakeholder confidence.
Forecasts of loan growth, for instance, flow directly to income projections. Similarly, changes in capital structure can impact profitability and long-term risk assessments.
This is a crucial aspect for both internal decision-making and external stakeholders, such as regulators and board members, who may require transparency on the institution’s financial strength.
Ultimately, when done well, balance sheet forecasting provides you with a clear view of liquidity, earnings, and capital needs, enabling you to act with confidence. Integrated forecasting—connecting ALM, planning, and profitability on one platform—beats manual spreadsheets by reducing errors, keeping assumptions consistent, and speeding reforecasts.
Building a Balance Sheet Forecast Model
Before starting a balance sheet forecast, you must have a solid base of information to start with. Historical financial data provides an initial foundation, but identifying the operational and economic drivers is key to a more valuable forecast.
By mapping these drivers to projections, finance leaders can develop an accurate forward-looking view that accounts for past performance and expected conditions.
Scenario analysis adds a layer of insight. It can allow a bank to assess the resilience of its balance sheet under various conditions, such as different interest rate environments, deposit runoff assumptions, or liquidity stressors. This type of testing is crucial for contingency planning, particularly in the current market of fluctuating interest rates.
Keep in mind that using Excel-based systems may make it difficult to balance or analyse your balance sheet. Between its static nature and susceptibility to human error, data quickly becomes outdated as you target growth and calculate earnings.
Banks using Empyrean’s ALM and Budgeting modules have a competitive advantage. The tools help maintain balanced forecasts through shared data and calculations, while integrating balance sheet projections into planning and profitability frameworks.
The result is a model that’s both mathematically sound and aligned with broader strategic planning.
For a deeper look at different modeling methods, see our guide on types of financial models.
How to Forecast Balance Sheet Line Items
A robust balance sheet forecast begins with its core building blocks — assets, liabilities, and equity. Each has its own unique drivers and cash flows that require accurate loan, investment, deposit, and borrowing models for current performance and future growth.
But, they must remain in balance to create a forecast that board members, regulators, and other stakeholders can rely on.
Tools like Empyrean Dataverse ensure forecasts are grounded in a consistent set of assumptions to reduce the risk of misalignment across planning models.
Forecasting Assets
Forecasting assets begins with examining cash and liquidity, items that should be closely tied to cash flow forecasts and liquidity stress testing. Key drivers typically include depositor behavior, interest rate assumptions, and the availability of funding.
For community and regional banks, loans are typically the largest component. Forecasts for these should consider growth targets, rate drivers, credit quality, prepayment speeds, and origination volumes.
Pro Tip: Align loan and investment forecasts with asset and liability management assumptions to ensure consistency across scenario planning.
Forecasting Liabilities
The process of forecasting liabilities begins by examining deposits, which are influenced by customer behavior, rate sensitivity, and historical decay trends. Accuracy is key here, as deposits are often the primary source of funding for community and regional banks.
When considering borrowings, careful consideration must be given to repayment schedules, interest expenses, and anticipated funding needs. Other short-term obligations, such as accruals and payables, should align with broader operating assumptions.
Forecasting Equity
Equity is the final piece of the balance sheet forecast. Projections often roll forward retained earnings from net income forecasts, which serve as an indicator of provision assumptions.
In simpler terms, the equity forecast depends on projected profits, which are influenced by how much the bank expects to lose on loans.
Capital planning should account for regulatory requirements and growth strategies, while dividend and member distribution policies should factor in the remaining capital to support future expansion plans.
Ultimately, keeping equity aligned with profitability and capital adequacy objectives helps ensure investors’ confidence in the reliability of forecasts.
Methods of Balance Sheet Forecasting
Not all forecasts are equal. The complexity of a bank, as well as the volatility of its operating environment, are key factors in determining the most suitable forecasting method. The following are several methods that finance leaders can consider.
Percentage-of-Growth Method
This is the simplest forecasting method. It uses a growth percentage that keeps the current distribution of accounts the same, but will grow accounts by that percentage.
This is most suitable in stable environments where predictable growth patterns are present and where relationships between sales and balance sheet items are steady.
However, its dependence on static ratios means it can miss the nuances involved with a volatile market, making this approach a good starting point rather than a complete solution.
Driver-Based Forecasting
Driver-based forecasting ties balance sheet items with operational and financial drivers. For instance, deposit balances can be modeled with decay rates, while loan balances can be projected by taking into account certain assumptions on loan prepayments.
By tying forecasts to these typical real-world occurrences, driver-based forecasting can be a more accurate methodology to utilize. It’s especially valuable for banks with a diverse offering of products where the performance of one segment can significantly impact others.
Historical Trend or Seasonality
Historical trend or seasonality works by extrapolating past performance. With this, finance leaders can extend historical patterns into the future to predict what balances may look like.
This is especially effective for predictable accounts that have regular cycles or maintain stable, long-term relationships. The downside is that history isn’t guaranteed to repeat itself, so unforeseen factors, such as rate shocks, can render past patterns unreliable.
