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How to make financial statements for small businesses.
Information is power. As long as you can make sense of that information. As a business owner, you’ll want to track your financial progress to make informed business decisions about your future. And that involves understanding cash flows, operating expenses, and net profit, all found in your financial statements.
Even if you delegate the bookkeeping to a professional, and don’t prepare financial statements yourself, you’ll need to know what your CPA is talking about when they walk you through your balance sheet.
In this article, you’ll learn about the 3 principal financial statements—income statements, balance sheets, and cash flow statements—and how to interpret them.
Here’s what we’ll cover: Income Statement (Profit and Loss Statement) Balance Sheet Difference Between an Income Statement and a Balance Sheet Cash Flow Statement Financial Statements Are Fundamental
NOTE: FreshBooks Support team members are not certified tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need tax advice, please contact an accountant in your area .
Income Statement (Profit and Loss Statement)
An income statement shows a company’s financial performance by revealing whether it’s made a profit or a loss.
Without an income statement, you’d be in the dark about the profitability of your business. An income statement is also known as a profit and loss statement, profit and loss account, or P&L.
The reporting period for an income statement is typically one fiscal year.
What Goes on an Income Statement?
Let’s now jump to the format of an income statement.
In most cases, it will look something like this:
Now, let’s dig into what an income statement covers.
Revenues (or Sales)
This is the top line on your income statement. It’s the total amount for the year of all the things or services you sold. But if you’ve given any discounts, you’ll reduce your sales by the discount amount.
For example, if you sold $100 in t-shirts but offered a 10% discount as a Black Friday incentive, you would record $90 as your net sales amount.
Cost of Goods Sold (or Cost of Sales)
These are the expenses directly related to the sales you’ve made. Suppose you’re selling electronics. The cost of goods sold is the cost of the electronics you sell within a financial year. And this is important. It’s not the cost of the electronics you bought in the year.
In a service-related business, a consultancy, for example, the cost of sales is often termed direct costs. Hence, you’ll include costs directly related to your service.
Gross profit is the profit that results directly and specifically from the trading activity of buying and selling. You calculate the gross profit by subtracting the cost of goods sold from revenues.
Selling, General, and Administrative Expenses
All other expenses like salaries, rent, or travel merely facilitate the main trading activity of your business and are often categorized under selling, general, or administrative (SG&A) expenses.
You can have as many categories of SG&A expense as is necessary and helpful for running your business. Some of the common ones are:
- Office supplies
- Salaries and wages
- Marketing and advertising
Next is operating income. As the name implies, it’s the profit your business has earned from its operations when considering all the revenue and expenses necessary to run your business.
Finance costs represent the costs of financing arrangements, such as interest on bank loans. You’ll want to strip financing costs away from SG&A expenses because they don’t represent the costs necessary for producing the goods or services you sell.
After factoring in finance costs, you’re left with net income (or net loss). This is the much-talked-about bottom line. Your net income is how much your company has earned throughout the year.
What About Income Taxes?
You may ask yourself, why didn’t we include taxes? A small business isn’t burdened with income tax unless it’s structured as a C-corporation (which few small businesses are due to their complexity and maintenance costs). Instead, the business profits pass through to the owner and get taxed on the individual Form 1040.
Also known as the statement of financial position, the balance is an organization’s most important financial report because it shows the company’s financial health.
A balance sheet reports data for a specific point in time, often the last day of a fiscal year.
What Goes on a Balance Sheet?
Balance sheets contain 3 sections: assets, liabilities, and equity.
These are the resources your company owns that have a current or future economic value. These include cash, equipment (such as computers), and vehicles.
Assets can be broken down into:
- Current assets: This is anything you own that can be converted to cash within one year (e.g., accounts receivable and inventory). Also called short-term assets.
- Non-current assets: These are assets that can’t be quickly converted into cash, like computers, equipment, and vehicles, or intangible assets, like trademarks and copyrights. Also called fixed assets or long-term assets.
2. Business Liabilities
These are amounts your business owes other entities such as banks, employees, and suppliers.
- Current liabilities: Amounts you owe that are due within one year (e.g., accounts payable and payroll liabilities)
- Non-current (long-term) liabilities: Debts that will be repaid in more than one year
3. Owner Equity or Shareholder Equity
This is the value of the owner’s or shareholders’ investment in the business after liabilities are subtracted from assets. It may also be called owner’s or shareholders’ capital.
Purpose of a Balance Sheet
The balance sheet shows anyone what your business is worth. Lenders, investors, partners, and potential buyers will want to review your balance sheet.
The overall worth of your business can be measured or estimated by the total value of its assets, which are recorded and presented on the balance sheet.
But even more important, your balance sheet shows your business’s net worth , which is the owner’s equity (or shareholder’s equity). This is a business’s residual value after removing its liabilities . It’s what ultimately belongs to the business owner.
Format of a Balance Sheet
Balance sheets are prepared based on the accounting equation, which is:
Traditionally, before accounting software was developed and bookkeeping was done with pencil and paper, assets were put on the left side of the balance sheet, while equity and liabilities went to the right side.
