Chapter Five Snippet
Accounting and Finance: Involves setting up a financial plan, budgeting, forecasting, and managing cash flow. A financial plan is simply a summary of a business’s current financial state and projections or plans for growth, despite how technical the accountants may make it sound. In the simplest terms, it is the present of your business and the future of your business. i.e., where you are now and where you plan to be.
Why Financial Planning?
One major reason why executives should plan is that it gives an objective view of their business. You don’t just have an ‘idea’ but ‘know’ the state of your finances. This way, you develop a realistic strategy to improve it. As you now have a clear view of your business, you will be very unlikely to step into deals your finances are not able to bear and leverage any opportunity that comes your way to improve it.
Being aware of your financial strength will give directions to the decisions you make. Another benefit of having a clear financial plan is that it improves your credibility and makes your business attractive to investors.
Creating a Financial Plan: Components.
You must first gauge and properly evaluate the current state of your business before you can draw out a plan. Growth plans must not come before proper evaluation of your current state. It is unwise to skip the process. Your financial plan as a startup or small business owner is less technical than most companies. In fact, it mainly comprises your SALES and EXPENSES. In this section, I will show you it’s not only accountants that can draw up a financial plan.
A. Profit & Loss statement.
Also known as a Pro Forma statement or income statement, a P&L statement is a list, document, or table that explains your company’s revenue streams and expenses, calculated over a period of time, usually three months.
Things to include in your Profit & Loss statement account include;
- Cost of Goods sold. (Except your company is a services firm, then it can be calculated as Cost of Sale or Cost of services.)
- Gross Margin: This can be calculated by subtracting the Cost of Goods Sold (COGS) from Revenue.
- Operating Expenses: These are the expenses incurred while running your business. They are usually fixed and hence remain the same irrespective of your income. E.g., Rent.
- Operating income: Your operating income is the amount of money you had before you had to take out your expenses like tax or rent. It is calculated by subtracting Operating Expenses from Gross Margin
Another feature of a P&L is the total net profit/loss written at the bottom of the document or list.