Narrative

To make sense of financial statements they need to be explained. The explanation can be done after the fact but it makes much more sense to start with the explanation before you make your spreadsheets. The most logical way to do that is to write a narrative. The narrative is a step by step account of the start-up and growth of your company. You write down your actions and results for: 
  • before you start (step 0)
  • the first year (step 1)
  • to break even (step 2)
  • when you expand your company (step 3)
  • when you exit your company or transfer ownership etc. (step 4)
The narrative usually covers a five year period (at least). 

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

For your expenditures you can stipulate whether they are investments, costs of goods to be sold, marketing expenses or overheads. The risks you come across form the input for your risk management approach.

All figures in your financial statements should find their origin in this narrative

Below a fictive example of the first step in the narrative (summerized)


STEP 0 - before start
Goal 1 (finalize product)
Goal 2 (make deal with distributors)
Goal 3 (acquire capital for start-up)
Resources needed 1 ($ xx.xxx,- for investment for programmers, project coordinator, prototyping and testing)
Resources needed 2 ($ xx.xxx,- for manpower, transportation, general terms and conditions, prototype product)
Resources needed 3 ($ xx.xxx,- for manpower, knowledge, intermediary, pitch, businessplan and financial plan)
Risks involved 1 (product does not perform as expected, production cost to high, finished to late ...)
Risks involved 2 (no customer value for distributors, distributors do not want to invest in your product, distributors damand guarantees or high commissions, distibutors do not pay you ....)
Risks involved 3 (....)

Total expenditures for period ($xxx.xxx,-)
Total revenues for period (none)


STEP 1 - setting up or first year
Goals for period
Resources needed
Risks involved

Total expenditures for period
Total revenues for period


STEP 2 - getting profitable
Goals for period
Resources needed
Risks involved

Total expenditures for period
Total revenues for period


STEP 3 - expansion 
Goals for period
Resources needed
Risks involved

Total expenditures for period
Total revenues for period


STEP 4 - exit or transfer of ownership
Goals for period
Resources needed
Risks involved

Total expenditures for period
Total revenues for period