3 Financial Guesstimates Every Financial Plan Needs
Dozens of decision are made each week in a business
. Each decision will affect your business.Question??
What financial projections does my business plan need to include, and will a forward thinking accountant help me identify them?
Answer.
You should tailor your business plan to your specific needs, but given the realities of business, we almost have to deal with certain simple financial projections. Even if you're running a non-profit organization, you can't escape the money, nor should you try. You have to have a plan to make sure you have cash in the bank as it's hard to imagine a business plan that doesn't need that.
Almost all of finance and accounting deals with three fundamental financial statements, the income statement (also called P & L) the balance sheet and the cash flow. But there's a critical difference between accounting and business planning.
What is this difference?
Accounting essentially reports on past transactions, pulling them into these three statements (which aka cash tables). Business planning looks to the future, it uses estimated guesses of monthly results to try to project how these statements will look in the future. A forward thinking accountant would help you see the subtle differences and use them to your advantage.
Forward Thinking Accountant Functions: THE PROJECTED INCOME STATEMENT
A competent forward thinking accountant would be able to help you with this. The income statement, whether it's projected or historical is about profits and/or losses. It shows financial performance over a specified time, like a month, quarter or year. The format for projected income in your business plan is the same as for income statements in accounting.
The income statement starts with sales. Then it shows the direct costs associated with those sales. Depending on your business, those may be unit cost; cost of goods sold, or directs costs of delivering the service.
How do you calculate your income statement?
Subtract direct costs from sales and you get gross margin usually in dollars and percent. Gross margin is useful for comparing your business's performance to industry standards, and bankers and financial analysis expect to see it.
Forward Thinking Accountant Functions: THE PROJECTED BALANCE SHEET
The balance sheet is a statement of a company's financial position at one specified moment in time, such as the end of the month or end of the year. It shows assets, liabilities and capital.
What are assets and liabilities and how do they differ?
Assets are normally cash, money owed to the company, and business property and equipment like chairs and tables, the espresso machine, vehicles, etc. Liabilities are debts, money the company owes as accounts payable, and loans to be paid.
Capital is money investment in the company which usually includes initial investments and retained earnings. Recent earnings are normally included in capital, so they provide the link back to the profit or loss.
Forward Thinking Accountant Functions: PROJECTED CASH FLOW
The cash flow statement sometimes feels like an afterthought in accounting statements, but in business planning, cash flow is essential. Make mistakes here and you'll end up bouncing cheques. Your forward thinking accountant should help you see this better.
The cash flow statement pulls information from both the projected income statement and the projected balance sheet, and ties them together. It shows money coming in, month by month, money going out, month by month, and the projected cash balance, and a good forward thinking accountant would help you know that better.
Tying up different functions of the business nicely together is something that a forward thinking accountant can help you with.
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