The best way to prepare your business for the future is by having a financial plan. A financial plan gives an overview of the current financial situation and its growth projections. It considers the financial documents that represent your existing business’s monetary situation and future expectations. Why is this planning important? A financial plan helps project the short and long-term financial goals of a company and gives you ways to develop financial strategies. To plan for your business’s financial future, you need to consider having the following.
Profit and Loss statement
A profit and loss statement, also known as a pro forma income statement, income statement, or P&L, explains how your business managed to get a profit or loss on a particular period. It considers all the revenue streams, expenses, and calculates if you made a profit or loss. Although they come in different formats, depending on the business, it must contain the revenue, the cost of goods sold (COGS), and the margin after subtracting COGS from the revenue. It must also incorporate your operating expenses, which include rent, utilities, insurance, etc.
Cash Flow Statement
A cash flow statement is critical in having a financial plan for your business. It explains how cash came in and how the spending to run your business and the balance per month. Not understanding how cash gets utilized in a business can lead to losses or your business crumbling down. It helps differentiate what a profit and loss statement gives as income versus the actual cash position.
A balance sheet gives a brief description of your business’s financial situation at a particular time. It shows how much you have in the bank, what you owe, and the debts with clients. It has three types of accounts. There is an Assets account, which refers to money in the bank, accounts receivable, inventory, and much more, and also Liabilities, which are credit card balances, accounts payable, loan repayments, and other related expenses. Finally, Equity, which includes investors’ shares, stock proceeds, retained earnings, etc.
These are projections of what you want to sell over a given period. It is essential for your financial plan in situations where investors and lenders are involved, and it should be an ongoing business process.
Creating a financial plan can be overwhelming, but it is crucial to do so for your business’s health. Even if you are outsourcing these services, you as the business owner must read and understand them fully to know if you are heading right or wrong with your business. They will also help in making crucial business decisions.