A financial plan gives you a snapshot of the overall health of your business. There are 3 key financial statements that make up a business financial plan. Taking the time to prepare these at the start of your business journey can pay off in the long run.
1. Cash flow statement
Sometimes called cash flow projection, this is one of the most important steps in completing your financial plan. It details your incoming and outgoing cash and helps make sure you have enough money to keep your business running.
Try this simple cash flow formula:
- Determine the period you want to focus on (e.g. the next 3 or 6 months)
- Start with your opening cash balance
- Estimate your incoming cash and expenses for the period
- Subtract the estimated expenses from your income and add it to the opening balance
How to use your cash flow statement
You can look at your cash flow statement from previous years to determine if you’ll have enough to cover your costs, like wages and rent, over the specified period. It’s important to allow for glitches like late payments when projecting your cash flow.
2. Income statement
Also known as profit and loss statement (P&L), this shows you a clear view of your income and expenses, and how these change over a period of time.
What to include in your income statement
What goes into an income statement depends on the type of business. You should at least cover these key areas:
- Cost of goods or services
- Total profit or loss (revenue minus cost of goods/services)
- Operating costs (e.g. rent)
- General expenses (e.g. marketing, advertising, depreciation)
- Operating income (total profit minus expenses)
How to use your income statement
Estimate your sales and expenses on a monthly, quarterly or yearly basis to see whether you can expect to make a profit or loss for each of these periods. This will help you develop sales targets and find ways to grow your business.
3. Balance sheet
Unlike your cash flow statement which looks at the future, and your income statements which looks at the past, your balance sheet is a financial snapshot of your business in the present.
Try this simple balance sheet formula:
- In one column list all your assets (e.g. cash, inventory, buildings)
- On the other side list your liabilities (e.g. accounts payable and loans)
- Subtract your total liabilities from your total assets to determine your equity
How to use your balance sheet
Your balance sheet can help you evaluate the financial health of your business, show your profit at a glance and work out if you’ll have enough resources to run your day-to-day operations.
Take your business financial plan to the next level
To enhance your business financial plan, consider preparing a break-even analysis. This shows you the number of sales needed to cover costs – anything above this number can be counted as a profit.
The break-even point can be useful for analysing the sales, costs and pricing numbers used in your earlier forecasts and judge whether your business idea is feasible. For example, if your break-even point is years away, you may want to revisit your numbers to see if there are any opportunities to make your business more profitable.
Once it’s ready, treat your business plan as a guide to running your business. Remember that it’s a working document, so if your goals and circumstances change, update the plan. If you need help, an accountant could help assess your prospective financial position and ensure you’ve thought through all potential income and expenses.
Check out our small business hub for more tools and insights on starting, running and growing your business.