When developing a business plan many find the financial component particularly daunting. This is completely normal. If people were comfortable with fine tuning business finances as a general rule, there would be no tax preparation businesses. With this being said, in their apprehension many also spend unbalanced amounts of time on the different components of the financial plan. An even and equal amount of attention needs to be paid at each level of the planning stage. This portion of the business plan includes an income statement, a balance sheet, and a cash-flow statement. By making sure you give each aspect of the financial plan the attention it deserves, you will simplify creating both your business and financial plan.
Assumptions You Need to Avoid
Those who have taken any high-school level business or accounting course probably feel confident in their abilities to whip up a balance sheet. However, your business’ financial plan is not a simple balance sheet, and care needs to be given to how it is crafted. Many times common errors in a balance sheet give prospective investors the impression that their presenter is under-prepared. Why would an investor risk money on a business that the owner does not give enough time and consideration to? Drawing up a good financial plan shows that you care about your business and that goes a long way. In all reality, there are actually very few people that have ever put together a detailed financial plan, according to a study by Princeton Survey Research Associates International.
Despite this, many people still race through this important step with little to no actual experience in writing up a good financial plan. One of the most crucial first steps of your business is creating a solid business plan or financial strategy for you company. Rushing it can lead to a variety of different errors and unforeseen traps throughout the development process.
Think of it this way: how would misspelling a position title in your resume look to a potential employer? It would make you look like you’re careless, or worse, incompetent. An incomplete or inaccurate balance sheet can be just as detrimental as a major mistake on a resume. Of the six elements of an organization, business plans often fail because entrepreneurs completely overlook their budget and focus solely on their strategy, according to the Carroll County Department of Economic Development.
Fortunately, with a little care, time and some basic steps, you can but together balance sheets that will enhance your business plan rather than acting as marks against it. The key is not to rush and to make sure you give every aspect the consideration it needs. Once your balance sheets are in order, you can use them to help inform the rest of your plan.
The Categorization of Assets and Liabilities
Keep in mind that a complete balance sheet needs to include all of your assets, this includes but is not limited to vehicles, merchandise, buildings, land, equipment, cash, tools, inventory and even your accounts receivable. Many people tend to overlook this category, but it will end up being a huge mark in your favour. Most people have thousands of dollars tied up in things like cars or offices spaces; if you own these things outright then your debt to income ratio is going to get better. By categorizing these assets along with your liabilities, you can make them very easy to spot for your target audience. It is recommended to separate your current assets, such as cash and accounts receivable, from your fixed assets, including land and vehicles. Current and long-term liabilities should also be categorized in the same way. The bottom line of your balance sheet should clearly show your equity as being your net profit.
Using a Template as a Guide
When this report has been finalized, your target audience should be able to quickly scan through it to get a firm understanding of your equity. For business purposes, equity is the amount of money that is considered income from the company and from shareholders. There are quite a few great templates you can use as a guide to explore different layouts and formatting concepts that will make it easy for you to maintain a consistent structure for your report. It is important to remember that taking the necessary steps to create an effective balance sheet does not require an extensive background in accounting, just some care with what you produce.
However, it is also imperative for you to never adopt the mentality of these important reports being too easy to take seriously when putting them together. As the old saying goes, failing to plan basically means that you are planning to fail. Use efficient tools that are readily available at your disposal to make sure that you get the job done right the first time around.