Cash is the basic fuel businesses run on, and optimizing its consumption is one of the most important challenges. Alas, the numbers game is not an easy one to get a hold of, and each and every figure has its meaning, origin and purpose. It is estimated that 28% businesses go under, due to avoidable financial problems, and other researchers have found out that the staggering 90% of startups never make it, falling short of even the marginal single-digit growth. Well, they have their own managers and owners to thank for this, or to be more precise, their lack of financial planning.
Making a statement
A financial plan is the heart and soul of the company, allowing you to achieve a sustainable, long-term growth. The document includes profit and loss statement, cash flow statement, balance sheet, sales forecast and personnel plan. Here lie the answers on million dollar questions — how much money you possess, where does it come from, where is it allocated and on what schedule? So, first of all, a startup must be able to present how it generated a profit and loss over a certain period of time. This involves a list of all revenue streams and expenses, with the net figure at the bottom.
Furthermore, cash flow statement encompasses per-month balances explaining how much an organization brought in and paid out. If this information is laid out well, investors and lenders will have no hard time figuring out the financial picture, and business owners can raise funds nice and easy. Now, the cash flow statement is not to be confused with profit and loss declaration. The difference is best illustrated in the following example: Imagine yourself enjoying a nice revenue, which exceeds your expectations, but you still lack money to keep the engines running.
Let us move on to the next item — balance sheet. You can think of it as a snapshot of your current financial outlook. The sheets themselves are standardized and hold assets, liabilities and equity. A basic equation is as simple as ABC: The sum of liabilities and equity is equal to your total assets. Note that retained earnings are a part of your equity (unless you are a sole proprietor), and that at the end of the accounting year the profits or losses add or subtract from them.
As for the sales forecast, it is pretty straightforward: This element covers the period of one to three years and makes sales predictions. As such, this part of the document is the backbone of the whole financial planning endeavor. That being said, you can go for a detailed analysis or summarize key expectations. Breaking down the various segments of the forecast is advisable, especially for those who are not seasoned entrepreneurs. Finally, we come to the personnel plan, which evaluates the impact of workforce and factors such as labor costs on business operations.
The restless cash streams
All the numbers ought to stand up to legal scrutiny. For publicly-traded enterprises, it is necessary to adhere to the generally accepted accounting principles (GAAP) standards, but small businesses can make “pro forma” financial statements. Still, pay attention to the method of accounting, whether you employ the cash method or accrual method. Also, keep in mind that the aforementioned aspects of the financial plan are essential, albeit not the only list of duties startup owners and their colleagues must fulfill. Namely, companies also engage in financial health checks, calculate business ratios, conduct break-even analysis, etc.
At last, experts from the Pherrus Financial Services point out to the existence of various tax planning and minimization strategies that enable you to make savings. Business owners can outsource some bookkeeping tasks to accounting firms, but even then they must not fail to grasp the basics. Only that way can an individual make informed decisions and keep the company on a steady course. A startup that does not grow is shrinking and not attracting cash. Growth leads to more growth, but do not go overboard and build your success on fragile financial pillars: Sustainability is the name of the game, and the rules are clear.
Be in full flow
Financial planning often feels overwhelming, but the abundance of available tools and resources should make your life easier. Develop a deeper understanding of the terminology, and then forge the financial plan from basic numbers. You need to be able to access your financial position with precision, and also to predict the cash flows in the future. Bankers, investors, accountants and clients expect you to handle the financial planning well, and you cannot afford to make a bad impression. In fact, the lack of spadework impedes your growth and separates you from the only means of survival in the fierce market arena.