Business Plans For Canadians For Dummies by Nada Wagner

Author:Nada Wagner
Language: eng
Format: epub
Publisher: Wiley
Published: 2010-05-27T00:00:00+00:00

Chapter 11

Figuring Out the Financial Details

In This Chapter

Understanding how you calculate profits

Balancing assets against your liabilities

Keeping track of your cash

Looking at your company’s financial ratios

Numbers. Some people love them; others are bored by them; some begin to stammer, shake, and exhibit other physical signs of distress around them. But almost everyone agrees that — love ’em or hate ’em — numbers are the way that you keep track of things. Think baseball, cholesterol, the stock market, and (of course) your very own business venture. Numbers tell you more than simply the score at the end of the game or the final TSX closing, however. When you put them together in the right ways, numbers paint a detailed picture of everything from the career of a hockey player to the state of the global economy.

You’re probably familiar with the financial forms that a bank requires when you want to borrow money for a new car, a bigger house, or your dream cottage at the lake. Those tedious documents include an income statement, as well as some sort of balance sheet. The income statement tells the bank where you get your money and where you spend it. The balance sheet lists the value of all the assets you own and balances the value against the money that you owe, including your car loans, mortgages, credit cards, and even personal I-owe-yous.

Financial statements tell the bank a great deal about you, and the bank discovers even more by taking numbers from the statements and calculating a bunch of ratios. The bank totals your monthly loan payments and divides that number by your monthly income, for example, and then compares this ratio with the average for other borrowers. The result gives the bank a good measure of your ability to repay the loan. Taken together, the statements and ratios create a financial portrait that the bank uses to get to know you better. And the better your bankers know you, the more comfortable they are with the decision to loan you money. The same goes for when you try to obtain money to start a business.

In this chapter, we introduce the basic financial statements and ratios that professionals widely use in business planning. In fact, these numbers look almost identical to those that paint a picture of your personal finances, only a little more complicated. We show you how an income statement and a balance sheet are put together. We explain cash-flow statements, which do pretty much what the name implies (they detail where the money comes from, where it goes, and how much is left over). Finally, we explore simple financial ratios that you can use to evaluate your business.

Reading Income Statements

An income statement presents the proverbial bottom line. By adding all the revenue that you receive from selling goods or services and then subtracting the total cost of operating your company, the income statement shows net profit — how much money your company makes or loses over a given period. Here’s

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