Financial Information for Your Business Plan
Writing a business plan is a good first step toward starting your business. The plan has several sections including a summary, a business profile, a list of products and services and a financial overview section. The financial section can be the most daunting, but it is important because it provides those who read your business plan with a good understanding of your business’s financial position. Investors, potential partners, creditors, even future employees want to know what capital you have available and what additional financial resources you will need to operate. They’ll also feel more comfortable supporting your business when you prove to have a clear understanding of the business’s financial position. The following are key pieces to include in your business plan.
Balance sheets show a company’s financial position at a certain point in time, for example at the end of the year. The balance sheet contains a list of assets and liabilities, and owner’s equity (the company’s net worth). The assets and liabilities plus equity must balance (assets = liabilities + Shareholders equity).
Assets listed on the balance sheet include:
- Accounts receivable (money owed to the company)
- Value of product inventories
- Equipment, land and buildings
Liabilities listed on the balance sheet include:
- Accounts payable (money you owe to others)
- Notes payable
- Accruals (charges incurred but not yet paid)
- Long-term debt such as leases
- Accrued income taxes
Equity includes common stock issued to raise money for the company and retained earnings, which are funds the company keeps rather than paying it out as dividends to shareholders.
An income statement shows the revenue your company has earned and the expenses it has incurred over a specific time period, usually monthly or quarterly. It is helpful in determining your business’s profitability.
The income statement can take two formats, multi-step or single-step. The single-step income statement is the simplest form, requiring fewer calculations to determine net income. The version you choose is based on the level of detail you or your investors need to evaluate your business.
In general, the income statement starts with a record of revenue. It may include the following:
- Sales revenue made by selling goods or services
- Interest revenue
- Non-operating revenue from the sale of assets
Next is a record of all expenses. Expenses may include the following:
- Costs of goods sold (this is the costs associated with selling a product)
- Operating costs such as salaries, advertising, utilities, depreciation, and other day-to-day operating expenses
- Interest expenses that you pay on loans, mortgages or any other borrowed funds
After determining the total expenses, these are subtracted from the total revenue to determine your net income before taxes. Next, list any taxes owed to local, state or federal governments and subtract this amount from the net income before taxes. The result or bottom line is called the net income, the income that is available to common shareholders or to owners if your company is a sole proprietorship or partnership.
Amortization and Depreciation
As mentioned above, amortization and depreciation are included on the income statement. Amortization refers to allocating the cost of an intangible asset over the asset’s lifetime. Assets are anything of value owned by a company. Intangible assets are items of value that cannot be touched or seen such as a mortgage, patent, or copyright. For example if you have a 30-year mortgage on a building you may pay $2,000 a month for 30 years.
Depreciation is used to allocate the cost of a tangible asset such as machinery over the assets useful life. A company uses specific calculations to determine how to depreciate its assets. An accountant can provide options for how best to depreciate your company’s assets.
Cash Flow Statements
The cash flow statement includes a breakdown of a company’s cash position during a set time period, usually monthly or quarterly. It is used to determine if a company is financially stable and can repay its debts. It is broken down into three sections: Operating activities, investing activities, and financing activities.
- Operating Activities are those that generate and use funds during the course of a company’s day-to-day operations.
- Investing activities are those that support the company’s long-term operations such as purchasing buildings, equipment and property.
- Financing activities include loans, stock transactions and any other activities between a company and its investors and shareholders.
It is a good idea to bring in a financial professional to help prepare these documents if you are not comfortable doing so. Making sure you have the right details will help you start out on the right foot.