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Why Projected Financial Statements Are Essential to the Future Success of Startups
by Sarah Hadjhamou
April 22, 2022

Using Financial Statements

Projected financial statement analysis is a key strategy-implementation technique. It allows your startup to examine the expected results of various actions and approaches.  This type of analysis can be used to forecast the various implementation decisions (for example, to increase your promotion expenditures by 50% to support a market-development strategy). Nearly all financial institutions require your startup to have at least three years of projected financial statements whenever your business seeks capital.  A projected income statement and balance sheet allows your business to estimate financial ratios under various strategy-implementation scenarios.  

Why is Budgeting The Basis of All Business Success?

A financial budget details how your business will obtain and spend funds.  Annual budgets are the most common, although the period for a budget can range from one day to more than 10 years. Financial budgeting should not be thought of as a tool for limiting expenditures but rather as a method for obtaining the most productive and profitable use of an organization’s resources.  Financial budgets can be viewed as the planned allocation of your business resources based on forecasts of the future.

There are almost as many different types of financial budgets as there are organizations.  Some common types of budgets include cash budgets, operating budgets, sales budgets.  When an organization is experiencing financial difficulties, budgets are especially important in guiding strategy implementation.

Budgeting and financial analysis are tools used to create a plan and see where the business is heading financially. Financial analysis encompasses several financial areas of the business from capital budgeting to income statement, cash flow, balance sheet, and other financial statements related to investments such as financial ratios.

What Role Do Income Statements Play in Financial Analysis?

The income statement is essential in building a substantial financial analysis for startups. A positive income statement demonstrates steady growth in the first three months of operating a business. The sales volumes should keep increasing and the business expenses need to remain reduced throughout the months and the first three years.

Businesses have different expenses depending on the industry they operate in. For instance, the service companies such as staffing companies exclude the use of inventory, facility…etc. Thus, the costs are lower.

How Is Cash Flow Measured in Your Startup?

The cash flow statement is one of the three key financial statements. It reports the cash generated by the startup and spent during a specific period. The cash flow statement indicates how the funds are moved in and out of the startup.

A positive cash flow statement in the first twelve months should not disclose a negative balance. The cash generated by the startup should be increasing monthly and the balance should remain positive after paying all the expenses at the end of the month. Therefore, the cash collected is considered as cash on hand for the following months.

How Do You Work on Your Startup Balance Sheet?

The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity.

The balance sheet of your startup indicates the company’s total assets, and how these assets are financed, through either debt or equity. As an entrepreneur, you should be very thorough in reporting your company’s assets and liabilities for a specific period. In other words, the balance sheet indicates what your business owns and owes.

There are many alternatives to assess your startup finances.  Every entrepreneur who embarks on a new journey faces a dilemma assessing how much capital is needed to start the business. It is possible to predict how much a new business will need during the first five years. However, businesses should come up with optimistic expectations.

Thanks to many accounting software in the market, calculations related to startup finances are made quickly and easily. Financial software companies enable entrepreneurs to assess any cost related to the startup or examine the financial health of the company. One of the easiest ways to develop a financial analysis such as income statement, balance sheet, and cash flow for the startup is to use a financial template that pulls together different financial formulas to help with preparing any financial projections. In recent years, many entrepreneurs were looking to incorporate accounting software into their startup's operations which turned to be successful.

Financial analysis encompasses several financial statements of the startups. It covers income statements, cash flow, balance sheets, and sales forecasting. They all convey the financial business activities as well as the financial performance of the startups.

About the author
Sarah Hadjhamou
Sarah Hadjhmou is a financial analyst and entrepreneur with work experience in Finance and Marketing alongside her venture capital investments
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Herndon, VA 20170

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