Table of Contents |
Now, having a financial plan is something that financial managers spend a lot of their time doing. They look at current financials, or what is happening right now, as compared to the organization's goals. They will use this information to anticipate requirements for finances or cash, as well as evaluate possible risks that they may be exposed to along the way.
The following are three different types of reports, called financial statements, that are created during a financial planning process:
A balance sheet is a ledger that compiles the holdings, liabilities, and funds, detailing the income and expenditures of an organization during a specific point in time. Basically, it reflects a snapshot of a business at a single point in time.
Now, being a snapshot of a company's financial condition, a balance sheet is useful because it gives current and short term information. Some of the details included on a balance sheet are a company's assets, liabilities, and owner's equity.
| Balance Sheet Details | Description |
|---|---|
| Assets |
Items that are solid, such as a building, or abstract, like a brand, that can produce value and/or add monetary value to a business. There are three types of assets: *Current: Cash, or anything that could be converted quickly into cash within a year. This is known as liquidity, or having a liquid asset. *Fixed: Things with long term value—like land or building equipment—that can decrease, because they wear out (also known as depreciation). *Intangible: Future expected monetary value of assets, coming from assets such as patents, copyright, goodwill, or brand recognition, or the abstract idea of a brand mentioned above. |
| Liabilities |
Items that are a present burden. There are two types of liabilities: *Current: Debts that are payable within a year, such as your phone bill, rent, or employee salaries for a company. *Long term: Debts that are payable in longer than a year, such as mortgage loans. |
| Owner's equity | A mathematical formula indicating the owner's contributions to the organization, minus the liabilities of the organization. This concept is represented by the accounting equation, which states that assets is equal to liabilities and owner’s equity; (A = L + OE) |
Let's take a look at a typical balance sheet that reflects the total for one year, ending December 31, 2018.
| Balance Sheet | ||||
| 31-Dec-18 | ||||
| Assets | Liabilities | |||
|---|---|---|---|---|
| Current Assets | Current Liabilities | |||
| Cash | $40,000 | Accounts Payable | $20,000 | |
| Accounts Receivable | $20,000 | Short Term Notes | ||
| (less doubtful accounts) | Current Portion of Long Term Notes | $10,000 | ||
| Inventory | $100,000 | Internal Payable | $100,000 | |
| Temporary Investment | Taxes Payable | $40,000 | ||
| Prepaid Expenses | $10,000 | Accrued Payroll | $100,000 | |
| Total Current Assets | $170,000 | Total Current Liabilities | $270,000 | |
| Fixed Assets | Long Term Liabilities | |||
| Long Term Investments | $20,000 | Mortgage | $20,000 | |
| Land | $100,000 | Other Long Term Liabilities | ||
| Buildings | $50,000 | Total Long Term Liabilities | $20,000 | |
| (less accumulated depreciation) | ||||
| Plant and Equipment | $40,000 | |||
| (less accumulated depreciation) | Shareholders' Equity | |||
| Furniture and Fixtures | $10,000 | Capital Stock | ||
| (less accumulated depreciation) | Retained Earnings | $100,000 | ||
| Total Net Fixed Assets | $220,000 | Total Shareholders' Equity | $100,000 | |
| Total Assets | $390,000 | Total Liabilities and Equity | $390,000 | |
As you can see below, the balance sheet has assets on one side and liabilities and owner's equity on the other. Notice how the assets are listed as both current assets (short term concerns like cash and accounts receivable) and fixed assets (long term, permanent things). At the bottom, you can see the total assets for that column.
On the other side, you can see liabilities, both current (such as accounts payable or short term notes) and long term (like the mortgage). Everything else is owner's equity.
An income statement is a little different. This is a report reflecting the income (R, or revenue), minus the expenses (E) for a set period of time—say, a year or a quarter, for instance. Sometimes it's referred to as R minus E equals P or L, which stands for revenue minus expenses equals profit or loss.
An income statement includes items like revenue, which is the money acquired by an organization during a specific period of time. It also includes the cost of goods sold, or COGS, which encompasses all the costs that are associated with getting a good to market. Lastly, it includes the operating expenses, or OE, which are additional costs, besides the production of an actual item, that a company incurs.
Essentially, an income statement is the profit and loss statement that shows the bottom line for that particular period of time. It allows you to see how you're doing today, as well as how you're performing compared to last year or last quarter. Are you performing better or worse?
