By Karlene Sinclair-Robinson
You might find while reading this article that I am a little bit exasperated. Why? Too often I see business plans with financial statements that are just not logical. To further compound the problem, simple addition and subtraction seems to be a problem. I find that some small business owners, especially startups, are so scared of these documents, they tend to totally mess them up. So, I figured I would put my fingers to the keys and provide some help by writing this article.
When the numbers do not add up, it tells a story or shows a pattern of incompetency, carelessness or inability or unwillingness on the part of the business owner to seek out support to solve these issues. Understanding how financial data is compiled for such documents as: Sales Forecasts, Cash Flow, Profit and Loss, and Balance Sheets are important. Using a CPA or even a Bookkeeper can help; however, the best thing to do is get some technical assistance or training in this area. Remember, this is your business.
It does not matter whether you had an “A” or a “D” on your grade report for Math, you must learn the basics or you can just say “bye, bye” to your business right now. What is the point of putting so much effort into other areas of the business, such as marketing, bringing on new clients, etc., when you have no clue if you are making money or not?
Your financial statements or projections tells lenders the story of your business or idea from a ‘numbers’ perspective. IF the lender comes across such simple mistakes as columns or rows not ‘totaling’ correctly, this could be detrimental to your receiving the loan necessary to move your business in the right direction.
Here are key financial documents you should be up-to-date with:
· Sales Forecast – this document tells how you came by your Sales or Revenue figures. Example: You plan to sell XXX number of widgets at $xxx price. This helps your lender better understand how you came by your sales numbers.
· Cash Flow Projections/Statements – Your business cash flow tells how money flows into your business and how it flows out – Revenue/Sales vs. Expenses. Completing Cash Flow projections gives you a baseline to work with, while using the Cash Flow Statement as the current and active document.
· Balance Sheet – identifies the business’ assets and liabilities. It includes current and long-term assets and liabilities. Never forget, it is called ‘Balance’ sheet for a reason – it MUST balance.
· Profit and Loss Statement – identifies and summaries the company’s revenue and expense position from a profit or loss standpoint. It will define the business’ Profit, Earnings Before Tax (EBT) and Profit After Tax (PAT).
· Personal Financial Statement – here is another document that must balance. It tells the assets and liabilities, along with the ‘Networth’ of the business owner.
When you have a better understanding of these documents, it will be easier to operate your business. They are the foundation of your business. When you are clear on these financial statements, you can rest easy that you know how your money is being made and how it is being spent. This just might keep you out of trouble.