Too often, business owners who get into trouble don’t even know they’re insolvent until the landlord puts a lock on the door.
A business plan sets the owner up with a basic understanding of business financials, and helps avoid the carnage. All business plans should include a cash flow forecast, pro forma income statements and balance sheets. In addition to these three critical components, there are a number of other financial reports that can help entrepreneurs understand how their business works.
Here are nine financial reports and a brief explanation of each.
- 1. Sales Forecast. A first year, 12-month projection of the number of units and the values for each product or service you will sell. A good sales forecast shows slower times, busier times and growth or shrinkage – it is the basic building block that enables owners to determine whether or not the business will bring in enough money to meet their financial expectations.
- 2. Labour Projections. A first year, 12-month projection of the value of all wages or salaries paid to the owner, employees and subcontractors.
- 3. Cash Flow Forecast. This report shows the flow of cash into and out of a business. This is the lifeline of the any business. It will enable owners to clarify how much money they’ll need to operate the business each month.
- 4. Operating Expenses. In the business plan, this is a 12-month projection of all operating expenses for the first year of business. This shows how much it will cost to operate the business, whether or not the owner manages to make any sales.
- 5. Pro Forma Income Statement. In its most simplistic form, the income statement is sales minus expenses and what’s left over is income. The income statement tells the owner whether or not the business is actually earning or losing money.
- 6. Break-even Analysis. The break-even chart identifies that point in the year when operating expenses are paid and the business begins to earn profit. This report tells how much the business will have to sell during the year, before it can be profitable.
- 7. Pro Forma Balance Sheet. The balance sheet is a financial snapshot in time that shows everything the business owns and owes. A business’ net worth is what’s left over after all liabilities are subtracted from the value of all assets. Pro Forma means the balance sheet is projected for some point in the future.
- 8. Start-up Expenses. This is a listing of all the expenses required to get the business to opening day. Start-up expenses might include some of the first few months operating costs, depending on the financial requirements of the business during that time.
- 9. Uses & Sources of Funds. This is a snapshot—usually created in conjunction with a business analyst or banker—that shows all funds needed at the point of borrowing money and what those funds will be used for.
Successful business owners learn to read financial reports and use the information to make business decisions. It’s a matter of survival to understand the difference between revenue and profit, and the difference between a cash flow forecast and an income statement. Most important of all, business owners need to understand their costs in order to be able to calculate and set prices for their products and services.