One of challenges with the business financial planning is understanding financial statements. The following is a quick tutorial of what the main financial projections are. These financial statements are income statement, cash flow statement and balance sheet.
Income statement
The pro-forma income statement, also known as a P/L statement (Profit and Loss statement), shows how much sales revenue a company earned over a period, such as a year or a quarter, and the costs associated with earning that revenue. The intent of a pro-forma income projection is to show how much net income the business is or will be generating. In other words, the last row of the income forecast shows whether the company was profitable or not for the period. First, it calculates gross profits from sales revenue. Gross profit is sales revenue minus cost of sales (also known as cost of goods sold, COGS). Then the report accounts for the operating expenses like personnel costs (payroll expenses), rent and utilities, marketing expenses, etc. Once that is calculated and subtracted from gross profit, it leaves the end result - net income. This will be an important figure for a banker or an equity investor.
Cash flow statement
The pro-forma cash flow projection essentially shows how money is flowing in and out of the business. Businesses generally generate cash from operating and funding activities, and require it for paying expenses, repaying loans and purchasing fixed assets. The pro-forma cash flow projection summarizes a company's cash inflows and outflows during a given period, indicating whether cash balance increased or decreased. It can be argued that the cash flow forecast is similar to the income statement (see above) with a lot of the same categories. However, a pro-forma cash flow projection accounts for loan principal repayments, dividend outflow and capital purchases (purchase of fixed assets like land, equipment, machinery), but not depreciation expense or write-offs. Essentially any cash transaction is accounted for, so a company's liquidity is being well tracked. Its target is to point out when a business will need cash (get additional financing) or be cash rich (return unused cash to owners or re-invest it).
Balance sheet
Nowadays, everyone thinks about a balance sheet being a insight in time about a company's economic condition. The pro-forma balance sheet provides an insight of the company's financial position at a point in time, such as year-end. It totals the company's assets and liabilities and tracks the owner's equity by comparing it with the liabilities - this provides a way for the two sections to balance. When summarized the assets and liabilities with owner's equity should equal each other. The bottom line of a balance sheet is always Assets = Liabilities + Owner's equity. What one could find with this financial report is where the owners equity and liabilities are allocated. It may be not too smart if a company's assets are primarily in accounts receivables or in inventory. Or the liabilities are too massive in the owner's investment showing little profit coming from operations. Regardless, a balance sheet may be presented as a company's financial "visit card".
Also, you may want to read more about financial ratios
