Castaway can be used to forecast many types of business structure, including companies, trusts and partnerships.
When you create a new forecast, Castaway starts with a company structure by default. This article guides you through the changes needed to model a partnership.
Modelling a partnership in Castaway requires 5 changes from the default forecast:
- Remove tax on profits (e.g. income tax, company tax, corporation tax)
- Set up equity elements for partners
- Create automatic distributions of the partnership profit
- Rename reports to suit partnerships
- Remove unnecessary inbuilt formulas from reports
1. Remove tax on profits
Partnerships generally don't pay tax on profits in their own right. Instead, profits are fully distributed to partners, who are then responsible for any taxes. To model a partnership in Castaway, we first need to remove any tax on profits.
You can do this in 2 ways:
- While setting up a new forecast, set the Income Tax Method to 'Exempt' in the setup screen
- With the forecast open, go to the Forecast workspace and click on the Income Tax element Profit and Loss then set the Income Tax Method to Exempt
2. Set up equity elements for partners
In the Balance Sheet section of the Chart of Accounts, set up the Partners as Equity accounts by clicking on the E shield. This will now give us a destination to model partners drawings or contributions.
To model a partner contribution, add the amount as a positive value in the Enter Equity Change line of the corresponding partner. In contrast, to model a partner drawing, the value is to be entered as a negative value.
To determine where these partner accounts will be reported in the Balance Sheet, change the Balance Sheet Reporting to General Equity.
3. Create automatic distributions of the partnership profit
We are now going to model the partnership arrangement via the Dividends element and the Transfers function. The Dividends element is a Castaway in-built element found in the Profit and Loss Chart of Accounts that can be used as a profit distribution tool.
Steps to set up the Dividend element for distribution
- Go to the Forecast workspace and rename the Dividend element in the Profit and Loss Chart of Accounts to "Income Distribution"
- Change the Dividend Method to the method that suits your operations best:
- Enter Dividend Declared: applicable to partnerships that do not have a consistent cycle of distributing profits
- Link to Equity Units: applicable to partnerships that distribute on the number of units (this method is only available if the equity change method is either Unit x Rate or Driver x Rate)
- % of Net Profit After Tax: applicable to partnerships that distribute a percentage or 100% of its profits to each of their named partners
- Under Settings, select the appropriate Transfer Method:
- % of Dividend declared: easier set up for automated distribution based on each partners' share of profit
- Enter Transfer: manual data entry of the dollar amount to be distributed to each partner
Model the distribution
- Click on the Transfers tab
- Click on Add Transfer and select TRANSFERS - % of Dividends Declared
- In the pop-up window, select the Partner equity element you'd like to distribute the profits to
- Click OK to confirm
- Add the percentage or dollar value in the Transfer line
- Repeat the steps to model the distribution to the other named partners
Castaway does not allow transfers in actuals months. You are only able to enter the results of the transfer i.e. increased equity and either a dividend/distribution or a retained earnings adjustment.
Moving forward, you will need to enter the Partner Equity values in the Balance Sheet and the Profit Distribution in the Dividend element in your Actuals Balance Sheet.
4. Rename reports to suit partnerships
Partnerships use terminologies that are different from that of companies, which is the Castaway default structure. Once you’re happy with the modelling setup of your partnership, rename your reports to reflect the language used by partnerships.
You can rename some of the reporting lines by right-clicking the in-built report line and select Rename. For example, in the Profit and Loss report, you might choose to rename Movement in Retained Earnings to Undistributed Profits or Dividend Expense to Income Distribution.
5. Remove unnecessary Inbuilt Formulas from reports
Castaway has a number of Inbuilt report formulas across every report that are purposed to provide further insightful commentary and analysis. However, in instances where the Inbuilt formulas are not required in the report, you may choose to remove them and add your own formulas. Learn how to create your own custom report formula via THIS link.
To remove Castaway’s inbuilt formulas, follow the steps down below:
- In the Reporting Workspace, select the Report you’d like to make changes to. For example, the Profit & Loss report
- Click on the Report Editor icon located in the upper left corner of the workspace
- A side panel will open
- Uncheck the report formulas that you no longer want to include
- Once you’ve completed your selection, save the changes made by clicking on the X located under the Report Editor icon
- Review your reports to ensure that they are as expected
Download a sample file for Modelling Partnerships down below. The attached sample file is built on the following assumptions:
- The partnership makes monthly sales of $20,000 which will be distributed between 2 partners, Partner A and Partner B
- The profits are distributed evenly between the two i.e. 50-50
- The partnership is tax-exempt
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