Creating Your Business Plan Financials

Your business plan financials are essential for lenders and investors who want to see hard figures before putting money into your business. Solid financials could help you get loans and attract investors, even if you aren't operating yet. "Financials can be very intimidating for a lot of small business owners," says Raman Chadha, executive director of the Coleman Entrepreneurship Center at DePaul University. "It's my experience that most small business owners don't know how to manage the numbers." Your business plan financial statement will cover three general items: an income statement, a balance sheet and a cash-flow statement, each with numerous subsets. The following is a general outline for creating business plan financials and is not meant to be a comprehensive account of the financial details you will need. The Income Statement An income statement shows how much profit or loss you expect to have for the year. For new businesses, income statements should be broken down monthly or quarterly. Business in their second to fifth years of operation should have quarterly or annual income statements, the Small Business Administration advises. An income statement includes:

• Revenue: "Revenue growth is always going to take longer than you expect," Chadha

cautions. "It's smart to be more conservative" in your estimates, he says. • Expenses: Includes operating expenses such as costs for supplies, rents and salaries; loan payments, including interest; and fees for advisers, including attorneys and accountants. • Cost of Goods Sold: The cost of merchandising, manufacturing and bringing your product to the market. Service business often do not need this. • Gross Profit: Your sales minus all costs directly related to those sales. • Operating Profit: Your company's profit after deducting your operating costs from gross profit. • Net Profit: Calculated by subtracting your company's total expenses from total revenue. • Net Profit before Taxes: The amount of income earned before taxes are taken out. • Net Profit after Taxes: Net income minus taxes paid. The Balance Sheet A balance sheet provides an annual snapshot of your business financials. The figures are often recorded for only one day. If you're not yet operating a business, American Express recommends you create a balance sheet from your personal assets and liabilities. A balance sheet includes:

• Current Assets: Includes cash, inventory, accounts receivables such as credit and

other payments owed to the company, and fixed assets. Fixed assets include machinery, property and goodwill. They are items that cannot be quickly converted into cash.

• Liabilities: Short-term liabilities include upcoming payments such as salaries and

wages due, accounts payable, which are payments owed for services, and taxes owed. Long-term liabilities include payments for debts and bonds due after at least a year. • Equity: Investments and retained earnings. Retained earnings, also called net worth, measure investments by subtracting liabilities from assets. Cash Flow Projections Projecting your company's cash flow can be an arduous task, but it’s crucial information for potential lenders who want an idea of how much money you'll have to pay back loans. For many experts, cash flow is where the rubber meets the road in terms of deciding whether a business is healthy. Cash flow projections include:

• Cash Inflow: This indicates how much cash you believe will come into your business.
It is largely based on your sales forecasts and accounts receivables, if applicable. • Cash Outflow: These are your expected cash expenses. Be sure to take into account any expected increase in expenses, such as employee raises or rent increases. Your cash flow projection will be your cash outflow subtracted from your cash inflow. All of these formulas are quite complicated, so consider hiring an accountant to help with creating the financials of your business plan.

Bookkeeping process

1. 2. Daybooks
Daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions or a book of original entry rarely kept for the entries are now contained in original documents such as invoices and supporting documents. Daybook's details must be entered formally into journals to enable posting to ledgers. Daybooks include: Sales daybook of the sales invoices. Sales credits daybook of the sales credit notes. Purchases daybook of the purchase invoices. Purchases credits daybook of the purchase credit notes. Cash daybook, usually known as cash book, of cash received and paid out. It may comprise two daybooks: receipts daybook of cash received, and payments daybook of cash paid out.

Journal is a formal and chronological record of financial transactions before their values are accounted in general ledger as debits and credits. If daybooks are not kept, the journals are books of original entry, where the transactions are first recorded, hence often considered synonymous with daybooks. Special journals include: sales, purchases, cash receipts, cash disbursements, and payroll. General journal is a record of the entries not included in other journals.

Ledger (or book of final entry) is a record of accounts, each recorded individually (on a separate page) with its balance. (Ledger is also a book holding such records.) Unlike the journal listing chronologically all financial transactions without balances, the ledger summarizes values of one type of financial transactions per account, which constitute the basis for the balance sheet and income statement. Ledgers include: Customer ledger of financial transactions with a customer (sometimes called a Sales ledger). Supplier ledger of financial transactions with a supplier (sometimes called a Purchase ledger). General (nominal) ledger representing assets, liabilities, income and expenses.

