When you use a few simple financial tools to analyze your business, you build both a plan
and the control to work your plan.
The purpose of this section is to explain some of these tools, demonstrate their use, and then give you some practical project forms to use. We will also look at some important documents that can help you gain approval on a loan.
There are three basic financial documents that permit you to analyze, control, and plan. The first is the balance sheet. This simply shows you what assets the company owns and what liabilities it has. Liabilities include what the company owes to the bank and to owners. The second document is the profit and loss (income statement). This shows the company’s sales income less all costs and the what’s left either a profit or loss. The third key document is the breakeven or payout and cash flow chart. This is a running P&L. Often it shows losses in the early periods, then a breakeven period and eventually periods of profit. Documents that help you get debt financing or equity financing include a realistic forecast, expense forecast, list of suppliers and repayment schedule.
Your balance sheet outlines your financial strength. Normally the left hand side of the balance sheet lists the company assets. The right had side shows what the company owes owes to the bank as well as what the company owes to the owners like you (stock value or net worth)
Balance Sheet Format
|Current Assets||Current Liabilities|
|Fixed Assets||Long Term Liabilities|
|Other Assets||Net Worth (Stock)|
Income Statement Format
|(-) Cost of Goods Sold|
|Sales and Marketing|
|Net Profit Before Tax|
|Net Profit After Tax|
Break Even Statement Format
|Period 1||Period 2||Period 3|
|Cost of sales|
Items that do not apply to your business can be left blank or marked n/a. Any other items that are not mentioned but are relevant to your business should be included.
How to calculate the breakeven point for your business?
First, estimate the total overhead cost (Fixed Costs) per month taking into account all administrative and marketing expenses that are incurred monthly.
Quantify the contribution per unit – i.e. the sales value per item sold minus marginal selling expenses.
Then divide the total Fixed Costs by the contribution per unit this will give the number of units that should be sold to achieve breakeven. If the business is able to exceed this figure it will start earning profits.