Once your brilliantly worded sentences and paragraphs have been linked together to form the pages of your convincing business plan, it’s now time to express it all rationally in numbers. Unless you’ve had experience with business financial management, or even if you have, creating the Financials section of your business plan can often be either intimidating or tedious.
For some folks the thought of having to sit facing spreadsheets is enough to justify putting off developing the business plan altogether. Committing to actual numbers means we are leaving conceptual world…the world of numbers is all strictly tangible and measurable by design, with no wiggle room or grey areas. Even if you use high and low performance scenarios you still using absolute numbers to illustrate the range. And ultimately your business plan is either profitable or it’s not.
However, from my experience, once you are up to your elbows in your formulas and data it can actually be a real relief to see your projections tell a very clear story, which completely supports your written business plan.
It’s not necessary to be an accountant to understand and prepare the 3 classic financial statements most investors want to see:
The cash flow statement records the amount of real money flowing in and out of the company. It shows payment cycles or seasonal trends that require added cash to cover payments. This cycle or pattern can help you plan ahead and be certain you have enough money to make future payments. The cash flow statement lets investors appreciate how a company’s operations are running, where its money is coming from, and how it is being spent.
The income statement is sometimes called a profit and loss statement (P&L) or statement of operations. The income statement shows the profitability of a company over a given period of time. It includes a section detailing revenues and gains and another section detailing expenses and losses. If a company’s revenues and gains are greater than its expenses and losses, then the income statement will show a net profit. But if the company experiences greater expenses and losses, the income statement shows a net loss. In other words, the income statement shows whether the company turned a profit within the period.
The balance sheet provides an overview of the company’s financial situation at a specific time, rather than profitability over a period of time. The balance sheet includes the company’s assets, liabilities and owners’ or stockholders’ equity. The company’s assets must always equal its liabilities plus owner equity. The balance sheet helps business owners and managers maintain a firm grasp on the business’s current financial situation in order to make appropriate financial decisions. For example, a lengthening receivables cycle may call for more aggressive collection practices.
What are the Differences between Them?
Each type of financial statement provides financial decision makers with different types of information necessary to run the company. For example, the income statement details the company’s revenues, gains, expenses and losses but does not include cash receipts or cash disbursements. Meanwhile, the balance sheet often includes what might be referred to as theoretical money such as money that is owed to the company but not yet collected, while the cash flow statement reports money actually received or paid.