The financial section of a business plan tends to get the most attention from commercial lenders, accountants, and potential investors. For this reason, company owners should also pay close attention to how they present this crucial aspect of their enterprises. Naturally, the financials of a startup venture that is being solely developed from ideas will look quite different from those posted by an established business. Trusted San Diego financial consultant Jan Gleisner has compiled a list of a few of the essential items that should be included in a business’s financial plan.
Profit and Loss (P & L)
As its name suggests, the profit and loss part of a business financial plan consists of the revenue realized and expenses incurred over a certain period, which is typically over a quarter unless the company has been operating for more than two years. The three elements of a P & L statement are revenue, cost of goods sold, and profit margin. In the case of companies that provide services instead of selling products, the cost of goods sold is replaced by operating expenses.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
The EBITDA of a company is essentially its gross operating income, which can be obtained by subtracting operating expenses from the gross profit margin. This item is of special interest to potential investors and lenders.
The net income of a company is calculated by means of subtracting the operating income minus interest, taxes, debts, and amortization if applicable. This final line item of the P & L statement should be indicated in bold typeface. It should be black if it is a gain and red if it is negative.
Cash flow should always cover quarterly and monthly periods. The objective is to indicate the cash that is brought in and paid out by the company during the reporting period, and it is of special interest to lenders since it indicates how disciplined and strategic business owners and managers are in terms of managing their inflows and expenses.
When a company is applying for financing, the final approval will be issued by a lending manager who glances at the balance sheet. This financial statement is generated by an established accounting standard of calculating the true business assets of the company, which can be obtained by adding up equity and taking away liabilities. Business assets can be treated as collateral in certain transactions.
Since all financial statements include some type of pro forma calculations, calculating and discussing business ratios is useful when trying to attract investors. These ratios can serve as technical indicators of how the company is doing business, and they are all related to profit potential. Return on investment is one of the most popular business ratios. Another one is debt-to-equity for prospective buyers.
A break-even analysis is highly recommended for startups and companies that have difficulty posting profits. The break-even point considers the contribution margin as well as the projected sales revenue.
If your business needs help planning finances, speak with a reliable business advisor. San Diego businesses trust Jan Gleisner to steer them toward success. Call 858-337-2385 today to learn more.