Financial Statements for Your Business Plan

A business plan contains a great deal of prose, but funders know that the numbers in the plan can make it or break it. These numbers are presented in three basic financial statements. For a startup business these documents are all “pro forma” meaning that they are projections of the future since no financial history exists for the company. If the business is already in operation, the financial statements can include past actual numbers, the present numbers as well as projected targets. The three key financial statements for a business plan are the income statement, the balance sheet, and the cash flow statement. Income Statement The income statement, or profit and loss statement, shows the sales revenues, costs of doing business, other expenses, taxes, and profit (or net income) for given periods of time. For recently past periods and the next 1 to three years, the income statement generally shows quarterly numbers to give greater detail. Annual data is shown for up to five years in the future. The income statement shows the profitability of the firm, and ratios such as the profit margin (net income divided by revenues) can be easily derived from this statement. Funders look to the income statement to see indicators like growth in the absolute level of sales, absolute level of net income, and profit margin (representing the company achieving greater efficiency at converting sales to profits). Balance Sheet The balance sheet, unlike the other two statements, shows snapshots of the financial situation of the company at given moments in time. At year’s end, for example, the balance sheet will show the value of assets, liabilities and owner’s equity (sometimes called shareholder’s or stockholder’s equity), drilling deeper into each of these categories as necessary. The word “balance” refers to the fact that the value of assets is always equal to the combined value of liabilities and owner’s equity, creating balance in the equation (A = L + SE). Funders use the balance sheet in conjunction with the income statement to derive ratios such as return on assets, return on equity, and return on invested capital. These numbers show how well the assets of and investment in the company are being employed to create profits. Cash Flow Statement The cash flow statement, also called the statement of cash flows, shows the cash inflows and outflows of the business for given periods of time, much like the income statement. Unlike the income statement, all numbers are in cash terms and are generally divided into three sections, operating, financing, and investing, covering some transactions not recognized on the income statement. Operating cash flows represent cash brought in through sales and cash paid out for operating expenses and inventory. Financing cash flows represents cash brought in from lenders and investors and paid out to those funders when principal is repaid or dividends are paid back, for example. Investing cash flows show investment in additional assets for the company, such as the purchase of equipment or leasehold improvements on a rented facility.