Financial Statements

Usually five simple statements and a narrative are enough to illustrate your business plan at the start of your business. Planning more than two or three years ahead at that point is pointless unless you have high capital investments. For educational purposes we will make at least five years forecasts, of which the first two years are specified per quarter.
  • Your narrative will help you and others make sense of your financial statements. 
  • Your investment budget helps you to determine your capital needs. 
  • Your cost calculation helps you to determine your margin which in turn helps you determine your growth potential.
  • Your cash-flow forecast helps you to not go broke and it determines your ability to pay interest and repay loans.
  • Your profit & loss account determines the profitability of your operations.
  • Your balance sheet helps you to illustrate the origin of your capital and how it is invested.
If you have no idea how finance works, you might want to study the IFC SMEtoolkit (very basic)


Your narrative describes the step by step start-up of your company. What do you need to do before you start. What will you do first when you start. What will you do in the first year, what will you do to break even, what will you do to expand your company and what will you do to exit your company or transfer ownership etc. The narrative should cover at least a five year period. 

In each step of the process you need to achieve goals, i.e. capture partnerships, haul in customers, bind employees, purchase goods, receive orders, ship products, send invoices etc. so formulate goals for each step (SMART), quantify the resources needed for each step (money, people, knowledge, agreements and permissions), formulate the risks involved in each step and the contingencies you have for the risks and last but not least state the total expected expenditures and revenues for that period.

For your expenditures you should stipulate whether the are investments, costs of goods to be sold, marketing expenses or overheads.

All figures in the financial statements should find their origin in the narrative. 
An example of the resume of the narrative: 

STEP 0 - before start
Goal 1
Goal 2 
Goal 3
Resources needed 1
Resources needed 2 
Resources needed 3 
Risks involved 1
Risks involved 2
Risks involved 3
Contingency for risks 1
Contingency for risks 2
Contingency for risks 3
Total expenditures for period
Total revenues for period

STEP 1 - setting up or first year
Goals for period
Resources needed
Risks involved
Contingencies for risks
Total expenditures for period
Total revenues for period

Step 2 - getting profitable
Goals for period
Resources needed
Risks involved
Contingencies for risks
Total expenditures for period
Total revenues for period

Step 3 - expansion 
Goals for period
Resources needed
Risks involved
Contingencies for risks
Total expenditures for period
Total revenues for period

Step 4 - exit or transfer of ownership
Goals for period
Resources needed
Risks involved
Contingencies for risks
Total expenditures for period
Total revenues for period

Financial Narrative
Period and GoalStart DateEnd DateMilestoneResources NeededRisks InvolvedContingencies for RisksTotal ExpendituresTotal Revenues
Period 1
(pre start)
Goal 1
Goal 2
Goal 3
Period 2
(first year)
Goal 1

Cost price calculation

The cost price calculation is a simple but essential calculation to assess the viability of your business model. It helps you calculate your retail price and/or net margin. Your net margin determines whether you can grow your business. More margin is more growth potential, especially when your margin is higher than that of your competitors.

You can start at the beginning (costs of good sold) and add costs for handling, transport, storage, import duties, insurance, distribution, retail, discounts etc. or the end (list price, or retail price) and subtract amounts for discounts, retail, distribution, logistics etc. The gross margin you make covers taxes, marketing costs, overheads, interest and profit, 

You can do costs price calculations for different batch sizes, like 1000 pcs, 10.000 pcs 100.000 etc. or do it for different years. Playing with batch sizes and service models will help you find the best business model for your business. You can also check whether your costs compare with bench marks in your industry. Example if you ship unique goods from Bombay to Rotterdam and your shipping costs are higher than the price difference for those goods in Bombay and Rotterdam, you are better of buying in Rotterdam or your should check your shipping costs. 

Cost price calculation each 1st year
or x1000
 2nd year or x 10.000 etc.
The list price minus av. discounts (excl. VAT)    
   minus costs for service and warranty    
   minus margin distribution and sales channel    
   minus outbound warehousing, insurance, freight,  
   handling, (import)duties and taxes. 
= the selling price    
   minus costs for sales and marketing               
   minus inbound storage and logistics     
   minus production or processing costs    
   minus costs of goods sold    
= gross margin    
   minus overheads    
   minus depreciation and amortization    
   minus capital costs    

There is a good CPC in this part of the documentary Planet Money Makes a T/Shirt

Investment budget

When you buy machines or other fixed assets its easy to see that those are investments, but you also need to build up inventory (working capital), hire sales people that need to be trained (start-up costs) and rent an office. Actually all your expenditures that are not covered by revenues should end up in the investment budget. Especially when you get a lot of orders, you need a lot of working capital, because you need to pay for the goods in advance and you get paid months later. How you set up your investment budget depends on the nature of your business. 