Today, however, a balance sheet will almost always look like this:
Now here’s something to remember.
The net income (your income statement bottom line) is annually transferred to your balance sheet, where it will appear as retained earnings. So retained earnings are a running total of your company’s profitability from day 1.
Difference Between an Income Statement and a Balance Sheet
If you want to know how your business has performed over a span of time (a year, month, or quarter), you’ll want to refer to your income statement.
On the flip side, if you want to know your business’s financial health, to know its value or worth at a particular point since it was established, the balance sheet is the report you’ll want to refer to.
Cash Flow Statement
A cash flow statement shows the movement of cash, the cash inflows and outflows within the business, based on 3 cash sources and cash expenditure categories: operations, investing, and financing.
This is an extremely important financial statement because, ultimately, cash is the best indicator of the financial health of an enterprise.
The reporting period for a cash flow statement is often one fiscal year but could be a quarter, month, or any reporting period that makes sense for your business.
Why Do You Need a Cash Flow Statement?
You already have an income statement that shows you the profits you’ve made. Why do you still need a cash flow statement?
An income statement is prepared based on the accrual method of accounting . This means your sales are recorded when you earn them, not when your business receives the actual cash.
This creates a timing difference. A sales amount of $10,000 on your income statement, for example, doesn’t always mean this amount is in your bank account. It may be an invoice you sent to your customer, and you’re still awaiting payment.
The same goes for expenses. In accrual-basis accounting, expenses are recorded when your business incurs them and not when you pay out the cash.
But what about the cash figure on the balance sheet? While the balance sheet captures the cash balance, which can be meaningful, this balance sheet figure doesn’t tell us the source of the cash.
The cash could be from a windfall, like an insurance claim, which is a one-time event and unsustainable. Or it could be from normal day-to-day business operations, which are more sustainable.
Sections of a Cash Flow Statement
A cash flow statement has 3 sections:
- Cash from operations (or from operating activities)
- Cash from investing activities
- Cash from financing activities
And this is what a typical cash flow statement looks like:
Cash From Operating Activities
Cash from operations is the first section of a cash flow statement, revealing its relative importance in the cash flow statement hierarchy. Cash from operating activities is the most meaningful because this is cash from your day-to-day trading activities.
These include cash received from sales, set off against cash expenses like the cost of goods sold, utility expenses, and rent.
It also takes into account non-cash items, like depreciation , that are included in net income but don’t involve any actual cash movement. And it considers any changes in your assets and liabilities during the time period, like an increase in accounts receivable .
Since operating activities are the mainstay of a business, a company with positive cash flow from operating activities will be more sustainable.
Cash From Investing Activities
The main source and use of cash from investing activities are purchasing and selling fixed assets. Common examples of fixed asset items are things like buildings, vehicles, computer equipment, or machinery.
But other investment items can appear in the investing activity section, such as buying stocks and bonds for investment purposes.
Cash From Financing Activities
All cash inflows and outflows from financing activities will be captured in this last section of cash flow statements.
If you’ve taken out a bank loan to purchase equipment, the cash the bank provided you will show up in this section. And when you begin making loan payments, these will be included here.
Financial Statements Are Fundamental
In Sam Walton’s autobiography Made In America , here’s what Al Johnson, the CEO of Walmart at one time, revealed about Walmart’s owner and founder:
“Every Friday morning for six years, I would take my columnar pad with all the numbers on it into Sam’s office for him to review. Sam would jot them down on his own pad and work through the calculations himself. I always knew I could not just go in there and lay a sheet of numbers in front of him and expect him to just accept it.”
As a small business owner, you should be able to make sense of your financial statements. It will ensure you ask the right questions and follow important clues and cues.
You can make financial statements manually in a spreadsheet, but accounting software automates everything, so it’s faster and easier and leaves less room for error. With all your financial information in one place, you can immediately access your financial data whenever you or your accountant needs it.
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Start » startup, business plan financials: 3 statements to include.
The finance section of your business plan is essential to securing investors and determining whether your idea is even viable. Here's what to include.
If your business plan is the blueprint of how to run your company, the financials section is the key to making it happen. The finance section of your business plan is essential to determining whether your idea is even viable in the long term. It’s also necessary to convince investors of this viability and subsequently secure the type and amount of funding you need. Here’s what to include in your business plan financials.
[Read: How to Write a One-Page Business Plan ]
What are business plan financials?
Business plan financials is the section of your business plan that outlines your past, current and projected financial state. This section includes all the numbers and hard data you’ll need to plan for your business’s future, and to make your case to potential investors. You will need to include supporting financial documents and any funding requests in this part of your business plan.
Business plan financials are vital because they allow you to budget for existing or future expenses, as well as forecast your business’s future finances. A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.
Sections to include in your business plan financials
Here are the three statements to include in the finance section of your business plan:
Profit and loss statement
A profit and loss statement , also known as an income statement, identifies your business’s revenue (profit) and expenses (loss). This document describes your company’s overall financial health in a given time period. While profit and loss statements are typically prepared quarterly, you will need to do so at least annually before filing your business tax return with the IRS.
