Whether you’re in business now or you’re just beginning, the starting point of writing a plan includes a thorough analysis of where you (and your business) stand.
This is a time to be brutally honest with yourself. Consider your present financial circumstances. Exactly how much do you have in the way of personal (and business) assets and liabilities? For the business, you may make a detailed assessment of your current financial position to gain some insight into how to gather and analyze the required information. You’ll also want to take a look at your personal financial assets, to see how much you can realistically invest in the business (or how much the business must contribute to your personal budget).
If you’re currently in business, you’ll want to create a snapshot of its activities, personnel, operating methodology, and other nonfinancial factors. This is particularly important if the business plan you’re working on involves expanding the scope or extent of the activities that your business performs. If you personally participate in or direct those current activities, how much time will you have for the newly planned business idea? How about your employees? Obviously, if you’re just getting ready to go into business, your current situation analysis won’t include this type of operational analysis.
After you’ve gotten the basics of financial recordkeeping down pat, and you have a good handle on your company’s cash flow and other day-to-day issues, you may want to take a longer and deeper look at the financial state of your company. In some cases, you may need to undertake a fairly detailed financial analysis because you are looking for additional capital in the form of loans or investors.
Business owners who haven’t been schooled in accounting often have a limited understanding of how financial analysis can help them manage their businesses effectively. Although you may be used to getting quarterly or annual financial statements from your accountant, are you sure that you’re really making the best use of all the information contained in them?
Over the years, accountants and financial professionals have developed a number of systematic ways of arranging and comparing the financial facts about your business so that they can be used to make sound decisions about future actions. In the following section, we’ll discuss some of the most commonly used tools for financial analysis:
- financial statements, including the income statement, balance sheet, statement of changes in financial position, and statement of changes in owners’ equity
- business ratios that identify key relationships between financial data and allow you to monitor your liquidity, profitability, and efficiency
- cost/volume/profit analysis, a way of determining the true cost to you of providing your product or service, and the optimal operation level for your business