The financial documentation of a small business plays a very important role. They have a wide range of applications, from internal income and spending management to demonstrate the viability of a firm to investors and funding sources. Business financial documents are significantly essential in small business financial planning by helping owners to forecast potential issues and handle them ahead of time, as well as decide which direction the business will head in. While financial planning for small business owners can seem daunting, having proper financial documents in a business plan greatly help, especially when preparing financial reports and other documents necessary to ensure the business’ success. `Following are some essential business financial documents for a small business’ financial planning.
1) Balance Sheet
A balance sheet is essentially a snapshot that depicts a business’ financial status at any point of time, highlighting: the assets of the business – everything owned by the business is considered, including buildings, vehicles, appliances, etc. – the liabilities – everything the business owes, including debts, loans, etc. – and the equities which consider the amount the business owners have invested in the business. This information is necessary to determine the net worth of a business. If a business’ balance sheet shows a positive balance, where the total assets are worth more than liabilities plus equities, the business has a solid financial foundation. As a business owner, one would want their balance sheet to be positive, especially when applying for bank loans or pitching to investors.
2) Profit and Loss Statements
Profit and loss projections for business plans summarise the revenues and expenses of a business over the course of a year. Knowing the revenues and expenses of a business will help in calculating the net profit or loss over a period of time. As business owners, one should want to measure their profitability, which allows them to determine how much revenue needs to be earned to cover the total expenses of the business. This method of financial planning and forecasting also gives an idea of how a business may perform in the coming period of time. If a projection is healthy with positive net profits, a business owner may want to expand or invest more into their business to grow it. Otherwise, it indicates where mitigatory measures need to be taken. Thus, it is important to maintain an accurate profit and loss projection for your business plan.
3) Cashflow Statement
Understanding the amount of cash inflow and outflow in a business is important, as cash is the determining factor in making or breaking a business. Every seasoned business owner maintains a cash flow statement, meaning that they are monitoring their inflow of revenue and outflow of expenses very closely. Cashflow statements reflect the inflow and outflow of cash in a business over a period of time, like monthly or quarterly. For small businesses, it is typically easier to monitor the cashflow on a monthly basis to ensure that there is enough cash in the business to ensure effective daily operations and indicate where mitigatory action may be necessary.
4) Breakeven analysis
Breaking even is when a business makes enough money to cover the total cost of expenditure. A breakeven analysis is used to find the break-even point in a business – i.e., how much a business must sell or how much revenue needs to be generated in order to recoup the total spent on the business. For small businesses, it is not uncommon to make a loss, but long term, struggling to break even may indicate that the business is not financially sustainable. Using analytic methods to find the break-even point of your business may be useful to determine if costs are too high, or if the business’ prices are too low, and find a potential way to remain viable to increase financial health.
Ensuring that your business is optimised to return you the best and maximum amount of wealth does not have to take a huge amount of planning – a few strategic and wise choices are usually enough to ensure that profits keep turning. With the application of the four elements discussed above, there is a better possibility to manage finances better in order to ensure a profitable and successful business.