Determining Business Cash Needs
Basic Financial Statement Analysis For Fledgling Entrepreneurs
Aug 25, 2009
When starting a business, one of the easiest steps is the financial statement analysis. This is the step where potential entrepreneurs put business ideas into straightforward formats- formats honed over hundreds of years to properly analyze, inform, compare, contrast and put to use a wealth of data and information so that anyone can see from a moment's glance the health of a particular business. What follows is an introduction to those business cash basics.
Getting Comfortable With Business Cash Needs
New entrepreneurs are frequently unfamiliar with the cash flow forecasting and financial analysis tools used in this process, but all know the information held within them (or will by the time the business plan financials are finished), such as:
- How much money will be required to get the business up and running?
- Can payroll be paid every week, without fail?
- How will the business make money?
- What is the business worth?
- How does the business compare to other, similar businesses either in product, service, location or price?
- What is the amount of product/services needed to sell in order to make a profit? Break even?
- Are new staff, a cash register, advertising, and/or getting a loan affordable at this time? If not now, when?
- When does too much debt become a burden?
Basic financial statements will answer all of these cash flow questions and many more, and specialized skills in financial forecasting aren't needed. In fact, most of the tedious and difficult calculations will be taken care of by an accountant or another business advisor. Still, the initial numbers and simple calculations are based on the entrepreneur's answers to the questions laid out above.
Determining How Much Cash For Business Is Needed
When starting up a business, the allowance factor for financial forecasting is quite small. This means that the information garnered during this phase needs to be reliable, substantial, and triple checked for accuracy by any business advisors used during the process, such as SOCAN or counselors from the Small Business Association. But at the beginning, the best a fledgling entrepreneur can do is make calculated guesses, and then hone the details as the business opens and grows. So have fun with this process; take the time to play with the numbers a bit to see what changes can be made more easily than others for future reference.
What Financial Analysis Statements Do What?
The most important part of the business cash flow planning is to become intimately familiar with both the balance sheet and the cash flow projection. Income statements are also important however; here are the questions to ask when trying to determine which financial analysis tools to use:
- Is there enough money to pay the bills? Look at the cash flow statement.
- How much needs to be sold in order to break even? Take a look at the break even analysis.
- Will there be a profit? The profit and loss statement is the place to peek.
In conclusion, business cash financials are a necessary evil, but can make or break a business. Use them properly to control finances, manage cash flow, budget spending and keep track of cash on hand.
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