Financial Factors

Financial Factors

The income statement is a simple and straightforward report on the proposed business's cash-generating ability. It is a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result -- which is either a profit or a loss.

For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year thereafter. It is formed by listing your financial projections in the following manner:

1. Income -- Includes all the income generated by the business and its sources.

2. Cost of goods -- Includes all the costs related to the sale of products in inventory.

3. Gross profit margin -- The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.

4. Operating expenses -- Includes all overhead and labor expenses associated with the operations of the business.

5. Total expenses -- The sum of all overhead and labor expenses required to operate the business.

6. Net profit -- The difference between gross profit margin and total expenses, the net income depicts the business's debt and capital capabilities.

7. Depreciation-- Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.

8. Net profit before interest -- The difference between net profit and depreciation.

9. Interest -- Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company.

10. Net profit before taxes -- The difference between net profit before interest and interest.

11. Taxes -- Includes all taxes on the business.

12. Profit after taxes -- The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.

Following the income statement is a short note analyzing the statement. The analysis statement should be very short, emphasizing key points within the income statement.

Cash-Flow Statement

The cash-flow statement is one of the most critical information tools for your business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. In a cash-flow statement, both profits and losses are carried over to the next column to show the cumulative amount. Keep in mind that if you run a loss on your cash-flow statement, it is a strong indicator that you will need additional cash in order to meet expenses.

Like the income statement, the cash-flow statement takes advantage of previous financial tables developed during the course of the business plan. The cash-flow statement begins with cash on hand and the revenue sources. The next item it lists is expenses, including those accumulated during the manufacture of a product. The capital requirements are then logged as a negative after expenses. The cash-flow statement ends with the net cash flow.

The cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and on an annual basis thereafter. Items that you'll need to include in the cash-flow statement and the order in which they should appear are as follows:

1. Cash sales -- Income derived from sales paid for by cash.

2. Receivables -- Income derived from the collection of receivables.

3. Other income -- Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.

4. Total income -- The sum of total cash, cash sales, receivables, and other income.

5. Material/Merchandise -- The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.

6. Production labor -- The labor required to manufacture a product (for manufacturing operations only) or to perform a service.

7. Overhead -- All fixed and variable expenses required for the production of the product and the operations of the business.

8. Marketing/Sales -- All salaries, commissions, and other direct costs associated with the marketing and sales departments.

9. R&D -- All the labor expenses required to support the research and development operations of the business.

10. G&A -- All the labor expenses required to support the administrative functions of the business.

11. Taxes -- All taxes, except payroll, paid to the appropriate government institutions.

12. Capital -- The capital required to obtain any equipment elements that are needed for the generation of income.

13. Loan payment -- The total of all payments made to reduce any long-term debts.

14. Total expenses -- The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital, and loan payments.

15. Cash flow -- The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.

16. Cumulative cash flow -- The difference between current cash flow and cash flow from the previous period.

As with the income statement, you will need to analyze the cash-flow statement in a short summary in the business plan.

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