Financial Statements for Business Planning IT Entrepreneurial Work Term Presentation

Financial Statements Financial Statements are a critical part of any business plan and are necessary to include for any phase of a business (startup, growth or succession). There are four key financial statements to consider in business planning including: 1. Balance Sheet 2. Statement of Retained Earnings 3. Income Statement 4. Cash flow Statement For the purpose of this course, we will be focusing on the importance of Income Statements and Cash Flow Statement Forecasting.

Balance Sheet Briefly, a Balance Sheet looks at the Assets, Liabilities and Owner's Equity (what the company is worth). Assets are items OWNED by the business Liabilities are anything OWED by the business. Owner's Equity is the net worth of the company; either a net profit or loss Assets=Liabilities + Owner's Equity If the Balance Sheet does not balance than there is a problem because you cannot own less than you paid for.

Balance Sheet Examples of Assets include Current and Fixed Assets: Current Assets-actual cash or assets that can be converted into cash within one year Cash Accounts Receivable (cash not yet collected, money owed to the business by its customers) Inventory Fixed Assets- (also known as long-term or capital assets) are not expected to convert into cash within one year Buildings Equipment Land Furniture and Fixtures *These assets depreciate over time to reflect the useful life of the item such as a car. The government allows an amount to be written off over a fixed period of time.

Balance Sheet Liabilities are what the business OWE, there can be current and long- term liabilities. Current Liabilities may include: Accounts payable (outstanding bills to suppliers etc.) Wages payable Taxes payable Long-term Liabilities may include: Bank loans Mortgages on buildings Loans of major equipment

Balance Sheet-Example Lisa's Lovely Locks-A mobile hair salon. As of December 31st, 20XX Lisa had the following: Supplies (inventory) $500 Equipment (portable dryer, sinks) $5000 Bank account (cash) $700 Bank Loan (for equipment) $3000 Money owed to suppliers $400 (shampoo, conditioner, dye products)

Balance Sheet Example Lisa's Lovely Locks Balance Sheet as of December 31st, 20XX Assets Cash 700 Inventory 500 Equipment 5000 Total Assets $6200 Liabilities Bank Loan 3000 Accounts Payable 400 Total Liabilities 3400 Owner's Equity 2800 Total Liabilities and Owner's Equity $6200

Statement of Retained Earnings The amount of net income which is left in a business after the distribution of dividends (incorporation) or withdrawals (sole proprietorship or partnership) by owner during a period of time (annually) is called retained earnings. It is calculated using the following formula: Retained Earnings = Beginning Retained Earnings + Net Income − Withdrawals by Owners Retained Earnings appear on the Balance Sheet under Owner's Equity This type of statement may be included in a business plan for a company that is currently in operations, may be looking to expand or sell to new owners because it indicates the company has earnings from the previous year. It provides information on how profit is being used. For more information on Statements of Retained Earnings please visit: https://www.youtube.com/watch?v=9ccmK5_nhpg

Income Statement An income statement shows all revenues and expenses that have been generated by the business over a given period of time (usually monthly or yearly) The difference between the two shows the net income of the company. Revenues-Expenses=Net income (if positive) or Net loss (if negative) If you have a business that sells product(s) the Cost of Goods Sold (COGS) is included in the income statement under Revenue Cost of Goods Sold are the direct costs it takes to produce or procure the goods sold by a company. This amount includes the cost of the materials used in creating the good(s) along with the direct labor costs used to produce the good. For example: A business that imports clothing would have shipping costs and import taxes that would be considered as COGS

Income Statement The Revenue portion of an income statement includes all sources of revenue streams (how your business is making money). Revenues can be more challenging to estimate than expenses. However, if adequate marketing research (Presentation: Marketing Plan) has been performed such as looking into the buying habits of the target market, exploring competitors strategies, industry statistics etc.), then revenue estimates will be more realistic based on that evidence. Comparatively, expenses are relatively easy to estimate accurately (based on obtaining quotes from suppliers, performing research, receipts) and to know when the money is to be paid. For example: rent is due on the 1st of each month and credit card payments are due on the 30th

Income Statement Expenses include ongoing costs that you can expect in order to keep the business operating. They may include: Advertising and Marketing costs Insurance (Business, Vehicle) Accounting and Bookkeeping Bank Charges Interest of loan(s) Credit card fees Office expenses Legal, registration Permits, licenses Utilities Travel, accommodations, gas, bus pass Payroll expenses (employers contribution for tax purposes) Wages Phone and Internet Rent etc. Note: Please refer to Handout: Financial Statements Template for an example of an Income Statement template

Cash Flow Statement A cash flow statement forecasts an overview of the money coming into the business and money flowing out of the business during a certain period of time (usually monthly). The difference between the two (cash coming into the business minus cash going out of the business), lets you know if the business has generated a positive or negative balance (profit or loss) in any given month. Cash flow projection helps a business plan for seasonal or monthly fluctuations in revenues and expenses. It looks for when funds will be received and paid out. A two year projected cash flow is encouraged for business planning purposes. Projections should be optimistic but realistic and demonstrate a positive ending cash position (if at all possible).

Cash Flow Statement Cash Inflows may include any source of cash coming into the business such as: Gross Revenue- (Total Revenue minus Cost of Goods Sold if you have a product-based business) which can be found on the Income Statement Any loans-may be from banks or other lenders Lines of credit Owner’s investment-cash contributions made by the business owner(s)

Cash Flow Statement Cash Outflows may include any source of cash flowing out of the business such as: Cash expenses Equipment Inventory Leaseholds/Rent Loan Repayments Owner’s drawings (what the owner(s) may take out to pay themselves) Note: Please refer to Handout: Financial Statements for an example of a Cash Flow Statement template.