Before break-even the cost of capital is very high (usually ten times higher than when you are making a profit), so try to avoid unnecessary investments until you are profitable (i.e. cars, offices and management fees).  

Below an example of a very simple investment budget:

Investment Budget
 pre start 1st year 2nd year 3rd year
 Product development (depreciate)    
 Capital goods (assets) (depreciate or lease)    
 Start-up costs (may be depreciated)    
 Furnishings and office equipment (depreciation or lease)    
 Working capital for inventory and inbound logistics     
 Working capital for storage, production/processing and handling     
Breakdown Start-up costs
 Marketing and sales (only costs before break-even)    
 Distribution and retail (only costs before break-even)    
 Personnel (only costs before break-even)    
 Management (only costs before break-even)    
 Lease and Rent (only costs before break-even)    
 Other Overheads (only costs before break-even)    
 Interest and fees (only costs before break-even)    

For all statements below do at least a five years forecast, of which the first two years are specified in quarterly statements and the last three years are specified in annual statements

Cash-flow forecast

Create a quarterly overview of all payments (both received and paid). A cash flow analysis is similar to a summary of your the bank statement. Make sure to include payments on investments but also costs for incorporation, rental guarantees, acquisition costs of capital, et cetera. Also plan loan disbursements and repayments and capital disbursements and dividend payments. Please make sure you are as conservative as possible with revenues from sales, which have a habit of being disappointing in the early stages of your business. Consider payment periods (delays) and VAT payments.

For each period you calculate cash-in, cash-out, net cash in or out for period and cumulative cash position for present period and all period before that. The cumulative cash position can not be negative at any point unless you have a licence to print your own money.

Cash-flow forecast
Cash Out
Investments (capital goods, R&D, market development etc.)
Fixed and variable cost (overheads excluding depreciation, amortisation and reservations)
Guarantees and advances
Interest, (loan)repayments and dividend
Corporate taxes and VAT
Total Cash Out
Cash In
Income from sales and deposits
Repaid guarantees and advances
Disbursements of loans, subsidy and capital
Total Cash In
Net cash per period

Profit & Loss account

The profit and loss account is a statement of operating revenues and expenses, again per quarter. The difference with the cash flow analysis is that loans, capital, guarantees and investments are not included as such. Investments in capital goods are spread out by amortization. This means that each time a portion of the amount invested is recorded, until the entire investment paid off.

A simple profit and loss account is as follows:
Profit & Loss account
Other Income
Costs of goods sold
Gross Margin = (sales - costs of goods sold) / sales
Marketing $ Sales
Warehousing and logistics
Distribution & Retail
Lease and Rent
Other Costs
Operating profit/loss = revenues - expenses (EBITDA)
Depreciation and amortisation
Interest payments
Special costs / benefits (reservations)
Profit / loss before tax
Income tax
Net profit / loss (after tax)

Balance Sheet

The balance sheet provides an overview of the distribution of capital. On one side states what the capital is used for and the other side states where the capital originates (or who it belongs to). A balance sheet is a snapshot. It states the situation at a specific moment (unlike the Cash-flow statement and the P/L). Important balance sheets are the opening balance sheet at the start of the company and the balance sheets just before and after new shareholders come on board. 

In a balance sheet, the amount of assets should equal the amount of liabilities, hence the mane "balance" sheet.

Entrepreneurs usually forget to enter the amounts receivable. It's easy to calculate. If your annual turnover is 120.000 and your customers (distributors) take an avarage of 30 days to pay their bills, you accounts receivable would be 10.000.

Example of a simple balance sheet:
Balance Sheet
Assets (property)Liabilities (financing)
Real EstateEquity capital
Capital goods... from shareholders
Inventories and ordersRetained profit / loss
Loans from shareholders
Money (cash or bank)
Bank loans (short and long)
Accounts receivableSupplier credit and accounts payable
Other assetsOther liabilities (lease?)

Finally, limit the financial annexes to two or three pages. They only serve to illustrate the business model.
(c) 2007-2014 - Nils de Witte