Business bank

External

Finance

Planning

Business planning - Financial planning

Step 3 - Projected financial statements

A bank or any other potential investor looking at your business plan will almost certainly expect to see projected financial statements (along with a cash flow forecast). The two main financial statements that you would normally include are a balance sheet and a profit and loss account. In this step we look at the construction of a balance sheet and a profit and loss account.

Profit and loss account

A profit and loss account is a statement of the trading performance of a firm over a period of time. It is usually shown for a year (as by law all limited companies have to produce these), though companies may produce internal ones to assess their progress more frequently.

A profit and loss account is normally laid out as follows:

Profit and loss account for Biz Training Ltd. For the year ended 30th April 2005.

The previous year is often given beside the current year to enable comparison.

Notes

1. The turnover is the total sales figure for the period, i.e. the total revenue received or sales revenue - you might see all these terms used interchangeably!
2. The cost of sales is the direct or variable costs. These are raw materials, labour costs (that can be directly attributed to output) and any other direct production costs for the product.
3. Expenses are the other costs that are not directly attributable to output. These are usually termed the indirect (fixed) costs or overheads.
4. Depreciation is a charge to the profit and loss account to allow for the fall in value that has taken place in fixed assets as they are used up. Depreciation can be charged in a number of ways including the reducing balance or straight-line methods.
5. Dividend is the share of profit that is paid to the shareholders as the reward for their capital. They are after all the owners of the business and so receive their share of the profit as a dividend.
6. Most companies retain some of the profit for use to help expand and grow the business - this figure is the profit after tax less the dividend and is called the retained profit. It is added to the balance sheet as part of the profit and loss account entry there.

Balance sheet

In contrast to the profit and loss account the balance sheet is a snapshot of the financial situation of the firm at a given moment in time. A balance sheet, as its name suggests, contains two parts which should balance, i.e. be the same value. One half shows what the company actually owns at that point in time (its assets) and the other shows where the money has come from to pay for those assets. In the assets section we have to recognise that at any point in time the company will also have money that it owes to other people (liabilities) - this has to be subtracted from its assets. These two halves of the balance sheet should balance as they simply show where the money has come from and where that same money is being used - hence the name balance sheet!

A balance sheet is generally laid out as follows:

Balance sheet for Biz Training Ltd. as at 30th April 2005.

As you can see the net assets in the top half of £330,000 match the capital employed in the bottom half of £330,000.

Notes

1. The fixed assets are the assets that will last for more than a year. This might include buildings and machinery. It is these assets on which depreciation is charged in the profit and loss account.
2. The current assets are made up of stocks, (goods not yet sold) debtors (those who have yet to pay the business for supplies/goods, etc. they have purchased) and cash and are assets that can be realised (sold) relatively quickly - certainly in less than a year.
3. Stock includes stocks or raw materials, any work-in-progress and also any stocks of finished goods that are waiting to be sold.
4. Debtors are people or firms that owe money to the company. The company wants to ensure that it collects these debts as promptly as possible to ensure a good cash flow through the business.
5. Current liabilities are short-term liabilities. That is, they are money that is owed by the firm to someone else. A large part of this is often creditors (suppliers who are owed money), but it may also include overdrafts or short-term loans.
6. Creditors are firms or people who the business owes money to.
7. Long-term liabilities include money that is owed to someone else or another firm, but is not due to be repaid for more than a year. This may include longer-term loans from banks or other financial institutions.
8. Share capital is the capital that was raised when the shares in the business were originally sold.
9. Retained profits are the total level of profit that has been kept in the business over the years and not paid out to the shareholders. Each year this will increase by the amount of the retained profit in the profit and loss account.

There is a business planning case study that you may like to have a go at when you have looked through this section.