Organizing Your Financial Statements
| At first, you might be intimidated by the task of forecasting the finances of your business. But in reality, it's not so bad if you plan well. Valid financial projections consist of making educated guesses of how much money you'll take in and how much you'll need to spend. Then, use these estimates to calculate whether your business will be profitable. Let's look at the income statement first. Creating Your Income StatementYour income statement is synopses of revenue, expenses, and profits of your proforma statement. The income statement gives you a quick bird's-eye view of the expected performance of your business. A simple income statement looks like this.
But many businesses forget one financial statement, which can tank even the most successful-looking business in a proforma or income statement: a company's cash flow statement. Projected profits don't guarantee money in the bank. Creating Your Cash Flow StatementEven if your proforma tells you that your business will become profitable, unfortunately, those projections can't tell you if you will have enough cash on hand at any given time to cover your monthly expenses, or even to pay for your inventory or materials to offer the products or services you sell. That's the purpose of a cash flow statement, one of the most critical tools for the evaluation of your business. It tells you how much money you must have on hand or available to draw on to stay in business while you are becoming profitable. Many a company has failed because of a lack of cash flow. A company might show a profit, but its cash is tied up in inventory and others that owe them money on sales. A necessary amount of working capital is critical to a company's success. As with the income statement, the numbers and projections from your proforma flow into the cash flow statement. You begin your cash flow statement with the money you have on hand and the money that is available for you to draw on. For example, this includes the amount of money you have in the bank, the cash available on your credit cards, or a business loan or personal credit line from your bank. The cash flow statement doesn't have to be long or involved. It should cover only the key elements of your cash flow projections. When you've determined the cash resources you have on hand or available to you, make a list of expenses, including any expenses incurred when manufacturing a product for sale. Then, subtract the expenses from the total cash available. The result is a net cash flowpositive or negative. If the net cash flow is negative, you need to increase the cash available for the business, even if your proforma and income statement show profit. Here's what a simple cash flow statement includes:
A simple cash flow statement or projection looks like this.
A profitable income statement might make you smile, but if you run out of cash to operate your business, you might have to close your doors. Creating Your Balance SheetAs with the income statement and cash flow statement, the balance sheet uses the information from your proforma projections. A balance sheet consists of three basic parts:
Company assets means anything a business owns that has a monetary value, such as cash on hand; receivables (customers and vendors that owe your company money); the value of a company's inventory on hand; other inventory items, such as office and shipping supplies or manufacturing supplies; and any prepaid expenses or deposits. Prepaid expenses are those that are fully paid for in advance, such as insurance premiums and maintenance contracts. Deposits are funds that are paid but that a company fully expects to have returned after a period of time, such as deposits on equipment rentals. Also included in the company assets are long-term assets, or fixed assets, such as manufacturing equipment, and long-term investments in financial instruments that cannot be readily converted to cash. Company liabilities are monies owed to vendors and creditors. These include accounts payable, accrued liabilities (accrued expenses that not been paid out yet, such as salaries and overhead), and city, state, and federal taxes. Other long-term liabilities include bonds payable that are due at the end of the year, mortgages or loans, and any amount still owned on long-term debts such as notes. A company's equity is equal to the company's net worth. After the assets and liabilities have been entered into the balance sheet, you can compute the equity of your company. You arrive at this number by subtracting company liabilities from your company assets. This number is important to investors because this is how they calculate the amount they will invest in your business. A simple balance sheet looks like this.
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EAN: 2147483647
Pages: 208