Common items to include on a profit and loss statement :
- Revenue: total sales and refunds, including any money gained from selling property or equipment.
- Expenditures: total expenses.
- Cost of goods sold (COGS): the cost of making products, including materials and time.
- Gross margin: revenue minus COGS.
- Operational expenditures (OPEX): the cost of running your business, including paying employees, rent, equipment and travel expenses.
- Depreciation: any loss of value over time, such as with equipment.
- Earnings before tax (EBT): revenue minus COGS, OPEX, interest, loan payments and depreciation.
- Profit: revenue minus all of your expenses.
Businesses that have not yet started should provide projected income statements in their financials section. Currently operational businesses should include past and present income statements, in addition to any future projections.
[Read: Top Small Business Planning Strategies ]
A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.
A balance sheet provides a snapshot of your company’s finances, allowing you to keep track of earnings and expenses. It includes what your business owns (assets) versus what it owes (liabilities), as well as how much your business is currently worth (equity).
On the assets side of your balance sheet, you will have three subsections: current assets, fixed assets and other assets. Current assets include cash or its equivalent value, while fixed assets refer to long-term investments like equipment or buildings. Any assets that do not fall within these categories, such as patents and copyrights, can be classified as other assets.
On the liabilities side of your balance sheet, include a total of what your business owes. These can be broken down into two parts: current liabilities (amounts to be paid within a year) and long-term liabilities (amounts due for longer than a year, including mortgages and employee benefits).
Once you’ve calculated your assets and liabilities, you can determine your business’s net worth, also known as equity. This can be calculated by subtracting what you owe from what you own, or assets minus liabilities.
Cash flow statement
A cash flow statement shows the exact amount of money coming into your business (inflow) and going out of it (outflow). Each cost incurred or amount earned should be documented on its own line, and categorized into one of the following three categories: operating activities, investment activities and financing activities. These three categories can all have inflow and outflow activities.
Operating activities involve any ongoing expenses necessary for day-to-day operations; these are likely to make up the majority of your cash flow statement. Investment activities, on the other hand, cover any long-term payments that are needed to start and run your business. Finally, financing activities include the money you’ve used to fund your business venture, including transactions with creditors or funders.
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How to Write the Financial Section of a Business Plan
Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.
Taking Stock of Expenses
The income statement, the cash flow projection, the balance sheet.
The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.
Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:
- Business registration fees
- Business licensing and permits
- Starting inventory
- Rent deposits
- Down payments on a property
- Down payments on equipment
- Utility setup fees
Your own list will expand as soon as you start to itemize them.
Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:
- Salaries (including your own)
- Rent or mortgage payments
- Telecommunication expenses
- Raw materials
- Loan payments
- Office supplies
Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.
Now you can begin to put together your financial statements for your business plan starting with the income statement.
The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.
While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.
Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.
If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.
The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how much capital investment your business idea needs.
For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.
Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.
There are three parts to the cash flow projection:
- Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
- Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
- Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.
The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:
- Assets : Tangible objects of financial value that are owned by the company.
- Liabilities: Debt owed to a creditor of the company.
- Equity: The net difference when the total liabilities are subtracted from the total assets.
The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .
For your business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.
Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.
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How to write a financial plan for your business
Steer your business on the road to success with a solid financial plan.
A financial plan gives you a snapshot of the overall health of your business. There are 3 key financial statements that make up a business financial plan. Taking the time to prepare these at the start of your business journey can pay off in the long run.
1. Cash flow statement
Sometimes called cash flow projection, this is one of the most important steps in completing your financial plan. It details your incoming and outgoing cash and helps make sure you have enough money to keep your business running.
Try this simple cash flow formula:
- Determine the period you want to focus on (e.g. the next 3 or 6 months)
- Start with your opening cash balance
- Estimate your incoming cash and expenses for the period
- Subtract the estimated expenses from your income and add it to the opening balance
How to use your cash flow statement
You can look at your cash flow statement from previous years to determine if you’ll have enough to cover your costs, like wages and rent, over the specified period. It’s important to allow for glitches like late payments when projecting your cash flow.
2. Income statement
Also known as profit and loss statement (P&L), this shows you a clear view of your income and expenses, and how these change over a period of time.
What to include in your income statement
What goes into an income statement depends on the type of business. You should at least cover these key areas:
- Cost of goods or services
- Total profit or loss (revenue minus cost of goods/services)
- Operating costs (e.g. rent)
- General expenses (e.g. marketing, advertising, depreciation)
- Operating income (total profit minus expenses)
How to use your income statement
Estimate your sales and expenses on a monthly, quarterly or yearly basis to see whether you can expect to make a profit or loss for each of these periods. This will help you develop sales targets and find ways to grow your business.
3. Balance sheet
Unlike your cash flow statement which looks at the future, and your income statements which looks at the past, your balance sheet is a financial snapshot of your business in the present.
Try this simple balance sheet formula:
- In one column list all your assets (e.g. cash, inventory, buildings)
- On the other side list your liabilities (e.g. accounts payable and loans)
- Subtract your total liabilities from your total assets to determine your equity
How to use your balance sheet
Your balance sheet can help you evaluate the financial health of your business, show your profit at a glance and work out if you’ll have enough resources to run your day-to-day operations.
