Say the words “profit and loss statement or “cash flow statement” and expect some blank…
The Business Plan Financial Plan: Follow the Money
Every business plan includes a financial section that projects what the financial statements will look like after the business is up and running. Some businesses are already operating at the time the entrepreneur decides he or she needs more capital to fuel growth. Other businesses are in the planning stage and need investors or loans for startup.
Make a Statement
The financial plan present information as to where the business currently stands financially and where it intends on being in the future so the entrepreneur and potential investors can make good financial decisions. Most people need to professional assistance developing the statements to ensure they meet investor requirements. The set of financial statements include:
• Profit and Loss Statement – This is the statement most people are somewhat familiar with because it includes revenues and expenses, and calculates profit or loss. Readers tend to go right to the bottom line first to see when the end result from operations is net income. Revenues include all sources from product and service sales to interest earned. Expenses include items like salary and benefits, cost of goods sold, insurance, office supplies, rent, and so on.
One of the first questions is: When does the business become profitable over the next five years? A business already up and running is hopefully earning net income. A startup should be making a profit within a year, in most cases. Investors will look at all the information to determine if the income statement is reasonable and realistic based on industry or competitive performance.
• Balance Sheet – The balance sheet is not as familiar to many new entrepreneurs. The balance sheet is a financial picture of assets, liabilities, and net worth at a point in time. Stating it in its simplest terms, net worth reflects the difference between assets and liabilities. Assets include items like equipment, inventory, cash, accounts receivable, prepaid expenses, property and more. Liabilities include accounts payable, loans payable, salaries and benefits payable, income taxes due, bonds payable, unearned revenues, and so on.
• Cash Flow Statement – This statement shows the flow of money coming in and out of the business. It too is a snapshot at a particular point in time. The statement projects cash from sales and other sources and cash payouts for expenses, including vendor payments. It takes into account sales forecasts, due dates of payables and vendor discounts. Once the business is operating, preparing a monthly cash flow statement is critical to staying out of trouble due to lack of cash.
The financial plan can also include financial ratios that use financial statement data in the calculations. Ratios like profit margin give a more in-depth perspective on how well the business is doing as far as liquidity and operating performance.
The Reality of Financial Projections
The financial plan in the business plan usually extends from three-to-five years. Since they are projections, they are called pro forma statements. This section presents the financial vision of the entrepreneur, but it has to be based on hard research and realistic projections. The numbers emanate from what it takes financially to startup or expand a business, and to operate for another five years. That is valuable information for the entrepreneur and investors.
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