Business FinancesCreating a financial snapshot of your company
There are three types of financial statements that will be necessary to provide a complete picture of your company: a Balance Sheet, an Income Statement, and Cash Flow Projections. Projected financial statements, known as Pro Forma Statements, can help you work through various "what if" scenarios for your business, and allow you to plan where you want your business to go.
If you run an established business, financial statements from the last few years will communicate where your business is coming from. The more years of historical information you provide, the deeper the insight you'll give into your business' financial position and how it has changed over time. Whatever life stage your business is in, your financial Statements should be a reflection of the growth, operations and market you described in the first half of your business plan.
Revenue - Expenses =
Net Profit or Loss
Just as a Personal Statement of Net Worth is a snapshot of your personal assets, liabilities and net worth, a Balance Sheet is a snapshot of what your business owns and owes at a specific point in time, usually at the business' year end. By drawing up Balance Sheets on the same day each year, you can track your business' progress over time. A Balance Sheet is divided into 3 sections:
- Assets, or what your business owns.
- Liabilities, or what your business owes.
- Equity, or the difference between what your business owns and owes.
If you run an established business, include in your Business Plan past Balance Sheets for your business, ideally for the last three years. If you're starting up, create a Balance Sheet by detailing the assets and liabilities your business already has.
An Income Statement is a summary of your business' performance over a specified period of time, normally one year. It starts with your business' revenues (also called sales) and subtracts the expenses incurred to generate those revenues. The result is your business' net profit or loss.
If you run an established business, include Income Statements for your business, ideally for the last three years. Whether you're starting up or you run an established business, create Pro Forma, or projected, Income Statements that reflects your business plan. That means estimating your sales, cost of goods of sold (for non-service businesses) and expenses; including depreciation, interest, and income taxes - and profit for coming years.
Cash Flow Projections
A business can show skyrocketing sales and profits on its Income Statement, but still be forced to shut its' doors because it doesn't have enough cash on hand to meet its' obligations. Why? Because income doesn't take into account when revenues are collected and expenses are paid.
The biggest sale in your business' history might not matter if you have bills to pay this week and your customer isn't planning to pay for 90 days. That's why forecasting cash flow is critical to keeping your business healthy. Include in your business plan Cash Flow Projections by listing all the cash you expect to come in to and go out of your business each month for the next year.
If your Cash Flow Projections suggest that your business will need cash, talk to your banker about financing options. For instance, you may want to consider an operating line of credit to help meet day-to-day requirements and cover cash flow needs until you can collect your accounts receivable.