Take your business financial plan to the next level
To enhance your business financial plan, consider preparing a break-even analysis. This shows you the number of sales needed to cover costs – anything above this number can be counted as a profit.
The break-even point can be useful for analysing the sales, costs and pricing numbers used in your earlier forecasts and judge whether your business idea is feasible. For example, if your break-even point is years away, you may want to revisit your numbers to see if there are any opportunities to make your business more profitable.
Once it’s ready, treat your business plan as a guide to running your business. Remember that it’s a working document, so if your goals and circumstances change, update the plan. If you need help, an accountant could help assess your prospective financial position and ensure you’ve thought through all potential income and expenses.
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How to Craft the Financial Section of Business Plan (Hint: It’s All About the Numbers)
Writing a small business plan takes time and effort … especially when you have to dive into the numbers for the financial section. But, working on the financial section of business plan could lead to a big payoff for your business.
Read on to learn what is the financial section of a business plan, why it matters, and how to write one for your company.
What is the financial section of business plan?
Generally, the financial section is one of the last sections in a business plan. It describes a business’s historical financial state (if applicable) and future financial projections. Businesses include supporting documents such as budgets and financial statements, as well as funding requests in this section of the plan.
The financial part of the business plan introduces numbers. It comes after the executive summary, company description , market analysis, organization structure, product information, and marketing and sales strategies.
Businesses that are trying to get financing from lenders or investors use the financial section to make their case. This section also acts as a financial roadmap so you can budget for your business’s future income and expenses.
Why it matters
The financial section of the business plan is critical for moving beyond wordy aspirations and into hard data and the wonderful world of numbers.
Through the financial section, you can:
- Forecast your business’s future finances
- Budget for expenses (e.g., startup costs)
- Get financing from lenders or investors
- Grow your business
- Growth : 64% of businesses with a business plan were able to grow their business, compared to 43% of businesses without a business plan.
- Financing : 36% of businesses with a business plan secured a loan, compared to 18% of businesses without a plan.
So, if you want to possibly double your chances of securing a business loan, consider putting in a little time and effort into your business plan’s financial section.
Writing your financial section
To write the financial section, you first need to gather some information. Keep in mind that the information you gather depends on whether you have historical financial information or if you’re a brand-new startup.
Your financial section should detail:
- Business expenses
Financial statements, break-even point, funding requests, exit strategy, business expenses.
Whether you’ve been in business for one day or 10 years, you have expenses. These expenses might simply be startup costs for new businesses or fixed and variable costs for veteran businesses.
Take a look at some common business expenses you may need to include in the financial section of business plan:
- Licenses and permits
- Cost of goods sold
- Rent or mortgage payments
- Payroll costs (e.g., salaries and taxes)
Write down each type of expense and amount you currently have as well as expenses you predict you’ll have. Use a consistent time period (e.g., monthly costs).
Indicate which expenses are fixed (unchanging month-to-month) and which are variable (subject to changes).
How much do you anticipate earning from sales each month?
If you operate an existing business, you can look at previous monthly revenue to make an educated estimate. Take factors into consideration, like seasonality and economic ups and downs, when basing projections on previous cash flow.
Coming up with your financial projections may be a bit trickier if you are a startup. After all, you have nothing to go off of. Come up with a reasonable monthly goal based on things like your industry, competitors, and the market. Hint : Look at your market analysis section of the business plan for guidance.
A financial statement details your business’s finances. The three main types of financial statements are income statements, cash flow statements, and balance sheets.
Income statements summarize your business’s income and expenses during a period of time (e.g., a month). This document shows whether your business had a net profit or loss during that time period.
Cash flow statements break down your business’s incoming and outgoing money. This document details whether your company has enough cash on hand to cover expenses.
The balance sheet summarizes your business’s assets, liabilities, and equity. Balance sheets help with debt management and business growth decisions.
If you run a startup, you can create “pro forma financial statements,” which are statements based on projections.
If you’ve been in business for a bit, you should have financial statements in your records. You can include these in your business plan. And, include forecasted financial statements.
You’re just in luck. Check out our FREE guide, Use Financial Statements to Assess the Health of Your Business , to learn more about the different types of financial statements for your business.
Potential investors want to know when your business will reach its break-even point. The break-even point is when your business’s sales equal its expenses.
Estimate when your company will reach its break-even point and detail it in the financial section of business plan.
If you’re looking for financing, detail your funding request here. Include how much you are looking for, list ideal terms (e.g., 10-year loan or 15% equity), and how long your request will cover.
Remember to discuss why you are requesting money and what you plan on using the money for (e.g., equipment).
Back up your funding request by emphasizing your financial projections.
Last but not least, your financial section should also discuss your business’s exit strategy. An exit strategy is a plan that outlines what you’ll do if you need to sell or close your business, retire, etc.
Investors and lenders want to know how their investment or loan is protected if your business doesn’t make it. The exit strategy does just that. It explains how your business will make ends meet even if it doesn’t make it.
