Successful entrepreneurs not only have visions in their minds, they also translate their abstract visions into concrete financial projections. Financial projections enable entrepreneurs to set targets for their goals, control costs and predict problems. Balance sheet, profit-loss statement, and cash flow statement are the 3 main parts of financial projections and should be included in any business plan:
It is a summary of the financial balance of a company. It looks at the company’s assets, liabilities, and equity. Assets are economic resources. They include tangible and intangible things that can be owned and controlled to produce value. Liability is defined as an obligation of an entity. To settle this obligation, an entity can transfer assets or provide services. Equity is the residual claim of investors in assets after all liabilities are paid. Assets, liabilities, and equity are listed on the balance sheet, and the difference between assets and liabilities is the company’s net worth. The balance sheet is a snapshot of a company’s financial condition, and it gives decision makers a solid understanding of the company’s resources and debts.
It indicates how revenue, after charging against costs and tax, is transformed into profit. This projection vividly interprets the business’ entire operating process into financial figures. These projected figures might not largely match the company’s actual performance. But they, to a certain extent, give entrepreneurs a general idea of how profitable their businesses could be. The profit-loss statement helps entrepreneurs set goals for both short term and long term periods, and it also alerts entrepreneurs to potential costs that could incur.
Cash Flow Statement
It essentially indicates the flow of cash in and cash out of the company, and it has been a very useful tool to determine the business’ short term viability. Cash is the life blood of a business. Payroll and immediate expenses have to be paid in cash. Whatever scale a business entity is, it can go bankrupt if it runs out of cash. Therefore, the cash flow statement is crucial for a startup owner to judge the company’s financial health. It is also important for investors and lenders to judge the company’s potential return and its ability to repay. It as well tells how much startup capital the company will need.
Financial projections include balance sheet, profit-loss statement, and cash flow statement. They inform their readers the company’s financial condition. This information is crucial important and is in a professional business plan. Therefore, by having a business plan at hand, one can always examine his/her business’s financial health, and present investors or partners with valuable data.