Creating a Successful Financial Plan

Creating a Successful Financial Plan

INTRODUCTION

Chapter 12 covered creating a successful financial plan. The three basic financial statements that were covered including the balance sheet, the income statement, and statement of cash flows.

Balance sheet is based on the old accounting formula assets equals liabilities plus owners equity. Balance sheets an estimate of the company’s value on a particular date, much like a snapshot of the company’s financial position. The income statement contains the firm’s revenues and expenses and determines what companies net income. It provides information about the amount of money going to the company’s bottom line. It is important to remember that income and cash are not the same things.

The cash flow statement shows the change in the company’s working capital over an accounting period. These typically formatted by listing the sources and uses of funds. Also important for the entrepreneur to produce projected financial statements. These projections will help the owner manage the company’s cash flow. Another method that the entrepreneur may use to determine the company’s performance level is ratio analysis. It’s important to understand the four basic categories of ratios used to analyze your company.

Leverage ratios tell how much the company is financed by owners and by creditors. A highly leveraged firm has a lot of as compared owners equity. Operating ratios show how effectively the farm is using its resources. Profitability ratios demonstrate the company’s profitability. A breakeven analysis is often used for a startup company to determine the required level of revenues to pay expenses including your salary.

Chapter 13 was focused on managing cash flows. The entrepreneur must know that cash is the most important asset that a small company has and the entrepreneur must maintain enough cash to pay normal expenditures, plus keep a reserve for emergencies, without retaining an excessively large cash balance. Large cash balances should be invested into accounts that are easily accessible should the money become necessary.

It’s important to remember that cash and profit are not the same large number of businesses fail because of cash issues. Many growing companies can be making a profit but still have cash shortages. Thus, it’s critical for the entrepreneur to create a cash budget as part of the company’s financial planning. Five steps to create a cash budget are determine a minimum cash balance, forecasts sales, forecast cash receipts, forecast cash disbursements, and determine the end of month cash balance.

Three main company accounts must be managed in the cash budget which include Accounts Payable, Accounts Receivable’s, and inventory. Small business owner can have a tremendous amount of cash tied up in these three accounts. Hence, it’s important to have a plan for managing them. It’s highly recommended that you read chapter 13 to learn the many techniques that the entrepreneur may use to avoid a cash crisis.

Be sure to use the Excel template provided in the course and complete the Sources and Uses of Funds Statement. Include important assumptions, financial indicators and benchmarks, break-even analysis, projected profit and loss, and yearly profit, balance sheet, exit strategy, and cash flow by month.

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