When you’re working on the financial section of business plan, take advantage of your accounting records to make things easier on yourself. For organized books, try Patriot’s online accounting software . Get your free trial now!
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How to Prepare a Financial Plan for Startup Business (w/ example)
Free Financial Statements Template
13 Min Read
If someone were to ask you about your business financials, could you give them a detailed answer?
Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.
Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.
A business plan’s financial plan section is no easy task—we get that.
But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.
Ready to get started? Let’s begin by discussing startup financial planning.
What is Startup Financial Planning?
Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.
Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis, and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.
- Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
- Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
- Preparing a financial plan is easier and faster when you use a financial planning tool.
- Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.
Why is Financial Planning Important to Your Startup?
Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.
A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.
It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .
Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.
Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.
Key Components of a Startup Financial Plan
Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.
An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.
Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.
Your income or P&L statement must list the following:
- Cost of goods or cost of sale
- Gross margin
- Operating expenses
- Revenue streams
- EBITDA (Earnings before interest, tax, depreciation , & amortization )
Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.
Cash flow Statement
A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.
This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.
Your cash flow projection consists of the following three components:
✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.
✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.
✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.
Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.
Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.
Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.
This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.
Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:
Here is what’s the core purpose of having a balance-sheet:
- Indicates the capital need of the business
- It helps to identify the allocation of resources
- It calculates the requirement of seed money you put up, and
- How much finance is required?
Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.
Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.
For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.
Remember, anything you sell beyond the break-even point will result in profit.
You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.
- Fixed costs: fixed expenses that stay the same no matter what.
- Variable costs: expenses that fluctuate over time depending on production or sales.
A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.
Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.
How to Create a Financial Section of a Startup Business Plan?
1. determine your financial needs.
You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.
Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.
Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.
Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.
Having learned to determine financial needs, let’s head straight to setting financial goals.
2. Define Your Financial Goals
Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.
Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.
However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.
Feeling overwhelmed? Just define your financial goals—you’ll be fine.
You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.
3. Choose the Right Financial Planning Tool
Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.
Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.
Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.
Create a Financial Plan with Upmetrics in no time
Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.
4. Make Assumptions Before Projecting Financials
Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.
You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.
You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.
After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.
5. Prepare Realistic Financial Projections
It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.
Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.
Following are the two key aspects of your financial projections:
In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.
It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.
The following are the key components of an accurate revenue projection report:
- Market analysis
- Sales forecast
- Pricing strategy
- Growth assumptions
- Seasonal variations
This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.
Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.
Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.
These are the most common costs to consider while projecting expenses:
- Fixed costs
- Variable costs
- Employee costs or payroll expenses
- Operational expenses
- Marketing and advertising expenses
- Emergency fund
Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.
6. Consider “What if” Scenarios
After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.
Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.
Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.
7. Build a Visual Report
If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.
Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.
Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.
Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.
Here’s what Upmetrics’ dashboard looks like:
8. Monitor and Adjust Your Financial Plan
Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.
There are multiple ways to monitor your financial plan.
For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.
Consider making necessary adjustments if your assumptions are not resonating with actual numbers.
Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.
And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.
Startup Financial Plan Example
Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.
- The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
- The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
- The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
- Sales are cash basis – nonaccrual accounting
- Moderate ramp- up in staff over the 5 years forecast
- Barista salary in the forecast is $36,000 in 2023.
- In general, most cafes have an 85% gross profit margin
- In general, most cafes have a 3% net profit margin
Projected Balance Sheet
Projected Cash-Flow Statement
Projected Profit & Loss Statement
Break Even Analysis
Start Preparing Your Financial Plan
We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.
Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.
So what are you waiting for? Try Upmetrics and create your financial plan in a snap.
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Frequently Asked Questions
How often should i update my financial projections.
Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.
How do I estimate startup costs accurately?
You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.
What financial ratios should startups pay attention to?
Here’s a list of financial ratios every startup owner should keep an eye on:
- Net profit margin
- Current ratio
- Quick ratio
- Working capital
- Return on equity
- Debt-to-equity ratio
- Return on assets
- Debt-to-asset ratio
What are the 3 different scenarios in scenario analysis?
As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:
- base-case (expected) scenario
- Worst-case scenario
- best case scenario.
About the Author
Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more
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Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected balance.
This is another in a series of posts on standard business plan financials, continuing from last week.
“Think of it as your business dashboard, providing a snapshot of the financial health of your company at a specific moment in time. The purpose is simple: balance sheets list assets, liabilities and owner equity, typically in order from shortest- to longest-term assets and liabilities divided on either side of the balance sheet.”
The Balance Sheet includes spending and income that isn’t in the Profit and Loss. For example, the money you spend to repay a loan or buy new assets doesn’t show up in the Profit and Loss. And the money you take in as a new loan or a new investment doesn’t show up in the Profit and Loss either. The money you are waiting to receive from customers’ outstanding invoices shows up in the Balance Sheet, not the Profit and Loss. The Balance Sheet shows many reasons why profits are not cash, and why cash flow isn’t intuitive. It’s all related to the essential principles of cash flow .
