As one of the most essential aspects of a business proposal, your financial plan uses current financial data to project long-term profits and losses for your company. Having a strong financial plan helps you identify potential issues and discrepancies while it’s still early enough to make changes. A good financial plan also improves your odds of securing funding from lenders and other investors by showing you’ve done your due diligence. But what separates an average financial plan from one that truly sets you up for success? To create these documents successfully, it’s important to fully understand what’s involved.
Income Statements for Profit and Loss Planning
Income statements reveal revenue, expenses, and profits over a given period of time. If you’re creating an income statement, you would need a list of all the costs and expenses associated with running your business. This may include raw materials, suppliers, employee salaries, and rent costs. Then you record your revenue, which is the money you receive in exchange for providing goods and services. By subtracting your expenses from total revenue, you can determine whether your company can expect to make a profit or face a loss. Profit and loss planning not only comes in handy for decision-making purposes, but it can also help draw potential investors to your business.
Income statements for existing businesses show data from the past one or two years, but startups don’t have that historical data. Instead, you forecast this information based on research. When drafting your company’s first income statements, you may need to project profits and losses using information from similar businesses in the area. The goal is to determine if your company can support itself moving forward and make budgetary changes as needed.
Cash Flow Projections
Cash flow projections estimate the amount of money entering and exiting the business on a regular basis. To determine net cash flow, you simply subtract cash outflow from cash inflow, which shows only those funds that are actually available at a given time.
Just as with your income statement projections, you have to create a plan of how you expect your cash to flow based on rational observations, predictions, and your own research. Creating a schedule of when cash comes in and out can give you and investors insight into how much cash you may actually have available to operate your business.
By keeping accurate cash flow statements as your business matures, you can spot problem areas before they grow too large to contain. For instance, if your projections suggest you need more immediate cash, you can try strategies to help bring it in, such as turning over inventory more quickly or reducing the length of your billing cycle. Which ever way you use it, a cash flow’s primary functions are to assess your company’s financial health and help you make sound business development decisions.
When calculating your cash flow projection, you can’t use any revenue amounts from unpaid invoices. The reason? That revenue hasn’t been collected yet and thus isn’t available to go in or out. Yes, you may be able to declare the money from unpaid invoices in your revenue projections, but not as cash on hand.
A balance sheet provides a snapshot of a company’s assets, liabilities, and equity at a given time. As its name implies, a balance sheet needs to show a balance between a company’s assets, which equal liability added to the value of equity. This statement can have a significant impact on your ability to secure funding to get your company off the ground.
First, you want to list all assets, including accounts receivable, savings, inventory, and equipment. Next, you should detail all liabilities, such as accounts payable, loan payments, and credit card balances. Lastly, you can add up the company’s equity, which may take the form of owner equity, investor shares, and earnings from stocks. When you’re finished, the total value of assets should equal your liabilities plus your equity.
It’s no secret that startups rarely turn a profit at the onset. If and when your business does cross the threshold from red to black, you cross the break-even point. The break-even point happens when the expenses of running your business equal the revenue from your products and services, and knowing your break-even point helps you with your profit and loss planning in future budgets. To increase your odds of reaching that crucial turning point, it’s a good idea to create a break-even analysis as part of your financial plan.
Along with your company’s fixed and variable costs, the document should include projected prices and account for the value of inflation. Not only does a break-even analysis show potential investors that your company has the potential to succeed, but it also helps you make better decisions regarding resource allocation. If your break-even point is too high, you may want to consider ways to reduce your costs of doing business. This might include shopping for new suppliers, increasing prices, or even temporarily working out of your home.
Most people can’t launch a new business entirely on their own. Because loans are common in the startup world, it’s a good idea for every business plan to include a loan summary and financing schedule. Take note of the types of loans incurred, including interest rates and expected terms, as well as securities information. After all, potential lenders want to know that you have a solid plan to pay off existing debts before investing more money in your business venture.
Having a strong financial plan before you launch can help you improve your chances for financial success. With the right tools, you can create that financial plan with less work. Using an accounting system, such as QuickBooks Online, you can generate a Profit and Loss statement automatically. Learn how today.