BUSINESS INFORMATION
Financial planning documents
To assess your business’s financial health and cash flow, maintaining accurate records and understanding financial reports is essential.
Keeping proper records and understanding financial reports are vital for understanding the financial state and cash flow of your business.
Budgets and forecasts
Financial forecasts play a key role in achieving your business objectives. Unlike financial statements, which reflect actual results, forecasts provide a projection of your business’s financial future.
Predicting your business’s financial future can be complex, particularly for new ventures without a trading history. However, refining forecasts and adjusting can enhance their accuracy over time.
For businesses in their initial stages, undergoing rapid growth, or encountering financial difficulties, weekly or monthly forecasts may be necessary. These frequent updates enable close monitoring of finances and early resolution of potential issues. In contrast, established businesses with stable operations might find monthly or quarterly forecasts more appropriate.
Whether launching a new business or acquiring an existing one, start-up costs must be accounted for. These may include:
- Legal or accounting fees
- Insurance expenses
- Furniture, equipment, supplies, or fit-out costs
- Inventory or stock
- Advertising and marketing
- Permits and licenses
- Initial cash reserves to sustain operations until customer payments are received
- Staff wages
- Leasing expenses for property, plant, and equipment
- To assist in estimating these expenses, consider using our initial start-up costs calculator
Tip: Starting a business often incurs higher costs than anticipated. It’s advisable to allocate an additional 20% in your forecast to accommodate unforeseen expenses.
Estimating sales for your business can be challenging. For new businesses, market research and industry benchmarks can serve as a foundation for your projections. Established businesses, on the other hand, can rely on historical sales data from the same period. Additionally, consider the current market trends and broader economic factors.
To assist with your planning, consider downloading our sales forecast calculator.
Tip: Regularly compare your actual sales figures with your forecast and make necessary adjustments. Understanding the reasons behind any discrepancies can help you address potential issues before they escalate.
Forecasting expenses involves estimating your ongoing operational costs, such as rent, insurance, vehicle expenses, advertising, employee wages, and accounting or legal fees.
For new businesses, base your projections on market research and industry standards. If you’re already operating, use past records to guide your estimates. Be sure to account for potential changes, such as rising costs or the need to hire additional staff.
To help manage this process, download our operating expenses forecast tool.
If your business involves selling physical products, you’ll need to estimate the costs associated with producing or stocking them.
Your COGS forecast is closely tied to your sales projections. An increase in sales typically means higher production costs, as you may need to purchase more raw materials, components, or finished goods.
When forecasting COGS, include all direct costs related to production and preparation for sale, such as:
- Wholesale costs of finished goods, raw materials, or parts
- Packaging expenses
- Freight and freight insurance
- Sales commissions
- Direct labour costs for manufacturing
To simplify this process, download our cost of goods sold (COGS) calculator.
A cash flow forecast predicts the money expected to flow into (receipts) and out of (payments) your business, covering projected income and expenses. These forecasts are typically prepared for a 12-month period but can also be created for shorter intervals, such as a month.
Cash flow forecasts help you identify periods of surplus or shortage, enabling better decision-making. Regularly compare your forecast with actual results to spot potential financial challenges early. If your cash outflows exceed inflows, you risk running out of funds.
To aid in your planning, download our cash flow forecast tool.
Profit and loss (P&L)
Typically produced monthly, this document provides an overview of your business’s income and expenditures. The P&L statement indicates whether your business generated a profit or incurred a loss during the specified month.
