Dear Olga: Starting a Business
Updated: Jun 8, 2020
Dear Olga,
I am writing a business plan for my business but I have a challenge with the financial statement and how to go about it. Please, can you guide me on how to write an accurate financial statement plan?
Thank you,
Amina
Dear Amina,
Starting a new business is so exciting, congratulations! 👏👏👏
While working on my MBA degree, I wrote several business plans each semester. To help me stay on track with all of the things that were required for each business plan, I used a resource recommended by one of my professors, score.org.
Score.org includes free templates and articles that can help walk you through each section, way better than I can.
There are three financial statements that you should include with your business plan: Income Statement, Balance Sheet, and Cash Flow Statement.
Before we go further, don't let the names for these statements overwhelm you. You don't need to become an accountant overnight (or at all) to get this!
If you understand the reasoning for each statement and their general workings, you will be able to research the rest.
Income Statement aka Profit & Loss
The income statement shows your revenues, expenses, and what is left (profit or loss) at the end of each period.
Revenue - Expenses = Profits
Usually, this report is summarized monthly, quarterly, and yearly.
An income statement is very similar to your personal budget when you start your business, check out this Dear Olga column discussing the similarities and differences.
To build an accurate forecast of your income statement, you will need to do some research.
First, decide what you'll be charging for your services or products.
Second, if you're selling a product you will need to have a very detailed understanding of the cost to create each item. This detailed understanding will help you make the best choices when it comes to all other costs your business will incur.
Third, research every cost you think you are likely to incur starting your business because lack of cash is one of the biggest business killers. A US Bank study found that 82% of startups and small businesses fail due to cash flow problems.
It's a good idea to have 3 to 5 years of projected income statements if you're presenting your business plan to potential investors.
If you're preparing a business plan for a bank loan, you should follow the guidelines required by the bank application. If the application requirements are unclear, ask for clarification.
Another great resource for writing a full business plan if you're presenting it to investors or a bank is this Finimpact article that goes into detail about how to write a business plan like a pro.
There is no shame in asking questions when something is unclear, clarity allows you to make decisions with confidence and that confidence is key.
Balance Sheet
The balance sheet shows the details of your assets and how they are financed. Typically assets are financed either by liabilities (aka debt) or equity, in most cases by a combination of both.
Assets = Liabilities + Equity
Usually, this report is summarized monthly, quarterly, and yearly. At the end of each year, the total profits from the income statement become retained earnings on the balance sheet.
This is the case whether you've made a profit or had a loss for the year. If you're not careful to watch your profits each year, you may have a cash flow issue.
To build an accurate forecast of your income statement, think about what assets your business needs in the first year.
If you have limited starter cash, think about what is absolutely necessary to keep your business going, and don't let yourself get carried away with a wishlist you can't afford.
Cash Flow Statement
As a new business, the cash flow statement is one of the most important financial reports. This statement shows how cash flows in and out of your business.
Usually, this report is summarized monthly, quarterly, and yearly. However, when you begin maintaining your cash flow as your business starts up, I recommend checking in weekly or bi-weekly.
Without getting into the nitty-gritty, the way to have an accurate cash flow statement is to make sure you know exactly what is flowing in and out of your business almost on a daily business.
You may not need to become an accountant as an entrepreneur but it's important to understand what is going on with your business. Cash is every business's bloodline.
Don't forget that small businesses are often supported in their communities, you just have to look for the resources. I have found groups that are helpful for NYC entrepreneurs, including free resources that can help you with business plan building and landing your first contract.
I am also here for you. If you have any questions about these statements, send me a note at olga@ragstorichesconsulting.com.
Good luck on this exciting adventure!
Olga
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