The Balance Sheet shows your financial picture – assets, liabilities, and capital – at some specific moment. It helps to understand that the Profit and Loss shows financial performance over a length of time, like a month, quarter, or year. The Balance, in contrast, is a moment. Usually it’s the end of the month, quarter, or year. Sometimes it’s the end of the business day.
Balancing is a common term associated with bookkeeping, accounting, and finance. We “balance the books.” It’s a lot like reconciling a checkbook: if it isn’t right down to the last penny, then it’s wrong. Assets have to equal liabilities plus capital. Always.
A traditional Balance Sheet statement shows assets on the left side and liabilities and capital on the right side or the bottom, as in this illustration:
The balance sheet involves the other three of the six key financial terms (the ones that aren’t on the Profit and Loss: Assets, Liabilities, and Capital).
- Assets. Cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns. Assets can usually be sold to somebody else. One definition is “anything with monetary value that a business owns.”
- Liabilities. Debts, notes payable, accounts payable, amounts of money owed to be paid back.
- Capital (also called equity). Ownership, stock, investment, retained earnings. Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital. That means you can subtract liabilities from assets to calculate capital.
Although traditional printed balance sheet statements are usually arranged horizontally, as in the illustration above, balance sheets in financial projections are usually arranged vertically, showing the assets first, then the liabilities, and then the capital. Here, for example, is the balance sheet for the first few months of the bike store I mentioned earlier. It’s the balance sheet associated with the Profit and Loss for the same company, Garrett’s bicycle store:
This is planning, not accounting . It’s one of the primary principles of the lean business planning. To make a powerful and useful cash flow projection, you need to summarize and aggregate the rows of the balance sheet. Resist the temptation to break it down into detail the way you would with a tax report after the fact. This is a tool to help you forecast your cash.
The Link Between Balance and Profit
The balance sheet is so different from the Profit and Loss that there is only one direct link between the two, a vital one that connects them so that when the books are right, the balance balances: That is the direct line from profits (Net Profits) on the Profit and Loss to Earnings and Retained Earnings on the Balance Sheet. The illustration here shows the link with the bicycle store sample:
[…] Balance Sheet that shows your current assets and […]
How can I make a well representable business plan. Which I can be able to look for funding
Darren, that’s what bplans.com is all about. Start here: Business Plan Guide
When creating a business plan, is it important to show a 3 year balance sheet?
Craig, depends on context. Is it for investors? For your own use? For a lean plan, cash flow may be enough, but it’s hard to do cash flow without a summarized balance. If you want a full formal business plan, a summarized balance sheet is part of what we’d call full financials. But of course it depends on the specific context of the plan. Tim
how can i draw a balance sheet for my business plan..since the no activity has started
@Brenda. As soon as you have either capital, assets, or liabilities assigned to your business, you have a balance sheet. Correct double-entry bookkeeping will ensure that the sum of your capital and liabilities are equal to your total assets. For projections, looking ahead, you estimate ahead-of-time what you think will need to happen with your capital, liabilities, and assets. Obviously these are estimated guesses. Then as your business launches, you regularly compare actual results to what you had expected, which helps you manage.
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Women & wealth, 3 financial statements your business plan must include.
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One of the most common reasons that businesses fold is that they run out of money. This doesn't necessarily mean that they didn't have enough customers – many do – but rather that their expenses exceeded their revenue: They couldn't sell enough to cover their costs.
In fact, according to U.S. Bank data, 82 percent of businesses have poor cash flow management processes and/or a poor understanding of cash flow management and, according to a CB Insights study, 29 percent run out of cash altogether.
While financial statements can help business owners spot upcoming financial challenges, such as running low on inventory or raw materials, sometimes the problem is that they're using their financial statements incorrectly or ineffectively. This can lead entrepreneurs to overlook important warning signs specific to cash flow or operations, or to miss upcoming opportunities.
Financial statements are a critical section of any business plan, whether the company is pursuing outside financing or creating more of an internal operating manual. There are three primary financial statements a business needs to generate and regularly monitor:
- Profit and loss statement, or P&L, also known as the income statement
- Balance sheet
- Cash flow statement
Each statement provides insights into how the business is doing that can help owners and managers recognize how to improve operations. But because each statement serves a different purpose, it's important to know how to best use each one.
Profit and Loss Statement
Your P&L, or income statement, is an overview of your company's operations over a specific period of time – usually one year. It is a reflection of the business's financial performance or health. It's also generally used as a look back, although you can certainly use it when creating projections as well.
Your P&L summarizes how much revenue you generated, what your total expenses were, and what your resulting profit (or loss) was once those expenses were subtracted from your revenue.
The P&L is a useful tool for comparing performance and assessing growth. You can compare past years' P&L figures to your current and future years to see if your business is growing or shrinking.
Profits generated can then be used to buy more assets, reinvested in the business, applied to reduce liabilities, or paid out to owners as a dividend or bonus, all of which will be reflected on the balance sheet. That's how the two documents are related.
While your P&L reflects how much money came in and how much went out over the course of a year, a quarter, or a month, your balance sheet is a statement of what your business owns and what it owes at a particular point in time (the most common date used is 12/31).
