Financial Templates to Plan, Finance, and Operate Your Business
In this article I am going to briefly describe the three main financial statements you will need to plan, finance and operate your business. These are the Balance Sheet, Profit and Loss Statement, and Cash Flow Statement.
Your Balance Sheet
Your Profit & Loss Statement
Your Cash Flow Statement (and Forecast)
Startup Costs
Overview of Financial Statements
Financial statements have been developed over the centuries to answer different questions about an organization’s past, current and future performance. Typical questions answered by financial statements include:
- Are you making money or losing money?
- How much money do you need to start your business and achieve profitability?
- Are your assets greater than your liabilities, and if so how liquid are they?
- When you can take cash out of the business?
The Balance Sheet:
Like a scale, your Balance Sheet measures your company’s Assets and Liabilities, the difference being your Equity or “Net Worth”.
Your Balance Sheet is a summarized statement of the financial condition of a business at any specific date and is usually produced quarterly or annually. It lists all of your company’s assets such as working capital, property, inventory, cash and accounts receivable, and liabilities such as long and short term debt and accounts payable. The difference of Assets less Liabilities is Net Worth which is the net accounting value of the company.
The Profit and Loss (P&L) or Income Statement:
Your P&L statement includes information necessary to calculate revenues, expenses, and profits or losses for tax purposes. Typically, P&L statements are based on either the “Cash” or “Accrual” methods of accounting, each of which has certain characteristics useful for accounting and tracking (see final section for more detail on this).
Most entrepreneurs are fairly capable of estimating their forecasted expenses on the P&L, but where they often miss the mark is in accurately forecasting their revenues. This results in projected profit targets that are often not met. The moral of this story is to be very sure that your P&L statement is a true and accurate reflection of your best estimates and accounting.
The Cash Flow Statement (and Forecast):
In many respects, your Cash Flow statement is the most important financial working tool you have for your business. After all, cash is what is needed to pay your bills and meet payroll. If you run out of cash, you will probably go out of business. The Your Cash Flow forecast should itemize by month all of the income and expenses expected in the first year, and by quarter for the next two. For each period, at the top of the statement is the available cash at the beginning of the period. Then list all the forecast income and expense items, ending with the cash flow at the end of the period. This number is the cash available at the beginning of the following period. The bottom-line cash flow is cumulative and will show the maximum negative cash flow over the period forecast. This displays the total funding that will be needed, when it will be needed, and when the business will break even.
It is highly recommended that a 10-15 percent contingency be included in your cash flow forecasts to help assure that sufficient funding will be available to operate your business. Your funding sources will insist on a cash flow forecast since it will show the business’s ability to generate working capital, earnings, and repay debt.
Once your company has sufficient operating history, next to each “forecast” column will be an “actual” column which will show whether the business is running as planned, is ahead or behind of forecasts, and if corrective actions are needed.
- What is Cash versus Accrual accounting? Under the “Cash method” of accounting, sales are deemed to occur when payment is received, and all expenses are incurred when payment is made. Most small businesses use the “cash method” because of its simplicity and accuracy of reflection of the company’s current financial condition. If significant inventory is necessary to account for income, the “accrual method” should be used. . The accrual method of accounting may be advisable of all businesses with gross sales over a certain amount since it reflects longer term trends in both revenues and expenses than the cash method. Whichever method you use for your P&L, an important element to recognize is that these statements do not show precisely how much cash is available to pay bills. The Cash Flow statement will provide this information.
- Do you need a personal financial statement? You will definitely need a personal financial statement if you are a startup dealing with a bank for a loan. Such statements are not always required by equity investors, however. You should have such a statement in any event to clearly understand your assets and risks required to start your business. You also need to ensure that you separate your personal and business records from those of your business.
You should complete a personal financial statement so you can understand:
- Your financial situation.
- How much you can afford to put into the business.
- How much you have to cover possible contingencies.
- How much you have left to live on, and to meet personal and family emergencies.
- How should you handle Business Expenses? Business expenses generally fall into one of three categories: Start-up Costs, Capital Expenses, and Working Expenses. Note: You should always check with a financial professional regarding these matters, since laws and regulations do change over time. However, here are some general guidelines:
Start-up Costs: These are costs incurred for setting up a business or investigating the possibility of creating or acquiring a business. They include any amounts paid in connection with activities of a for-profit business and the production of income in anticipation of the activity becoming an active business.
Examples include:
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- Surveys of potential markets.
- Analyses of available facilities
- Labor and supplies.
- Salaries and wages of employees being trained and their instructors
- Advertisements for the business opening.
- Travel and other costs of securing distributors, suppliers and / or customers
- Organizing and setting up the business structure.
- Salaries and fees for executives and consultants or other professional services.
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These amortizable costs must be costs you could deduct as expenses to operate an existing business. They must be incurred or paid before the business begins operations and are frequently not fully considered when starting a business.
Capital Expenses: These include the costs of assets acquired for use by the business and held for future production of income. The property must have a determinable useful life of longer than one year and must be an asset that “depreciates”—e.g., wears out, decays, gets used up, becomes obsolete, or loses value from natural causes. Capital Expenses do not include inventory, land, or repairs or replacements which do not increase the value, lengthen the useful life, or increase usefulness of the assets acquired. Such capital expenses may not be deducted as a business expense when incurred or paid, but must be depreciated over the property’s useful life.
Working Expenses: These are all other costs of doing business which may be deducted since bottom-line cash flow is cumulative and will show the maximum negative cash flow over the period forecast. Working Expenses display the total funding that will be needed prior to profitability, when it will be needed, and when the business will break even. It is highly recommended that a 10-15 percent contingency be included to help assure that sufficient funding will be available to operate your business.
As your business begins to grow, your Financial Statements will provide you the true measurement of your performance, results, and value. They can also serve to suggest what types of adjustments you might make to improve your performance and value.
Conclusion
Final Words about Financial Statements
Financial Statements should be considered as the thermometer, scoreboard or report card of your business. I strongly urge you to generate preliminary estimates of your company’s financial performance by using these tools, and the sooner you start this process the better.
Accurate and current Financial Statements will help you establish parameters for your business and let you analyze alternative approaches. They will also help you determine how much capital you need and what the best terms are for securing such capital. For example you need to balance pricing, margins, competition, introductory offers and marketing requirements, all of which may be reflected in your financial forecasts. Preliminary Financial Statements will help understand and develop appropriate tradeoffs with financial partners and business associates.
DOwnload the Free Financial Statement Templates
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