It may seem like an obvious notion, but businesses should make money. If you are going to invest your own money, borrow money or ask other people to invest in your business, then you really need to know how you will pay back yourself, your creditors and your investors.
In fact, before you can raise money, you need to be able to explain exactly how you'll make money.
Back in the days of the dot-com boom, it seemed that entrepreneurs only had to explain how they would generate revenue -- or sales. The idea of actually making money -- i.e., a profit was largely ignored. That's why we had the dot-com meltdown and so many businesses went out of business.
But nowadays, you need to know how you'll generate positive cash flow and profit. That takes a financial plan, or more simply, a budget. You need to answer these questions:
How much do you think you'll sell each month?
What will it cost to create what you sell (cost of goods sold)?
What will it cost to sell what you sell (selling and marketing)?
What will your overhead cost (all your fixed costs)?
What's left after you subtract your costs from your sales (Your operating income)?
All that goes into your income statement. When you actually make money, you can substract depreciation, income taxes, amortization and interest expenses to get net income.
To understand your cash flow, you'll have to look at capital expenditures and the cost of producing your inventory, in addition to other cash outflows and inflows. These numbers are key in understanding what it will take to open and operate your business. Cash is king. If you have the cash to pay the bills, you'll be O.K..
Your assets (your cash and what you own) and your liabilities (what you owe) and your owner's equity (the difference between your liabilities and assets) are all on your balance sheet. Bankers care about balance sheets.
To learn more, visit www.sba.gov. That's the website for the Small Business Administration. They have lots of great information about financial planning and budgeting. Or contact me at firstname.lastname@example.org.