Write a Business Plan – Part VIII

I hope you were good at math in school. ’Cause up next is fixing the financials of your startup.

By Ankush Chibber

The financial components section of your business plan plays the dual role of not only deciding what kind of budgets you would operate on, but also provides an estimate for investors. They want to get an estimate of the company’s value, how it pays its bills and how it will make money going forward. Typically, the financial section of your plan should only contain three statements—a cash flow statement, income statement and a balance sheet.

Show them the money
An income statement is a statement that shows the business’s ability to generate cash. It reflects what you’re selling and what you are spending on. The information listed therein is drawn from various models such as revenue, expenses and cost of goods. From a combination of such elements, you can arrive at a profit or loss picture for the said period. An income statement should be generated on a monthly basis for the first year of operations, quarterly for the second year, and annually after that.

How will you pay the bills?
The next component of your financial section is the cash flow statement. This should be able to give you a timeline of when money is going to come into the business and what expenses need to be paid when. It also predicts a profit or loss for the end of the year. If you are in a negative in your cash flow statement, it basically means you will need some more cash to keep going.

The cash flow statement also first takes the revenue and cash in hand, after which it lists the expenses and capital requirements as a negative. It ends with the net cash flow figure for your firm. As with the income statement, a cash flow statement too should be generated on a monthly basis for the first year of operations, quarterly for the second year, and annually after that.

The final sheet
This is the last statement or component of your business plan. The main aim of the balance sheet is to give a summary of all the financial information generated yet into three areas—assets, liabilities and equity.

A balance sheet, generated annually, divides the assets and liabilities of a company into current and long term, depending on whether they will occur in the said year or last more than a year. Once you have both the assets and liabilities taken into account, the owner’s equity needs will be calculated. This is the difference between total assets and total liabilities. The equity that the owner has in the business is an important yardstick used by investors when evaluating the company. It decides for the investor his safe amount; beyond which he will not invest in the business.

Making these statements is not the easiest thing you will do. We have, in the ‘How To’ section of Entrepreneur, covered how to make these statements and will continue to do so. Do refer to them when you make your business plan. And I hope you do so soon. Bon voyage.

This is the last in the series of an eight-part series. The rest of the articles can be found at www.entrepreneurindia.in

Click here for more.

Tags:
balance sheet, business plan, cash flow statement, income statement