Understanding your Loan Package: P&Ls, Balance Sheets, and Cash Flow Statements

By on June 22, 2018

When you are ready to open or expand your business, you are going to need to put together some financial statements for investors to look at. When an investor asks for your financials, they want to see your historical data as well as three specific things: your Profit and Loss Statement, your Balance Sheet, and your Statement of Cash Flow. Each of these items is important in getting the full picture of your business.

Before we look at the statements, there is a basic caveat to this: the more transparent you are, the better off you will be. You don’t necessarily need to understand Generally Accepted Accounting Principles (GAAP), but follow this basic rule and you should be alright. If you need assistance with these, be sure to see a business consultant, certified public accountant, or other financial advisor.

The Profit and Loss Statement

Your Profit and Loss Statement (often just shortened to P&L, and also known as an Income Statement) is the easiest statement to put together when you prepare your financial statements. If you have ever done a personal budget, it’s quite similar, but you are going to be much clearer than you would with your own personal records.

Start with your sources of revenue at the top, and explicitly state where each comes from. In your personal budget, this is where you write down your employment income. If you have a single store, then you will have one line. The next step is to subtract the cost of goods sold (how much you spent buying the things that you sold), which will get you your Gross Profit.
Your next group will be your expenses. Everything from rent or mortgage, salaries, utility bills, insurance, and every other bill you pay EXCEPT to your vendors will go here. Subtract the total of all your expenses, and you have your net profit. This is what your business pays taxes on.

With P&Ls, you will have multiple columns to the right of your initial column. The first will typically be a Year-to-Date column showing the total amounts earned and spent during the current fiscal year. The next two columns are typically your status from the previous year. The fifth column is a percentage change of growth to show change from last year to this year. You get that by dividing the current Year-to-Date by the Year-to-Date from the previous year.

For internal controls, some people do another P&L sheet that assigns percentage points to each line, and place that column just after the current month and current Year-to-Date. Always use revenue as the basis for determining the percentages.
There are additional items, such as costs of research and development and depreciation for capital assets that you should see an accountant or business consultant on how to insert them into the P&L.

The Balance Sheet

While this can be a little more difficult to prepare, you will always know when you did it correctly because the left side and right side will be the same amount. Your balance sheet exists at a single point in time, such as the beginning or end of a fiscal year, though major corporations often do this every quarter. The formula for figuring this out is: Assets = Liabilities + Owner’s Equity.

Assets

This is everything the business itself owns. Count all the cash in the register and in the bank accounts, any property that the business owns outright (paid off company cars or common use tools), and the entire inventory the company has on-hand. You also count Accounts Receivable here, which are the sales that your company made, but have not been paid for yet.

Liabilities

This is everything the company owes money for. The payments to your suppliers, employee wages, rent or mortgage amounts, and anything else that you owe money for. In here, you also may see lines for corporate bonds (money the company borrowed from an individual as opposed to a bank or other lending institution).

Owner’s Equity

This is what you, the owner, have contributed or is owed from the business. As the owner, you should be paying yourself a salary, but at the end of the day if there is still profitability, then that counts as ‘Retained Earnings’, or money the business gets to keep. This also is where you investments in the company are listed in terms of stock ownership.

With publicly traded corporation balance sheets, you will see a lot more lines that break down assets into current and non-current assets, intangible or biological assets, liability lines for warranties, and deferred tax liabilities. You as a small business owner do not need to worry about those lines, though you may find some advantages that benefit your company by speaking with a business consultant or accountant.

The Cash Flow Statement

This statement looks at where the actual cash is going in the business. Most banks or other lenders want to see this because it is a pretty reliable way of determining the ability of a company to covers its expenses and repay its debts. It breaks down into 3 areas: Operations, Investing, and Financing.

Operations

Here is where you will list all of the items directly related to running your business. Here you will list income from sales, cost of buying your inventory, wages for employees, and advertising your business. You will also list anything that depreciates or amortizes over time (such as the value of the company car).

Investing

This area catches the things involved in your business that do not relate to day to day operations, but are related to the overall existence of your business. Purchasing (or selling) a new building or company vehicle, or payments related to merging or acquiring another business are both examples for this area. If you don’t know if it goes here or in operations, ask yourself “Does it relate to a single day for my business or for the next month of operations?” If it is not for a single day, it goes here.

Financing

Financing covers your company’s debt portfolio and the stock it has issued. Your debt portfolio is all of the bank loans and mortgages that your company has and how they are repaying them. For the average small business, you won’t need to worry much about the stock side. If you sold some private stock to an investor, this is where you will list that or the repayment if you bought those shares back.

As you put these three statements together, you have some simple things to remember. These statements are typically based on your historical data, but for a new business, you need to make some basic projections and assumptions. Keep everything realistic as you do these. If you are expanding, be sure to show your projections both with and without the loan. If you do not have experience in a specific area, but are opening a new business in that industry, you should definitely see a business consultant to help you.

Business consultants have access to industry standards and benchmarks that would be difficult for you to find on your own. Consultants also will have experience with other business owners in your industry and can help you with preparing both your business plan and your financial statements. A quick meeting with an experienced professional can be the safety net that you need to get the best terms and treatment from the banks.

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