Advanced Methods: AI and Predictive Analytics
One of the more advanced forecasting methods leverages scenario modeling, machine learning, and predictive analytics to capture relationships across the balance sheet.
This enables banks to stress-test multiple scenarios and outcomes simultaneously, ranging from sudden deposit outflows to changing interest rate environments. Financial institutions should keep in mind that AI and predictive analytics models may still need time to reach the appropriate level of efficacy and maturity that users of top ALM tools need.
Common Challenges and How to Solve Them
Regardless of experience level, finance teams will inevitably encounter challenges when building balance sheet forecasts, particularly maintaining model balance. Small errors — like incorrect assumptions across the balance sheet, income statement, and cash flow — make the equation unbalanced and the forecast unreliable.
Finance teams that rely on manual, spreadsheet-based models can also struggle to handle the scale and complexity of modern forecasting. Additionally, manual entry is more prone to input errors.
Fragmented processes are also an issue. For instance, if various teams, such as finance, risk, and treasury, work from different sets of data or assumptions, the end result could be siloed forecasts that are inconsistent. This wastes time and makes it more difficult to strategically plan when market conditions shift.
The solution lies in implementing automation, centralizing data, and integrating workflows. A unified platform like Empyrean allows teams to work from a single dataset, ensuring that forecasts align cross-functionally. This accelerates reporting and provides a greater degree of confidence to regulators, board members, and other stakeholders.
One area where this can prove especially valuable is in forecasting liabilities, specifically, predicting deposit behavior. With the right analytics, finance leaders can incorporate insights on rate sensitivity and build realistic forecasts. Empyrean supports this process by unifying monitoring deposit risk with broader forecasting workflows.
If these challenges sound familiar, the quickest way to get traction is to see a working model and take a checklist back to your team. Start here:
- Stream Dynamic Balance Sheet Forecasting in Empyrean ALM Webinar — Watch a step-by-step build of a balanced forecast, how to incorporate deposit behavior and rate paths, and how to carry results into planning and profitability for faster ALCO prep.
- Download Dynamic Balance Sheet Forecasting Guide — Get a practical checklist to evaluate budgeting solutions, map drivers to line items, and set a monthly or quarterly reforecast cadence.
Turn Your Balance Sheet Forecast Into Action
Balance sheet forecasting is only as good as the decisions it allows finance leaders to make. A well-built forecast provides insights into liquidity needs, performance trends, and any strategic planning or steps that need to be made to ensure stakeholder expectations are met.
This can be accomplished with a forecast that’s connected across multiple functions, and that’s something that Empyrean brings to life, as it can integrate ALM, budgeting, profitability, and Dataverse into a single framework. With Empyrean Budgeting & Planning, your bank can seamlessly connect projections with strategic moves.
Download the Budgeting Solution Evaluation Checklist, and book a demo to see how Empyrean unifies forecasting and planning.
Are you ready to take the next step?
Start building faster, more accurate budgets with Empyrean Budgeting & Planning. See how integrated planning transforms decision making.
FAQ: Cashflow-Based Balance Sheet Forecasting Management
Finance leaders often ask similar questions when it comes to cashflow-based balance sheet forecasting management, such as:
- How does it add value?
- How frequently should it be done?
- How can it impact long-term strategic planning?
Below are answers to the most common items, designed to offer clarity along with best practices to follow.
What Are the Benefits of Cashflow-Based Balance Sheet Forecasting?
Balance sheet forecasting offers the following main benefits:
- It provides transparency into funding needs and liquidity positions.
- It offers more reliable insights into profitability and performance across business lines.
- It builds a greater degree of confidence among stakeholders and regulators.
- Automation helps speed up budgeting and planning cycles.
With Empyrean’s budgeting, planning, and profitability tools, these forecasts transform status reports into strategic decision-making tools.
How Often Should Balance Sheet Forecasts Be Updated?
Refreshing a balance sheet forecast on a monthly or quarterly basis is a good general rule of thumb.
However, off-cycle updates should also be made if key assumptions change due to market conditions, such as significant shifts in rates, lending volume, or deposit behavior.
What’s the Biggest Challenge in Balance Sheet Forecasting?
Data quality and consistency are other common issues, highlighting the importance of centralized and integrated systems. Most breakdowns start upstream—teams pull numbers from different systems and spreadsheets, each with its own timing and definitions.
When ALM and budgeting use different assumptions for deposits, prepayments, or credit loss, minor mismatches cascade into imbalanced statements and misleading results. A centralized, integrated system gives finance and risk one source of data and rules, so updates flow through every report, reducing rework and surprises.
How Does Balance Sheet Forecasting Link to Budgeting?
Key factors that drive forecasts, such as loan growth, deposits, and capital expenditures, directly inform budgetary assumptions. That, in turn, shapes revenue, expense, and profitability planning. Combined, they provide a single, unified view of the bank’s financial trajectory.