4.3.9 Make a Financial Plan

A company will either prosper or fail dependent on its financial status, regardless of how good your idea is or how much time, money, or effort you put into it. People favor working with businesses they think will be profitable in the near future.

Your audience and your goals will determine how much detail is necessary in your financial plan, but generally speaking, the three primary perspectives of your finances should be an income statement, a balance sheet, and a cash-flow statement. It may also be important to include financial data and projections.

Income statement

The sources of your revenue and expenses for a certain time period can be seen by readers on your income statement. They can calculate your company’s key bottom line, or the profit or loss it made during that time, using those two pieces of information. If your business hasn’t yet launched, you can use the same information to project future milestones.

Balance sheet

Your balance sheet shows the equity you own in your business. You list all of the assets (what you own) in your company on one side and all of the liabilities (what you owe) on the other. This provides a brief overview of your company’s shareholder equity, which is calculated as follows:

Assets – Liabilities = Equity

Flow of Funds Statement

Your cash flow statement and income statement differ primarily in that the former takes into account when revenues are received and when costs are paid.

When your cash flow exceeds the quantity of money leaving your company, it is positive. If the contrary is true, then your cash flow is negative. When cash is running low, when you might have a surplus, and when you could need a backup finance source to keep your business viable, your cash flow statement should ideally disclose these things to you.

You may forecast your cash-flow statement to help you identify any gaps or negative cash flow and make the appropriate modifications to operations. Here is a detailed method for estimating your company’s cash flow.