Chapter 21. Financial Planning

In This Chapter

• How to create a proforma

• How to create an income statement

• How to create a cash flow statement

• How to create a balance sheet

If you're going to make the transition from a part-time business to one that will become a primary source of income, you need to have a good idea of what money you'll need, where it goes, and how it's spent. You need a clear picture of your financial position at any one point in time.

To do that, you need a proforma (a projection of your revenue and expenses) and what's called in the accounting trade the Big 3 financial statements (income, cash flow, and balance sheets). The financial planning you do for your business is just as important as your business plan. If you have done your homework, the financial documents you have prepared can help you assess the ongoing operation of your business and the business assumptions you've made.

Tip: Don't Get Spreadsheetitis

Today's spreadsheet software makes it too easy to create multiple variations of financial documents. In the case of financial projections, less is more.

Include four comprehensive reports in your financial plan:

• Pro forma

• Income statement

• Cash flow statement

• Balance sheet

We cover the hows and whys of these as we move through this chapter. But before you do this, you must perform one important exercise: create your financial assumptions. For a more comprehensive understanding of financial statements, see Write a Business Plan in No Time (Que Publishing, 2005), by Frank Fiore.