Small Business Planning: The Four Financial Statements

Small Business Planning Pillar #6.0: The Four Financial Statements

The Four Financial Statements are the nerve centre of your small business planning. Without them your business decisions are just a series of guesses.

You have already put together your postage stamp financials, a rough guide that your product has inherent profit potential. The time has come to produce the Four Financial Statements.

The first three provide the basis of all the financial information in the business: profit & loss, cash flow and balance sheet. And I’ll surprise you with the fourth, but more of that in a minute. The trio are inextricably linked and only provide a complete financial picture when all three are present. This is important to understand so let’s put it another way:

You take a visit to the GP for your annual medical. He looks at you and figures you’re probably in reasonable health. He then carries out a series of tests.

He tests your blood pressure and finds that it is high. Makes a mental note that you may be under a little stress.

Next he tests your blood cholesterol level and finds that it is also high. Mentally notes that you probably need more exercise.

Finally he puts you on the scales and notices that you have lost weight since your last test. Then alarm bells start ringing.

What’s the problem with losing a little weight you ask? The answer is that the GP has realised that, although each symptom in isolation gives little cause for concern, the combination of all three suggests type 2 diabetes, a potentially life threatening condition. He puts you on the appropriate form of medication. Had you waited for visible symptoms to show, it might have been too late.

What does this tell us?

1. It is possible for your business to look fine on the outside but have serious underlying problems. Your “gut feel” alone may not pick this up.

2. Investigating your P&L, cashflow and balance sheet individually can give you plenty of clues about the state of the business.

3. But it is only when you study all three financial statements as a set that the full state of health of your business will be revealed.

4. Checking your financials regularly gives you an early warning system to put things right before it is too late.

It is therefore critical for the intrapreneur to be comfortable with small business financials, both producing and analysing them. If you have positioned yourself as the intrapreneur but are at sea with the idea of financial planning then I can offer you four solutions:

1. Appoint a new intrapreneur

2. Get yourself on a financials crash course pretty quick

3. Go back to the day job

4. Buy a lottery ticket

How many businesses push this issue to one side and hope for the best? Indeed you may have met business owners who have thriving businesses despite a complete lack of any small business planning, let alone the four financial statements.

The fact is that these businesses are at the mercy of events.

A steady state business may escape without financials. It is when things change that it will come unstuck. Since you are starting a new small business with a big idea, I can guarantee you things are going to change fast. Financials equip a changing business with an early warning system that just can’t be picked up by gut feel alone.

Don’t think that you have to have the skills of a management accountant at this point. You need basic proficiency at understanding your financials, an understanding of why you need them and a committment to listen to what those financials are telling you. Don’t be afraid to ask for help at this point, perhaps a friend, a local accountant or small business consultant.

So, we need to indulge in financial planning and, ideally, be prepared to produce our four financial statements. Now let’s look at each in a little detail.

Ten Pillars Of Small Business Planning – Introduction

Small Business Planning Pillar #1: How To Start A Business Plan – Mindset

Small Business Planning Pillar #2: Strategy

Small Business Planning Pillar #3: Mini Business Strategies And Postage Stamps

Small Business Planning Pillar #4: Changing Gear: Seed Money & Intrapreneurs

Small Business Planning Pillar #5: Rapid Content Building

Small Business Planning Pillar #6.0: The Four Financial Statements

……Small Business Planning Pillar #6.1: Profit And Loss Statement (P&L)

……Small Business Planning Pillar #6.2: Cash Flow Statement (Forecast)

……Small Business Planning Pillar #6.3: Balance Sheet Statement (Forecast)

……Small Business Planning Pillar #6.4: Financial Assumptions

Small Business Planning Pillar #7: Business Metrics