Launching a successful business requires an entrepreneur to create a solid financial plan. Not only is such a plan unimportant told in raising the capital needed to get a company off the ground, but also as an essential ingredient in managing a growing business.
Earning a profit does not occur by accident; it takes planning.
Financial statements
entrepreneurs rely on three basic financial statements to understand financial conditions of the companies:
- The balance sheet. Built on the accounting equation: assets = liabilities + owners equity
it provides an estimate of the company's value on a particular date - The income statement. This statement compares the firm's revenue against its expenses to determine its net income (or loss). It provides information about the company's bottom line.
- The statement of Cash flows. This statement shows the change in the Company's working capital over the accounting period by listing the sources and the uses of funds.
Projected financial statements are a basic component of a sound financial plan. They help the manager plot the Company's financial future by setting operating objectives and by analyzing the reasons for variations from targeted results. Also, the small-business in search of startup funds will need these pro forma statements to present to prospective lenders and investors. They also assist in determining the amount of cash, inventory, fixtures, and other assets the business will need to begin operation.
Ratio analysis
the 12 key ratios are divided into four major categories:
- liquidity ratios -- would show the small firm's ability to meet its current obligations
- leverage ratios -- which tell how much of the Company's financing is provided by owners and how much by creditors
- operating ratios -- show how effectively the firm uses its resources
- profitability ratios -- which disclosed the company's profitability
Many agencies and organizations regularly publish such statistics. If there is a discrepancy between the small firm's ratios and those of the typical business, the owner should investigate the reason for the difference. A below average ratio does not necessarily mean that the business is in trouble.
To benefit from ratio analysis, the small company should compare its ratios to those of other companies the same line of business and look for trends over time.
When business owners detect deviations in the company's ratios from industry standards, they should determine the cause of the deviations. In some cases, such deviations are the result of sound business decisions; in other instances, however, ratios that are out of the normal range for the particular type of business are indicators of what could become serious problems for the company.
Business owners should know their firms breakeven point, the level of operations at which total revenues equal total costs; it is the point at which companies neither earned a profit nor incur a loss. Although just a simple screening device, break even analysis is a useful planning and decision-making tool.
