The Financial Aspect

Financial Planning and Investment

For me, financial planning is a challenging task. Besides that I have no background in financial planning, the uncertainties in the new venture make it even harder.

Regardless of its difficulty, financial planning is an essential part of business planning, and certainly important information for potential investors.

The readings this week are related understanding the concept of Profit, the Income Statement and the Cash Flow Statement. The articles were simple but informative.

Income statement

The income statement begins with sales, the cost and expenses on the income statement are those it incurred in generating the sales recorded during the time period. This is called the Matching Principle, where costs are matched to the sales to determine profits in a given period of time.

The income statement tries to measure whether the provided products or services are profitable when everything is added up. Different department head uses this information for various purposes; for example, marketing director may use this information to know which product is profitable to emphasize in marketing campaign.

Nevertheless the company cannot rely on profitability alone. This is because many times the bill money is collected later, and the real cash flow are not reflected in the profit.

Balance Sheet

Statement of what a business own and what it owes at a particular point in time. The difference between that it owns and what it owes represents equity.

Understanding the balance sheet means understanding all the assumptions, decisions, and estimate that go into it.

In business accounting, what company owns is called assets, what company owes is called liabilities, and the net worth is called equity.

assets – liabilities = equity.

* When a company buys a piece of capita, the cost doesn’t show on the income statement, rather the new asset appears on the balance sheet and only depreciation appears on the income statement as a charge against profits.

Cash Flow

Cash Flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. (From Wikipedia).

Things that can be done to improve

• Account Receivable: Keep the customer informed about their statement. Have the customer pay their bills on time.
• Inventory: Apply principles of lean enterprise to keep the inventory low.
• Expenses: Consider timing of cash flow when making purchase.
• Giving credit: Maintain a careful balance between cash flow and credit sales.

Cash flow is the key indicator of the company’s financial health, along with profitability and shareholder’s equity.

Applying to my venture

Understanding of finance and accounting is important. Profit, income statement and cash flow are all basic information used by investors in their decision making.

My venture is a service business. There will be no inventory, and no credits. Hopefully this will make the finance analysis simpler.

The expense will mainly be site hosting, rent, employee payroll, and marketing expenses. Therefore the profit will be sales minus the fixed cost.

Maybe this is an oversimplified analysis with too many assumptions. Probably the real world I will face more complex financial situations.

- Young