What Exactly Is a “Financial Plan” & Why You Need One
Your financial plan outlines how your business will perform from a financial perspective. It comes to life in the form of three financial statements – an income statement, cash flow statement and balance sheet. The financial plan is the financial goals that you manage to.
Your financial plan details how your business is expected to perform from a financial basis. It takes into account many things including how much revenue will you generate, what your expenses will be, your use of cash and what your financing needs are. Your financial plan comes to life in three financial statements that give readers an overview of the financial results and condition of a business.
Income Statement. Presents the revenues, expenses, and profits/losses generated during the reporting period. This is usually considered the most important of the financial statements, since it presents the operational results of an entity. At the end of each period (e.g. monthly, quarterly, annually), you’ll tally it all up to show whether you made a profit or created a loss.
Cash Flow Statement. The cash flow statement is kind of like a checking account register, that details how much money will flow into (income) and out of (expenses) your business. At the end of each period (e.g. monthly, quarterly, annually), you’ll tally it all up to show whether you generate or lose cash. Presents the cash inflows and outflows that occurred during the reporting period.
Balance Sheet. The balance sheet shows the business’s overall net worth by measuring assets, liabilities and equity. This presents the assets, liabilities, and equity of the entity as of the reporting date. Thus, the information presented is as of a specific point in time. The report format is structured so that the total of all assets equals the total of all liabilities and equity (known as the accounting equation). This provides information about the liquidity and capitalization of an organization.
For your first year, you should have these statements on a monthly basis and for subsequent years on a quarterly basis. You should project three years.