A P&L statement generally consists of five primary elements:
- revenue (sales/turnover)
- cost of goods sold (COGS)
- gross profit (revenue minus COGS)
- expenses
- net profit (gross profit minus expenses)
Formula: Sales – COGS = gross profit – expenses = net profit
The net profit figure reveals whether your business has achieved a gain or suffered a loss. When examining your P&L, it is beneficial to evaluate four critical benchmarks or key performance indicators (KPIs) to assess financial performance.
| Analysis | KPI | Formula |
|---|---|---|
| What percentage of the sales price covers the cost of providing or producing the product or service? | COGS as a percentage of sales/revenue | COGS ÷ revenue x 100 |
| Is my business running profitably? | Gross profit margin Net profit margin | Gross profit ÷ revenue x 100 Net profit ÷ revenue x 100 |
| What percentage of the sale price covers the fixed costs of my business? | Expenses as a percentage of sales/revenue | Expenses ÷ revenue x 100 |
Gross profit reflects a business’s efficiency. A higher gross profit margin is preferable, as it indicates that more revenue is retained from each dollar of sales. If this margin declines over time, it is essential to identify the cause and implement corrective measures.
The net profit margin reveals the profit generated (before tax) for every dollar spent. A decrease in this margin often signals rising expenses, which should be closely monitored. Generally, businesses with higher profitability allocate a smaller portion of their income to expenses.
The structure of your business influences how certain expenses are calculated. Your accountant can offer tailored advice based on your specific setup.
- Sole traders: Drawings (funds withdrawn by the owner for personal use) are not classified as expenses. Tax is paid on the net profit, irrespective of the amount taken as drawings.
- Partnerships: If a partnership agreement exists, net profit is distributed according to its terms. In the absence of an agreement, profits are divided equally among partners. Each partner is taxed on their share of the net profit, regardless of the amount withdrawn as drawings.
Companies: Salaries for working directors are treated as expenses, alongside employee wages. Net profit is distributed to shareholders as dividends. Note that net profit and taxable income may differ, as certain expenses or income are treated differently for tax purposes.
Balance sheet
A balance sheet offers a snapshot of a business’s assets and liabilities at a specific moment, typically prepared at the end of a month or financial year. It provides insight into the financial health of the business.
The balance sheet is divided into three sections:
- Assets: Includes cash, inventory, equipment, receivables, and goodwill.
- Liabilities: Encompasses loans, credit card debts, tax obligations, and payables to suppliers.
- Owner’s equity: Represents the residual value after deducting liabilities from assets.
Assets and liabilities are further categorized as current (short-term) or non-current (long-term):
- Current assets: Items expected to be converted into cash or consumed within 12 months, such as inventory and receivables.
- Non-current assets: Items not expected to be converted or consumed within 12 months, like equipment, vehicles, buildings, and goodwill.
- Current liabilities: Obligations due within 12 months, including credit card debts, short-term loans, and tax payments.
- Non-current liabilities: Obligations due beyond 12 months, such as mortgages and long-term loans.
View our example balance sheet
Financial health indicators
Your P&L statement and balance sheet can be analysed to identify key performance indicators (KPIs), as outlined below.
Financial health indicators
Your P&L statement and balance sheet can be analysed to identify key performance indicators (KPIs), as outlined below.
| Analysis | KPI | Formula |
|---|---|---|
| What level of sales do I need to cover all my expenses? | Breakeven point | COGS + expenses |
| Is my business operating profitably | Gross profit margin Net profit margin | Gross profit ÷ revenue x 100 Net profit ÷ revenue x 100 |
| Does my business have too much debt? | Debt to income ratio | Total liabilities ÷ sales x 100 |
| Can my business survive an economic downturn? | Debt to equity ratio | Total liabilities ÷ equity x 100 |
| Can my business afford to pay its bills? | Liquidity ratio | Current liabilities ÷ current assets x 100 |
| How much working capital should I retain in the business? | Working capital ratio | Current assets ÷ current liabilities |
| Is my business earning a worthwhile return? | Return on investment | Net profit ÷ equity x 100 |
| How quickly is my stock turning over? | Inventory turnover | Closing stock ÷ COGS x 365 |
| How many days do customers take to pay me? | Accounts receivable | Accounts receivable ÷ net sales x 365 |
| How quickly am I paying invoices? | Accounts payable turnover | Accounts payable ÷ purchases x 365 |
| Are my expenses under control? | Expenses ratio | COGS + total expenses - (depreciation and interest) ÷ revenue x 100 |
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