Before getting started, it is important to understand the purpose of creating financial statements. The primary objective of any financial statement is to communicate and provide an overview of the current state of a business. The most commonly prepared financial statements for a small business are balance sheets, income statements and cash flow statements.
A balance sheet is a summary of what the business owns (assets) and owes (liabilities). It paints a reliable picture of the financial health of a business. Further, it forms the basis for more sophisticated analysis of the business. The balance sheet is also a tool to evaluate a company’s flexibility and its liquidity position. To be more precise, a balance sheet is a statement of a firm’s assets, liabilities and the shareholder’s/owner’s equity. The key to understanding a balance sheet is the simple formula:
Assets = Liabilities + Shareholder’s Equity
Keeping that in mind, we can now go ahead to understand how to prepare a balance sheet for a business plan. As a business plan is prepared for a company that is yet to start its business, the financial statements and the balance sheet have to be projected. These projections have to be realistic, and reflect the current market values as well as realistically estimated future market values. We need to go through the financial statements and the balance sheet of similar businesses in the same industry, and get an estimate. We also need to do our own research to find out the prevalent market rates in the particular region where the company is planning to set up an office or manufacturing unit or warehouse or any other unit. To prepare the balance sheet for the business plan, we need to first prepare the profit & loss statement and the cash flow statement.
The profit and loss statement means the calculation of profit made or loss incurred during the year by calculating the total income and the total expenses. For the profit and loss statement, we need to first ascertain what will be the different heads of income and the different heads of expenses for the particular company for which the business plan is being prepared. The primary source of income would be from the sales of the product or service being offered by the company. The usual heads of expenses are materials, labor, admin, promotional, branding, power, rental, telephone, salaries, bonuses, financial, bank charges, logistics, packaging etc. The heads of expenses depends on the type of industry and industry segment to which your company belongs to. After the heads have been identified, we need to ascertain the monetary values or the amount of income and expenses. For this, we need to do a thorough research to find out the current market prices in the regions in which the company is operating.
Once the profit and loss statement is prepared, the cash flow statement needs to be prepared. The cash flow statement gives the figure of cash and bank balance at the end of the year. The cash flow statement provides a picture of the total cash outflow and the total cash inflow during the year. The cash inflows are the revenues earned, inflow of equity, inflow of long term loan, inflow of working capital loan, and cash balance at the beginning of the year. The inflows of long term loan, working capital loan, and equity will be present in the balance sheet for only those years in which the inflow has taken place.
To get a better understanding of the balance sheet, let us assume a hypothetical business situation. From the above explanations, we can concur that, initially, before starting the balance sheet, we need to estimate the revenues and expenses in order to determine the quantum of investment that the start-up will require to put in the venture.
As an example for preparing balance sheet, let us assume that there is a company X, which plans to start an online store. It must be noted that in order to start any business, capital is required that can be availed in the form of venture capital, own equity or bank borrowing. Next requirement will be that of an operating location and other associated technologies. To determine the cost of renting an office and setting up a portal we need to look for industry specific parameters. Then there are the office set up cost that we need to estimate depending on the nature of the business. Here, average cost is assumed depending on the market value. Other expenses such as maintenance, electricity, telephone bills, and employee wage and salary are assumed based on current charges applicable in that region.
Some of the generally assumed details for estimating balance sheet and profit loss statement for a start-up are mentioned below:
• Out of the total proposed investment of $100,000, the company seeks to raise $70,000 through equity and the rest through bank loan.
• Out of the total set up cost of $60,000 for the portal the company will be required to make an initial down payment of $58,000 with the rest in the form of bills payable.
• An additional purchase of computer and office equipment worth $20,000.
The tables below divides the balance sheet of the company into assets and the liabilities and shareholder equity. The results attained from the two tables must be similar in order to equate the balance sheet.
|Cash & Bank Balance||$18,000|
|Net Value of Online Portal||$100,000|
|Net Value of Equipment||$20,000|
|Total Net Fixed Assets||$120,000|
|Liabilities and Owner’s Equity||Amount|
|Long term liabilities (more than 1 year)|
|Paid up Capital||$70,000|
|Total Liabilities and Owner’s Equity||$139,000|
Thus, from the above tables, it can be seen the total assets of the company is equal to the sum of the total liabilities and shareholder’s/owner’s equity. The balance sheet shown above can be considered for the first year of business of the start-up. In further years, the balance sheet may be prepared in the same manner with addition of a few more attributes of the company’s transactions.