Hi there. Grab a pen and a pad of paper. Today, we're talking financial planning, what documents you need, and what numbers you have to calculate. You might be wondering, when do you need a financial plan? Good question. A financial plan gives you the power to better manage your business, project expenses, and even apply for financing in the future. I know the words financial plan can be daunting, but I'm going to break it all down.
Good things come in threes, right? Well, every financial plan has three essential parts. The first one is the balance sheets. Balance sheets are statements that outline all of your business's assets, liabilities, and any equities. Assets are bigger than you think. They break down into current, fixed, and intangible. Current assets include the amount of cash your business has available as well as money owed to the business like outstanding invoices.
Fixed assets are real things your business owns like land, property, and equipment. Intangible assets refer to copyrights, patents and intellectual property. Now for liabilities. These are debts that your business owes, and all do, so no stress. This includes any money owed to suppliers and vendors, employee compensation, and in some cases, unpaid tax obligations.
Last of our balance sheets is your equity. The value of your business assets after subtracting liabilities. It's not uncommon for new businesses to be in the red when they're starting out. You've invested in your vision, and now, you're putting in the hard work to make that vision a reality. Part two to creating a solid financial plan is the cash flow projections. This projection focuses on how much money is expected to come into and out of your business during a specific time period in the future.
To calculate your cash flow projections, you need to know your cash coming in, cash going out, and the difference between the two. For most business owners, cash revenues mean how much your business brings in on a monthly basis. Cash revenues include payments made to your business by credit or debit card too, but only if those card payments are likely to be processed and deposited in your bank account within the specified time period.
Cash disbursements are your monthly expenses. This should focus on regularly recurring expenses you pay most months, not one-off payments. This includes everything from lunches paid for with petty cash, inventory, and office supplies to employee payroll costs and commercial rent. Reconciliations of cash revenues to cash disbursements are calculated by subtracting cash disbursements from cash revenues.
This should include any balances left over from the previous month. This balance should be added to your cash revenues total. Part 3 are your income statements. This is an itemized outline of your business's expenses, revenues, and profits for a specified period. Most built-up businesses create income statements either quarterly or annually, but many new businesses create income statements on a monthly basis.
Income statements typically include information like revenue, which is the amount of money a business brings in, expenses include direct expenses like your salary, employee payroll, equipment costs, as well as marketing costs general administrative expenses, like accounting fees, bank charges, insurance, and rent if you have it. Total income is calculated by subtracting your revenue from your expenses before income taxes.
Don't forget, your income taxes could include more than one tax like state and federal taxes if you're in the US. And finally, net income. This is your total income after expenses and taxes have been subtracted. There you have it. It's a lot to take in for sure. Creating your financial plan will take time, and it's OK to ask for help.
Once you've got it, you'll know your business inside out. Keep coming back to your financial plan, updating it and reviewing where you're spending your money. Over time, you'll be able to make better business decisions. Bravo for making it through. I hope that was helpful, and check out other videos on Shopify Compass. Bye for now.