The Basics of Small Business Financial Reports

As SCORE mentors, we have the opportunity to see a wide variety of small business ideas. In nearly every discussion with a start-up client, we eventually get around to discuss the need for a sound business plan. The plan plots a road map for the entrepreneur and summarizes the business opportunity for a prospective investor or lender. A critical part of every plan is the financial projections.  The three most important are :

  1. The projected cash flow statement
  2. The projected income statement
  3. The beginning balance sheet

Preparation of these reports is usually difficult for most start-ups. They can require many  assumptions and they force the entrepreneur make some tough decisions on financing, marketing, sales, pricing, operating expenses and even the location of the business. Let’s briefly describe each of the three reports.  A good starting point for both projected cash flow and income statement is preparation of a first year sales projection.

The Projected Cash Flow Statement

The cash flow statement simply tracks the projected movement of cash into and out of the business each month. Normally this is done for at least one year. You start with a cash balance on hand at the beginning of the first month, add estimated revenue (sales) , subtract disbursements (expenses) to calculate a new cash balance at the end of the month. The ending cash balance for this period becomes the starting balance for the next period. After doing this for 12 months, you’ll quickly see if the business model is viable. If you have several months with negative cash balances , you may need to revisit your sales assumptions, reduce projected expenses or increase the working capital you’ll need for start up, or a combination of all three. Done in a spread sheet format (like EXCEL), this can be a powerful tool to simulate different business scenarios. This projection is probably the most important report provided to a prospective lender.

The Projected Income Statement

The income statement is a different view of the new business. The horizon of the statement may be for the entire year, or for 12 individual periods (months).  Unlike the cash flow statement, it matches actual sales with the cost of the product or service sold in each period. For example, if you sell ten widgets in a month, the transaction is recorded as a sale that month, regardless of when you are actually paid for it. The cost of producing the ten widgets gets recorded as an expense in that month, no matter when it was acquired or produced. Month to month, the income statement may look very different than the cash flow statement  because of when cash is actually received or disbursed.  It is conceivable  that a new business is reporting a month to month profit, but is in financial trouble because of cash flow timing.

The new business needs to be profitable and generating positive cash flow to be successful.

The Beginning Balance Sheet

The balance sheet is a snap shot of the health of the business at any point in time. It lists the assets of the business (what is owned and what is owed by others), subtracts the liabilities (what the business owes to others) to calculate a net equity (assets-liabilities=net equity). Healthy businesses have a positive net equity position.

Our Raleigh SCORE mentors would be happy to explore these concepts more completely with you and assist with the preparation of a start-up business plan. Feel free to call us at 919-856-4739, or go to our website, and sign up for a free mentoring session.