A financial statement is a legal document that documents a company’s financial activity. These plans depict the current state of your small business and forecast the company’s future vision and plans.
Beginning with your day-to-day bookkeeping, you can create financial statements for your small business. You’ll pull and organize data from these records to put together your financial statements.
Financial statements are an important part of a business plan because they can help you attract investors or get bank loans.
In this article, we will cover the following:
- Balance Sheet
- Income Sheet
- Statement of Cash Flow
- What Should Be Included In a Financial Statement?
- How do I write a Financial Plan for my Business?
Here are the types of financial statements and tips on how to create them:
A balance sheet displays the assets, liabilities, and shareholder equity for a given time period. Begin by listing your assets on the left side of the page, including cash on hand and in the bank, your equipment’s value, your inventory in stock, and any other financial assets.
List your liabilities on the right side of the page, including accounts payable, credit card balances, bank loans, and any other money your company owes.
An income sheet shows a period’s revenues, expenses, and profit or loss. First, collect all types of earnings for the period covered by the statement. Wholesale and retail sales, as well as rental income, are possible sources of income. Then add up all of your expenses, including materials, payroll, advertising, utilities, equipment, and business property rent. Subtract your total expenses from your total income to get your bottom line.
Statement of Cash Flow
During a period, a cash flow statement shows the inflows and outflows of cash as well as the ending balance. Operating, investing, and financing activities are the three sections of the cash flow statement.
What Should Be Included in a Financial Statement?
Financial statements forecast investors and creditors about the company’s financial health and activity.
Because the report is sent to external stakeholders, a company must prepare it in accordance with the US generally accepted accounting principles.
This makes it easier for investors and creditors to compare your company’s financial health to that of others by comparing financial statements.
As a result, including these elements in your financial statement is standard practice.
- Assets are likely forecasted economic benefits obtained or managed by an external entity as a result of previous transactions.
- Comprehensive income: the change in equity (net assets) during a period as a result of transactions and other external events and circumstances. It includes all changes in equity during a period that are not the result of owner investments or distributions to owners.
- Owner distributions: decreases in net assets as a result of transferring assets, providing services, or incurring liabilities to owners. Owner distributions reduce ownership interest.
- After deducting its liabilities, equity is the residual interest in the assets that remain. The ownership interest in your company is referred to as equity.
- Expenses are cash outflows, asset uses, or liabilities incurred as a result of delivering or producing goods or services that comprise your core operations.
- Gains are increases in equity (net assets) resulting from business transactions and all other transactions other than those resulting from revenues or investments by the owner.
- Owner investments: increases in net assets resulting from transfers of something of value from other entities to obtain or increase ownership interest (or equity) in it.
- Liabilities are probable future economic losses resulting from present obligations to transfer assets or provide services in the future as a result of past transactions or events.
- Losses are reductions in equity (net assets) resulting from all business transactions, events, and circumstances affecting a business during a period, except those resulting from expenses or distributions to owners.
- Revenues are the inflows or enhancements of a business’s assets or the settlement of its liabilities during a period resulting from the delivery or production of goods, the rendering of services, or other activities that constitute the business’s ongoing central operations.
How Do I Write a Financial Plan for My Business?
Business planning or forecasting is a look at your company from today to the future. The financials in a business plan are not calculated the same way as the details in your accounting reports.
The financial section of your business plan serves two purposes. For starters, potential investors, venture capitalists, angel investors, and anyone else with a financial stake in your company will require this information.
The second and arguably most important purpose of your business plan’s financial section is for your benefit so you understand how to forecast your business’s performance.
Make A Sales Forecast
Make a spreadsheet that forecasts your sales over the next three years. Set up different sections and columns for different lines of sales for each month of the first year and quarterly for years two and three.
You should create spreadsheet blocks that include one for unit sales, one for pricing, and a third for calculating the cost of sales by multiplying units by unit cost. Because you want to calculate the gross margin, you include the cost of sales in your sales forecast. The gross margin is the difference between sales and the cost of sales.
Create A Budget for Your Expenses
You must understand how much it will cost to make the sales you have forecasted. When developing your budget, consider both fixed costs (such as rent and payroll) and variable costs (such as most advertising and promotional expenses).
Many of these figures will require you to make educated guesses, such as interest and taxes. To estimate taxes, multiply your estimated profits by your best-guess tax percentage rate and then multiply your estimated debt balance by an estimated interest rate.
Develop a Cash Flow Statement
This is a statement that shows how much money is coming in and going out of your company. Your cash flow statement is based in part on sales projections, balance sheet items, and other assumptions.
Historical financial statements should be available for existing businesses to use in projecting cash flow.
Beginning with a 12-month cash flow statement, new businesses should project their cash flow. It is critical to understand how you will invoice in order to obtain these projections. Will you expect payment right away or within 30 to 90 days from your customers? You don’t want to be surprised if you only collect 70% of your invoices in the first 30 days when you expect 100% of your expenses to be paid. Some business planning software programs will have these formulas built in to help you make these projections.
Project Net Profit
This is your pro forma profit and loss statement, which details your company’s forecasts for the next three years. Use the figures from your sales forecast, expense projections, and cash flow statement.
Net profit is calculated by deducting expenses, interest, and taxes from the gross margin.
Deal with Your Assets and Liabilities
You may deal with assets and liabilities not included in the profit and loss statement and forecast your company’s net worth at the end of a fiscal year.
Compile and estimate your monthly cash flow, including accounts receivable (money owed to you), inventory (if you have it), land, buildings, and equipment.
Then, calculate your liabilities or debts, which include accounts payable (money owed by your company) and debts from outstanding loans.
Find the Breakeven Point
The breakeven point is when your business expenses match your sales volume. Your three-year income projection should enable you to obtain this analysis. If your business is viable, your overall revenue should eventually exceed your overall expenses. This is important information for potential investors who want to know that they are investing in a company that is growing quickly with an exit strategy.
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