At the top of the statement are all of your business assets – the things you own. This includes your property, plant and equipment – your long-term assets. Any real estate, computer equipment, raw materials, inventory and machinery would be included in this list. Short-term assets, such as accounts receivable (what your customers owe you), also fall into this category. Anything you use to generate income should be listed under assets.
Your liabilities and shareholders' equity goes on the bottom half of your balance sheet. Liabilities are what you owe. This includes expenses like building or equipment leases, loans, taxes owed and unpaid invoices.
Your shareholders' (or owners') equity is the value the business has created, which is shared by your shareholders – all your partners or owners in the business.
Shareholders' equity plus liabilities always equals your assets. The higher the shareholders' equity, the more value the business is creating.
Cash Flow Statement
Your cash flow statement is a look at all the money the business has earned and paid out over a period of time. Cash flow statements are frequently used for projections – for looking ahead to try and anticipate when the company might need an infusion of cash or be able to afford a major investment. For that reason, cash flow statements often break down cash inflow and outflow on a monthly basis.
Cash coming into the business can be generated by operations (what you sell to customers), investments (such as stocks or real estate), and/or financing (such as when you receive a loan or take on an investor).
When cash is paid to buy more assets or to pay back a loan or credit extended, those amounts fall under cash outflow.
Analyzing changes in cash flow over several periods, such as months or quarters, gives you, lenders or investors a sense of how cash-healthy the company is.
Putting It All Together
Where P&L statements provide an overview of how a business is doing, a cash flow statement can shine a spotlight on the peaks and valleys many companies experience during a typical year. For example, if you're a swimming pool retailer, your projections for the spring and summer months will likely go way up with demand, while cash flow in the winter months – at least in the north – may plummet. It's important to be prepared to sustain the business during November, December and January when you may have little in the way of cash coming in.
Your balance sheet is a reflection of how well you're using your company's assets. Over time, your assets and shareholders' equity should steadily rise, while your liabilities should decline. If they're headed in the other direction, you may be headed for a cash crunch.
These three financial statements are important business tools that can help you recognize where your attention needs to be directed in order for your business to grow. Update and look at them regularly to keep cash steadily flowing in, in order to bulk up your P&L and your balance sheet – and to help ensure your business survives and thrives.
Looking for additional guidance? Connect with a First Horizon banker to learn more.
4 Steps to Creating a Financial Plan for Your Small Business
When it comes to long-term business success, preparation is the name of the game. And the key to that preparation is a solid financial plan. It helps you pitch investors, anticipate growth and weather cash flow shortages. To get started, you need to learn some of the key elements to financial planning.
What is a Financial Plan?
A financial plan helps determine if an idea is sustainable, and then keeps you on track to financial health as your business matures. It’s an integral part to an overall business plan and is made up of three financial statements—cash flow statement, income statement and balance sheet. In your plan, each of these will include a brief explanation or analysis.
- A financial plan helps you know where your business stands and lets you make better informed decisions about resource allocation.
- A financial plan has three major components: a cash flow projection , income statement and balance sheet.
- Your financial plan answers essential questions to set and track progress toward goals.
- Using financial management software gives you the tools to make strategic decisions efficiently.
Why is a Financial Plan Important to Your Small Business?
A well-put-together financial plan can help you achieve greater confidence in your business while generating a better understanding of how to allocate resources. It shows your business is committed to spending wisely and its ability to meet financial obligations. A financial plan helps you determine if choices will impact revenue and which occasions call for dipping into reserve funds.
It’s also an important tool when asking investors to consider your business. Your financial plan shows how your organization manages expenses and generates revenue. It shows where your business stands and how much it needs from sales and investors to meet important financial benchmarks.
Components of a Small Business Financial Plan
Whether you’re modifying your plan or starting from scratch, a financial plan should include:
Income statement: This shows how your business experienced profit or loss over a specific period—usually over three months. Also known as a profit-and-loss statement (P&L) or pro forma income statement, it lists the following:
- Cost of sale or cost of goods (how much does it costs to produce your goods or services?)
- Operating expenses like rent and utilities
- Revenue streams, usually in the form of sales
- Amount of total net profit or loss, also known as a gross margin
Balance sheet: Rather than looking backward or peering into the future, the balance sheet helps you see where you stand right now. What do you own and what do you owe? To figure it out, you’ll need to consider the following:
- Assets: How much cash, goods and resources do you have available?
- Liabilities: What do you owe to suppliers, personnel, landlords, creditors, etc.?
Shareholder equity (the amount of money generated by your business): Use this formula to calculate it:
Shareholder Equity = Assets – Liability
Now that you have these three items, you’re ready to create your balance sheet. And just as the name implies, when complete, you’ll want this to balance out to zero. On one side, list your assets, such as cash on hand. And on the other side list your liabilities and equity (or how much money is generated by the business). The balance sheet is used along the other financial statements in order to calculate business financial ratios, discussed further below.
Why have a balance sheet? It can provide insight into your business and show important measures like how much cash you have, what your obligations are and what kind of profit you’re making all at a glance.
