Getting to the Money: Tips for Creating a Solid Financial Plan
There are certain components to business planning that are prerequisites to achieving success. These components ensure that you have a solid financial plan with the corresponding data to match will happen in the future for your company. Having a clear representation of your financial plan that can be both easily articulated, and represented on paper is unarguably critical. Whether you’re just hoping to modify or enhance the one you have in place, or haven’t quite gotten to create one just yet, this article can be a resource for you.
To keep things simple, there are four areas you’re going to focus on: income statement, balance sheet, cash-flow statement and projections. It is imperative that you pay equal attention to all areas of your business plan. Neglecting any of them is putting you and your business at risk for holes in future planning and overlooking things that could end up being major pitfalls for you later. Each of them is explained in further detail below.
A solid income statement reflects the amount of revenue generated within a specific period of time, according to the Securities and Exchange Commission. This projection is going to have to have facts and figures to back it up if you want it to hold water with prospective investors. That means that you’re going to have to dedicate time to market research before you even begin drafting. Further derived, your income statement is, in fact, the ever-elusive bottom line. It’s comprised of things like sales, expenses, operating expenses, net profit and sales. When it comes down to the business of, well, business, this is one of the most important numbers into which you’ll want to have direct insight.
Balance sheets are simple in concept; however you still want to take care with them. While most people think that they can easily craft a balance sheet, they fail to realize the vast difference between something that is written for personal accounts and something written for a business. At the heart of it, a balance sheet is a listing of your assets and liabilities in order to determine your business’s equity. An asset is something you or your business owns, like cash, notes, accounts receivables, securities, inventories, goodwill, fixtures, machinery and so forth. A liability is the opposite, so that’s money you owe, accounts payable, etc. Equity is calculated by adding up your assets and then subtracting your liabilities. You want as precise an accounting of your equity as possible, and you want to be able to access it readily.
This part of your financial plan comes back to your income statement. If your income statement is the amount of revenue generated within a specific period of time (aka, your bottom line) then your cash-flow statement is the path that your funds take to become your revenue. This means that it includes the income that your company generates along with the expenses that it incurs in the general flow of operations. The benefit of your cash-flow statement is that you can readily see precisely where revenues are low, where the business is performing well, and how to best move forward to mitigate and exploit, respectively. Of course, based upon exactly when money is exchanged, your cash-flow statement could either overly inflate the numbers, or drastically reduce them. This means that you want to take averages instead of snapshots when you are assessing the long term impacts of your cash-flow data.
The last aspect of your financial plan is to be able to intelligently predict what’s going to happen. This doesn’t mean that you have to be a mind-reader, but it does mean that you need to know your market. Never underestimate the value of market research in any aspect of business planning. Being able to analyze your numbers and make decisions on how to move in the future is the very essence of business. Additionally, being able to predict your actual income along with your expenses can make it much easier for you to anticipate as well as prevent financial shortages from occurring in the future, according to Wells Fargo. Since money is tied to almost every component of a business, it is simple good sense to know exactly when and where belts may need to be tightened.
To sum it all up, creating a sound income statement, balance sheet, cash-flow statement and reliable projections are all critical to having a solid financial plan. This financial plan, in turn, is critical to the success of your business. The more care you take with these early on, the better a position you will be in for the future. Taken together, they will create an excellent guide as to the timing of the rest of your business plan.