Understanding
Business Plan Financial Statements
Business Plan Financial
Statements
Management of
any business requires a flow of information to make informed,
intelligent decisions affecting the success or failure of its
operations. Investors need statements to analyze investment
potential. Banks require financial statements to decide whether or
not to loan money, and many companies need statements to ascertain the
risk involved in doing business with their customers and suppliers. Generally an accounting department, a bookkeeper or the owner of a
business systematically records, sorts and summarizes the thousands of
documents (register tapes, invoices and vouchers) representing the
transactions of a business. These transactions include: sale
of merchandise; payroll distribution; material purchases for inventory -
to mention just a few. These facts are then compiled, classified
and summarized into financial reports for a business so that a financial
statement can then be prepared. Financial statements are customarily prepared on a quarterly, biannual
or annual basis. The date of a financial statement is of
considerable importance. Most are drawn up on a yearly
(fiscal) basis. Statements provided that are outside of the fiscal
closing are known as interim statements. Lenders and investors expect to see "pro forma"
financial statements included in your business plan. Pro
forma statements are hypothetical statements - financial statements
as they would appear after a certain set of events occur, e.g., the
recognition of sales revenues, recording of accounts receivable,
accounts payable, expenses and so forth. When
The Business Plan Store writes business plans, we generally prepare pro forma
financial statements (income statements, balance sheets and statements
of cash flow) by month for the first twelve months of business and by
year for the four years thereafter. We will vary that model
depending on the needs of our clients. The Business Plan Store includes three parts to the financial statements
- the balance sheet, the income (profit and loss) statement,
and the statement of cash flows or cash flow statement. A balance sheet is a
detailed snapshot of the condition or financial health of a company on a
specific date. December 31st is the most popular choice among
businesses, however many seasonal businesses issue their statements
after their main selling season, because their condition is most
favorable at that time.
Balance sheets show the dollar amount of assets (what the
business owns) and liabilities (what a business owes) in relation to net
worth or owner's equity (what the owner, principals or stockholders
own). Balance sheets are generally presented with assets on the
left side of the page (or top) and liabilities and equity on the right
(or bottom). Totals of both left and right (or top and bottom)
must be the same since total assets must equal total liabilities plus
net worth (Example
Balance Sheets). The income or profit and loss statement is a detailed
computation of the money a business makes or loses over a specific time
period. Sales or service income is offset against expenses -
operating and productions costs (Example
Income Statements). The statement of cash flows (or cash flow statement) shows
cash receipts minus cash disbursements. It differs from the income
statement in that a business can record sales revenue on account
(accounts receivable) without receiving cash, and pay dividends or
purchase securities or long-term assets - cash disbursements that do not
appear on the income statement. A well-constructed statement of
cash flows will begin from the operating profit line on the income
statement, identify working capital adjustments (e.g.,
increases/decreases in accounts receivable, inventory, accounts payable)
to arrive at cash flow generated from operations, subtract cash income
taxes, interest expense, debt payments, and add/subtract changes in
owner's equity to arrive at net cash flow. The proof that
financial statements "tie" is that the change in the cash
balance on the beginning and ending balance sheets equals the net cash
flow for the period (Example
Cash Flow Statements). A shortcoming of reviewing financial statements for a single period is
the inability to establish important trends. By comparing two or
more successive financial statements of the same concern, a trend becomes
apparent. Individual items of the balance sheet and profit and
loss statement compared with identical items on previous statements can
be significantly revealing in decision making. This observation
process is called comparative analysis. Comparative analysis of a
company's financial statement to its previous results and to industry
averages is essential in assessing its financial health. The Business Plan Store will prepare detailed financial
statements for your business plan that express your vision in terms of dollars and units of time, and in a format
that is easily understandable to all people in the lending industries.
(How we do it) Links
to Understanding:
Income
Statements | Balance Sheets | Cash
Flow Statements |
