Many businesses begin with a vision, but many cannot build a financial plan to bridge that vision with reality. The problem may be that entrepreneurs do not understand the financial benefit they get out of a financial plan. Instead of implementing an idea with a solid logical foundation, many entrepreneurs conceive of an idea and then pursue that idea without researching enough to justify it. By shooting from the hip like this, an entrepreneur may be throwing away opportunities for success. If entrepreneurs focus on developing their financial plan before taking immediate action, they may be able to figure out if that action is worth continuing. Financial Education Benefits Center (FEBC), a membership benefits company, offers resources that may help entrepreneurs plan and improve their business.
“Having a clear measurement of your own financial ability is the first step in improving your financial ability,” said Jennifer Martinez, Manager at FEBC. “A strong financial plan can be used to point out what you are accomplishing, show what needs to be cut, and can give you a chance to see financial opportunities before they appear.”
However, a financial plan should also help the company assess its strengths and weaknesses. The plan might begin with a sales forecast, continue with financial statements, and end with a decision of what to do next. The sales forecast is often useful to evaluate the current market and determine any weak spots. When making a prediction of things to come, try to account for anything, then review the financial prediction later and see what was missing or what changed; this is a good way to notice how things can be improved. The following financial statements may be valuable:
- Income Statement. This document states how much is being made compared to how much is being lost.
- Balance Statement. This document states what assets are providing equity and which are liabilities.
- Equity Change. This document should state whether a company has gained or lost equities in the last year. The last two documents should give all the information needed to make an equity change statement.
- Cash Flow Statement. This document states how money is used within the operations, investing, and financing sectors of a company and the ROI of each of those sectors.
- Notes to Financial Statements. Lastly, write notes that explain any necessary concepts for the statements, such as which formatting process or laws were used. This is the place to explain why the budget should work. This may be useful for anyone who is looking at the budget, such as auditors.
By understanding these documents, a company can assess its strengths, weaknesses, and position relative to other companies. An entrepreneur can use these documents to see what needs to be cut, modified, or emphasized. A company can also compare itself to its competitors since their financial statements are public knowledge. If the company spots something unknown in a competitor’s financial statement they may be able to examine that information to discover their competitor’s financial tricks. FEBC members have access to some of the documents needed to make such financial plans whenever they wish.
Financial statements can directly increase the income of a company. Revealing a powerful financial statement may convince investors that a company is worth investing in, causing the interest and stock of the company to rise. In this way, a financial statement directly affects a company’s value and should be considered an annual necessity.
“A company’s financial plan becomes its bottom line,” said Martinez. “The strength of a business is often measured through its budget and financial statements, and FEBC members have access to some of those and more through their member portal.”