Here is an example of an income statement for the years ending December 31, 2018, and December 31, 2017.
| Income Statement | ||
|
Your Company, Inc. For the Years Ending Dec. 31, 2018 and Dec. 31, 2017 | ||
| 2018 | 2017 | |
| Revenue | ||
|---|---|---|
| Sales Revenue | $220,000 | $195,000 |
| (Less Sales Returns and Allowances) | ($67,000) | ($130,000) |
| Service Revenue | $80,000 | $60,000 |
| Interest Revenue | $20,000 | $15,000 |
| Other Revenue | $10,000 | $2,000 |
| Total Revenue | $263,000 | $142,000 |
| Expenses | ||
| Advertising | $1,000 | ($1,000) |
| Bad Debt | $4,000 | ($2,000) |
| Commissions | $2,000 | ($1,000) |
| Cost of Goods Sold | $65,000 | ($63,000) |
| Depreciation | $0 | 0 |
| Employee Benefits | $3,000 | $4,000 |
| Furniture and Equipment | $2,000 | $8,000 |
| Insurance | $200 | $300 |
| Interest Expense | $4,200 | $5,200 |
| Maintenance and Repairs | $4,000 | $3,000 |
| Office Supplies | $200 | $300 |
| Payroll Taxes | $5,000 | $400 |
| Rent | $3,000 | $5,000 |
| Research and Development | $6,000 | $4,000 |
| Salaries and Wages | $65,000 | $55,000 |
| Software | $4,000 | $3,000 |
| Travel | $1,000 | $4,000 |
| Utilities | $2,000 | $2,000 |
| Web Hosting and Domains | $300 | $100 |
| Other | $17,460 | $16,500 |
| Total Expenses | $189,360 | $43,800 |
| Net Income Before Taxes | $73,640 | $98,200 |
| Income Tax Expense | ($14,936) | ($9,920) |
| Income from Continuing Operations | $58,704 | $88,280 |
You can see at the top, the company has a lot of different kinds of revenue—sales revenue, service revenue, interest revenue, etc. They also have a lot of expenses. One is the cost of the goods, which is everything it takes to get the goods to market directly. Other expenses include operating expenses, like salaries and commissions for sales, administrative expenses, payroll taxes, rent, etc.
When you subtract the expenses from the revenue, then you get the net income before taxes. If you subtract the income tax expense, you get the final net income.
The statement of cash flows reflects how much cash you have on hand at any given time. Net income or loss can be very different than the amount of cash that you have. A statement of cash flows is a report reflecting the amount of revenue created and spent during a specified period of time. Investors want to see this to ascertain the health of the company. It is required by the Securities and Exchange Commission for any company that has its stock publicly traded.
Negative cash flow is referred to as being "in the red," and this is a cause for concern. This means that the business may be failing or perhaps reflecting a seasonal fluctuation, if you have a seasonal item like Christmas trees, for instance. Basically, negative cash flow means that you are laying out more cash than you're bringing in, and your bank account is getting smaller and smaller.
Positive cash flow, on the other hand, is called being "in the black." This is generally considered good, but may not always indicate a company making or exceeding its financial goals. For instance, you might be making money, but are you doing it at the same rate that you want to, according to your plan?
The statement of cash flows reflects cash from three different areas:
| Statement of Cash Flow | |
| Happy Company, Inc. | |
| For the Year Ending | 12/31/18 |
| Cash at Beginning of Year | $16,700 |
| Operations | |
|---|---|
| Cash Receipts from Customers | $690,000 |
| Cash Paid for: | |
| Inventory Purchases | ($254,000) |
| General Operating and Administrative Expenses | ($111,000) |
| Wage Expenses | ($133,000) |
| Interest | ($15,500) |
| Income Tax | ($42,800) |
| Net Cash Flow From Operations | $133,700 |
| Investing Activities | |
| Cash Receipts from Customers: | |
| Sale of Property and Equipment | $37,600 |
| Collection of Principal on Loans | $6,800 |
| Sale of Investment Securities | $10,000 |
| Cash Paid for: | |
| Purchase of Property and Equipment | ($75,000) |
| Making Loans to Other Entities | ($14,000) |
| Purchase of Investment Securities | ($12,000) |
| Net Cash Flow From Investing Activities | ($46,600) |
| Financing Activities | |
| Cash Receipts from Customers: | |
| Issuance of Stock | $5,500 |
| Borrowing | $6,000 |
| Cash Paid for: | |
| Repurchase of Stock (Treasury Stock) | $0 |
| Repayment of Loans | ($34,000) |
| Dividends | ($53,000) |
| Net Cash Flow From Financing Activities | ($75,500) |
| Net Increase in Cash | $11,600 |
| Cash at End of Year | $28,300 |
Notice the cash flow from operating expenses, investment activities, and financing activities—things like cash received from customers or issuing stock, or cash paid for capital assets.
For this particular company, you can see that the cash balance at the end of the period was positive. They started off with $16,700 and at the end of the period, they had $28,400—they almost doubled their cash during this period.
Source: adapted from sophia instructor james howard
