Why You Need to Know
I believe these three things about startup entrepreneurs, business owners and standard business plan financials:
- The essential need-to-know facts about financials are very important;
- They are easy enough to learn; and
- Bankers, accountants, investors and their analysts expect you to know them and use them correctly.
And here’s why, quoting from a post I wrote for the Amex OPEN forum:
All financial projections are wrong, by definition. We’re human and we don’t predict the future accurately. So don’t expect accuracy. Go for plausibility, and then follow up with regular plan versus actual analysis, review and revisions. We call that management.
What You Need to Know
It starts with standard financial terms. Please don’t use financial terms incorrectly. Banking, finance, and investment assign exact meanings to several important financial terms. They are easy to learn and really important because using them wrongly in business plan financials is at best going to make a very bad impression, and at the worst could even be fraud.
The guardians of financial correctness live in an unforgiving world. Banking and securities laws make even some innocent financial errors look like fraud. Preserving the details of financial standards is the only way business numbers can stand up to legal scrutiny. Numbers in financial statements have to mean what they are supposed to mean.
And seriously, it doesn’t take an MBA degree or CPA certification to know essential financials required for business planning and, really, running a business. It takes focusing your attention for an initial few minutes and then having the discipline to check back when you need to. Read and understand this section, keep it in mind when you deal with financial projections, and you will be fine.
There are three standard financial projections: the Projected Income (also called Projected Profit and Loss), Projected Balance, and Projected Cash Flow. I’m going to continue in following blog posts with more details, and how-to, with steps and illustrations, for each.
All of this is taken from my Lean Business Planning website, reprinted here with permission. If you’d like to jump ahead into the details, you can find it all starting on this page. Or just check back with this blog tomorrow, and once a day for the next few days.