Personnel plan: You need the right people to meet goals and retain a healthy cash flow. A personnel plan looks at existing positions and helps you see when it’s time to bring on more team members, and whether they should be full-time, part-time, or work on a contractual basis. It looks at compensations levels, including benefits, and forecasts those costs. By looking at growth and costs you can see if the potential benefits that come with a new employee justify the expense.
Business ratios: Sometimes you need to look at more than just the big picture. You need to drill down to specific aspects of your business and keep an eye on how individual areas are doing. Business ratios are a way to see things like your net profit margin, return on equity, accounts payable turnover, assets to sales, working capital and total debt to total assets. Numbers used to calculate these ratios come from your P&L statement, balance sheet and cash flow statement and are often used to help request funding from a bank or investors.
Sales forecast: How much will you sell in a specific period? A sales forecast needs to be an ongoing part of any planning process since it helps predict cash flow and the organization’s overall health. A forecast needs to be consistent with the sales number within your P&L statement. Organizing and segmenting your sales forecast will depend on how thoroughly you want to track sales and the business you have. For example, if you own a hotel and giftshop, you may want to track separately sales from guests staying the night and sales from the shop.
Cash flow projection: Perhaps one of the most critical aspects of your financial plan is your cash flow statement . Your business runs on cash. Understanding how much cash is coming in and when to expect it shows the difference between your profit and cash position. It should display how much cash you have now, where it’s going, where it will come from and a schedule for each activity.
Income projections: How much money will your company make in a given period, usually a year. Take that and then subtract the anticipated expenses and you’ll have the income projections . In some cases, these are rolled into profit and loss statements.
Assets and liabilities: Both of these elements are part of your balance sheet. Assets are what your company owns, including current and long-term assets. Current assets can be converted into cash within a year. Think of things such as stocks, inventory and accounts receivable. Long-term assets are tangible or fixed assets designed for long-term use like furniture, fixtures, buildings, machinery and vehicles.
Liabilities are business obligations that are divided into current and long-term categories. Examples of current liabilities in a financial plan are accrued payroll, taxes payable, short-term loans and other obligations due within a year. Long-term liabilities include shareholder loans or bank debt that matures more than a year later.
Break-even analysis: Your break-even point—how much you need to sell to cover all your expenses—will guide your sales revenue and volume goals. Start by calculating your contribution margin by subtracting the costs of a good or service from the amount you pay. In the case of a bicycle store, the sale price of a new bike minus what you paid for it and the salary of your bike salesperson, your rent, etc. By understanding your fixed costs, you can then begin to understand how much you’ll need to markup goods and services and what sales and revenue goals to set in order to stay afloat or turn a profit.
Video: How to Build a Financial Plan
Create a strategic plan: Starting with a strategic plan helps you think about what you want your company to accomplish. Before looking at the numbers, think about what you’ll need to achieve these goals. Will you need to buy more equipment or hire more staff? Is there a chance of new goals affecting your cash flow? What other resources will you need?
Determine the impact on your company’s finances and create a list of existing expenses and assets to help with your next steps.
Create financial projections: This should be based on anticipated expenses and sales forecasts . Look at your goals and plug in the costs needed to achieve them. Include different scenarios. Create a range that is optimistic, pessimistic and most likely to happen, so you can anticipate the impact each one will have. If you’re working with an accountant, go over the plan together to understand how to explain it when seeking funding from investors and lenders.
Plan for contingencies: Look at your cash flow statement and assets, and create a plan for when there’s no money coming in or your business has taken an unexpected turn. Consider having cash reserves or a substantial line of credit if you need cash fast. You may also need to plot ways to sell off assets to help break even.
Monitor and compare goals: Look at the actual results in your cash flow statement, income projections and even business ratios as necessary throughout the year to see if you need to modify your plan or if you’re right on target. Regularly checking in helps you spot potential problems before they get worse.
Three Questions Your Financial Plan Should Answer
Once you’ve created your plan, you should have answers to the following questions:
- How will your business make money?
- What does your business need to get off of the ground?
- What is the operating budget ?
Financial plans that can’t answer these questions need more tweaking. Otherwise, you risk starting a new venture without a clear path and leave behind valuable insight.
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Using spreadsheets can get the job done when you’re just getting started. However, it’s easy to get overwhelmed, especially if you’re collaborating with others in your organization.
Financial management software is worth the expense because it offers automated capabilities such as analysis, reporting and forecasting. Plus, using cloud-based financial planning tools like NetSuite can help you automatically consolidate data and improve efficiency. Everyone across your organization can access and analyze up-to-date information, which leads to better informed decisions.
Whether you’re looking to secure outside funding or just monitor your business growth, understanding and creating a financial plan is crucial. Once you have an overview of your business’ finances, you can make strategic decisions to ensure its longevity.
Small Business Financial Management: Tips, Importance and Challenges
It is remarkably difficult to start a small business. Only about half stay open for five years, and only a third make it to the 10-year mark. That’s why it’s vital to make every effort to succeed. And one of the most fundamental skills and tools for any small business owner is sound financial management.
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