The financial part of a business plan includes various financial statements that show where your company currently is financially, and where it intends to be. This information helps you determine how much financing your business needs and helps financiers determine whether lending you money or investing in your business is a prudent use of funds.
While the financial statements are helpful in and of themselves, the data they contain can also be used to calculate financial ratios such as gross profit margin, return on investment and return on owner's equity. Ratios provide helpful information about a company's liquidity, profitability, debt, operating performance, cash flow and investment valuation.
Income Statement
The income statement summarizes your company's revenue and expenses. Revenues are your company's sales and/or other sources of income (for example, a car dealership might earn money from car sales, car leases and auto loans). Expenses include items such as the cost of goods sold, payroll, taxes and interest. The bottom line of the income statement shows the company's net income. Financiers want to know what kind of numbers your company is working with and whether your company is profitable.
Balance Sheet
The balance sheet shows your company's assets and liabilities. It's called a balance sheet because the assets must perfectly balance the liabilities. Within each category are numerous subcategories. For example, your assets will include things like cash, accounts receivable, inventory and equipment. Your liabilities will include things like accounts payable and loan balances. The balance sheet is important because it shows the company's financial position at a specific point in time, and compares what you own to what you owe.
Cash Flow Statement
The cash flow statement shows the amounts of money you expect to be coming into and going out of your business in a given time frame. Topics you'll need to examine to predict cash flow include sales forecasts, cash receipts vs. credit receipts and the time frame for collecting accounts receivable. How much will these expenses be, and how often will you need to pay them? Will you have trade credit, and how long will you have to pay your suppliers? A realistic cash budget covering one year of operations and broken down into one-month intervals is an important short-term planning tool. You'll also need to prepare longer-term projections that go at least three years out, if not five. These are called "pro forma" statements, and they are based on your assumptions about how your business will perform.