Interchangeable Terms

Debtors Ledger/Customers Ledger/Sales Ledger/Accounts Receivable Ledger Creditors Ledger/Suppliers Ledger/Purchases Ledger/Accounts Payable Ledger General Ledger/Nominal Ledger
(the general ledger or nominal ledger (see also bookkeeping) and also in the terms purchase ledger and sales ledger.)

Bookkeeper (
A bookkeeper (or book-keeper), also known as an accounting clerk or accounting technician, is a person who records the day-to-day financial transactions of an organization.[2] A bookkeeper is usually responsible for writing up the "daybooks." The daybooks consist of purchase, sales, receipts and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct daybook, suppliers ledger, customer ledger and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

Bookkeeping systems
Two common bookkeeping systems used by businesses and other organizations are the singleentry bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a revenue and expense journal. Single-entry bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits.[3]

Bookkeeping process

Sales and purchases usually have invoices or receipts. (From the point of view of a seller, an invoice is a sales invoice. From the point of view of a buyer, an invoice is a purchase invoice.) Deposit slips are produced when lodgements (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks).

For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Columns in the journal normally correspond to an account. After a certain period, typically a month, the columns in each journal are each totalled to give a summary for the period.

To quickly check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totaled and then the credit column is totaled. The two totals must agree this agreement is not by chance - because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made in either the journals or made during the posting process. The error must be located and rectified and the totals of debit column and credit column re-calculated to check for agreement before any further processing can take place.

Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. The process of transferring summaries or individual transactions to the ledger is called Posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing which is simply a process to arrive at the balance of the account.

Once there are no errors, the accountant produces a number of adjustments and changes the balance amounts of some of the accounts. For example, the "Inventory" account and "Office Supplies" asset accounts are changed to bring them into line with the actual numbers counted

during a stock take. At the same time, the expense accounts associated with usage of inventory and with the usage of office supplies are adjusted. Other refinements necessary to ensure that accounting principles are complied with are also done at this time. This results in a listing called, not surprisingly, the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements. Finally financial statements are drawn from the trial balance, which may include:
• • • •

the income statement, also known as a statement of financial results, profit and loss statement, or simply P&L the balance sheet the cash flow statement the statement of retained earnings

Double entry? Isn't that more work?! For every transaction in your bookkeeping, there must be a Debit and a Credit entry in order for your books to balance. Each type of transaction follows a standard system for determining whether to post the amount as a debit or credit. See the chart below. Account Type Assets Liabilities Equity Income Expenses Debit Increase Decrease Decrease Decrease Increase Credit Decrease Increase Increase Increase Decrease

So, now that you've got the basics of the double entry system, the next step is simply a matter of beginning to enter the info. As you enter checks you've written, they will mostly be simple entries - debit (increase) the correct account number, and credit (decrease) bank. If you are keeping your bills current, make your entry after you pay your bill, and the entry will always be credit bank, debit expense. To keep the process simple, when you receive a bill, go through it and total what part of the money due goes to which account, write it on the bill and use that when you make the entry into the system. There are always exceptions to the rules! Regular exceptions to the system above will be: - When you buy a large tool or piece of equipment that needs to go in the asset section: credit cash and debit the proper asset account. As you make these entries, keep a separate list of the asset and it's details. You will need to use the asset list to calculate your year end deprecations. - When you pay an expense that has been listed as a liability, like a bank payment on a loan: credit cash, but debit two accounts, debit the liability account you're paying on for the amount of principal, and debit interest for the amount of interest expense. Doing this will decrease what you owe on the loan by the principal amount you have paid, and it will increase the record of what you have paid in interest expense. - Inventory is a cost you need to count as an expense only when you actually use it. Until it is used, or sold, it's an asset. So when you purchase inventory, credit cash and debit inventory - that will increase the value of your inventory. When you USE inventory, credit (reduce) inventory, and debit (increase) the appropriate expense account - materials, supplies, etc., or an inventory change account.

Let's Walk You Through Bookkeeping

( Before you begin, you may be interested in reading " Starting A Business" for the basics on where to begin setting up your business. If you are looking for help with a particular subject, you can skip ahead to a subject with these links, otherwise we suggest you read each section by following the NEXT PAGE links at the end of each section. Expenses Paid by Cheque Expenses Paid By Cash Accounts Payable Cash Discounts on Purchases Petty Cash Payroll Sales & Customer Deposits Accounts Receivable Inventory Deposits Sale of Assets Depreciation Suspense Month End Adjustments Paper Trails

( Good with Example

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