The accounting equation may be expressed as Assets = Liabilities + Equity and is the basis for all accounting using the double entry bookkeeping system. One side of the equation shows the assets of the business whereas the other shows how those assets are funded. The basic accounting equation underlies all financial projections based on the three statement financial model.
The financial projections template produces an income statement, balance sheet and cash flow statement for the business. These 3 financial statements appear initially to be unconnected; however, closer investigation shows that they are linked and a change in one statement substantially impacts the other statements. The entrepreneur need to understand these connections in order to be able to understand the financial performance of the business.
As part of the process of producing financial projections for a start-up business it may be necessary to undertake a simple financial statement analysis of competitor businesses. This process will help the entrepreneur understand what drives the financial model and assist in generating reasonable assumptions for the business plan.
For the purposes of the financial projection template other liabilities are defined as amounts owed by a business at the year end arising from operating expenses, finance costs, and income tax expenses. The year end value of other liabilities is calculated using the other liabilities days assumption.
The opening day other liabilities balance forms part of the opening balance sheet of the business. For the purposes of the financial projections. other liabilities are amounts which are owed by the business in respect of operating expenses, finance costs and income tax expenses.
Financial projections are made up from three financial statements, the balance sheet, the income statement, and the cash flow statement. Here are sixteen things to know about creating financial projections which should give you a better understanding of what’s included in the three financial statements, and how they relate to each other.
Invoice factoring is a process of raising short term funding particularly suited to high growth start up businesses. The method involves the business selling its outstanding customer invoices (accounts receivable) to a factoring company for a cash advance to fund working capital.
The invoice factoring company is responsible for collecting the accounts receivable, and pays the business the remaining balance less any fees due, when the customer has settled the account.
The terms financial budget, financial forecast, financial projection and pro forma financial statement are often used to refer to the same thing. However, while they have a very similar format, normally comprising a balance sheet, income statement, and cash flow statement shown over a period of months or years, they are each based on a very different set of assumptions.
The terms pro forma financial statements, financial projections, financial forecasts, and financial budgets are often used interchangeably, but they are not the same thing.
Pro forma financials simply refers to a set of financial statements in the usual format (balance sheet, income statement, and cash flow statement), which have been prepared in order to show the effects of a transaction on the historical financial statements prior to the transaction actually taking place.
The financial projections checklist can be used at any stage, but is particularly useful for startup businesses preparing financial projections for first time. The checklist provides a listing of some of the most common items to check for when reviewing financial projections.
Sensitivity analysis is used when preparing a business plan financial projection to assess the impact on the financial projection of changes in each input variable. Scenario analysis involves changing all input variables at the same time to show the base, best, and worse case scenarios. By doing this the business can show how vulnerable its business plan is to changes in major assumptions and inputs. Scenario and sensitivity analysis is carried out in order to assess risk.
Debt finance is normally evidenced by a note or document which specifies the amount, interest rate, and date of repayment. The date of repayment will dictate the payment term for the debt, for example a debt might be payable in five years time.
In the previous step the opening balance sheet debt was entered, and in order to allow for this debt to be repaid, an opening debt payment term needs to be entered.