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10 Steps for Simplifying Business Plan Financial Statements

For most business owners and entrepreneurs, preparing, and communicating the financial statement section of a business plan is like trying to give driving directions to someone who doesn’t speak the same language.

“Numbers” is the language most investors speak. But, it is also the language that many business owners and entrepreneurs don’t speak or understand.

So how do you bridge this gap?

1) Understand there is a difference between “crunching” or preparing the financial statements and presenting them.

Preparing business plan financial statements often requires expert knowledge of double-entry accounting, taxes, merger and acquisition accounting, and finance. Skills most business owners or entrepreneurs don’t have, except for perhaps the most seasoned or those with accounting backgrounds. Presenting the numbers, however, only requires that you understand how what you plan to do translates into cash; and, what the potential financial risks for the business are, and how you’ll minimize them. If you cannot demonstrate that you understand these, then why would an investor ever give you money?

2) Get help early on.

Okay so you don’t have any money to hire a CPA or an accountant, and they just won’t do it for nothing. Reach out to your local college. Find the head of the accounting department or an accounting professor. Then, see how your project might be used to help the class learn about accounting, starting a business, or building financial models. The point is; you need someone who understands how to build projected financial statements based on your specific plans for the business. It is also important to find someone who can help you understand your financial statements.

3) Know the kind of investor you are seeking.

This is the same as a writer taking the time to know the audience before writing a book. For example, a banker puts more weight on the business’ liquidity, collateral, and ability to convert assets into cash quickly if the business runs into trouble and a loan is called. The emphasis on these financial measures is different for a venture capitalist whose interest is more on how quickly your business can grow, the potential future cash flow it can generate, and the potential for cashing out at an amount much higher than the initial investment.

4) Present only the numbers and measures most important to your type or types of investors in the body of your business plan.

Save the more detailed financial statements for the appendix and due diligence stage. Of course you need detailed financial statements and projections to support your business plan, but don’t think you need to share them with potential investors upfront. Investors are more interested in seeing if a few key numbers and financial measures make sense and that they support your strategies before they waste time digging through your supporting data. If they are interested in moving forward with you, believe me, they will dig into your financial statements.

5) Use graphs and tables wisely to present financial information.

Graphs are great for presenting trends and comparisons. Keep them simple and uncluttered. Be sure headings, labels, axis tabs, and so on are clear and legible. Nothing is better than a great graph or table to convey a message clearly and quickly. But remember, a bad graph or table can create much damage and confusion too.

6) Check you numbers.

Like typos, a wrong number can shatter your credibility instantly. It can cause your potential investors to lose confidence in your ability, or to question your understanding of the business. Be sure the numbers in your plan agree to the correct model or version of your financial plan. Verify the numbers in your business plan agree to all supporting documents.

7) Always include a statement of the sources and uses of cash.

If you have teenagers, I’m sure you always ask them where they’re going to spend the money you’re about to give them, before you hand the money over to them. The Statement of Sources and Uses does the same for investors. It tells potential investors how you plan to use their money. The statement accounts for all the money coming into the deal, whether it is bank debt, seller notes, personal cash, cash proceeds from the sale of stock, and so on. It then explains how you intend to use this money, whether it is to buy an existing business, buy certain assets, payoff existing debt, or payoff certain start-up liabilities, fees, and expenses.

8) Include all three fundamental financial statements: income statement, balance sheet and cash flow.

Don’t just provide potential investors with an income statement, it doesn’t give them the complete story. Also, be sure that all financial statements conform to Generally Accepted Accounting Principals or GAAP. Include at least three years of actual historical financial information, if available, and five years of projected financial statements. Although no one expects you to be able to predict the future with absolute certainty, projections do provide insight into your thought process, assumptions, and understanding of the business and its markets.

9) Maintain a good financial model capable of running sensitivity analyses to show how your projected results will change as your assumptions change.

This allows you and your investors to identify which assumptions are most critical to your future performance. Each critical assumption needs evidence to support it. Also, include in your model benchmark comparisons to other companies in your industry. Compare things like revenues per employee, gross margin per employee, gross margin as a percentage of revenues, and various expense and balance sheet ratios.

10) Use footnotes and descriptions to explain how key numbers were derived or the specific assumptions behind them.

As much as possible, keep these short and to the point. Don’t get carried away footnoting every number. Footnote only key numbers or unusual items.

At the end of the day, more business deals are not consummated because investors don’t feel like they can trust the numbers for one reason or another. Spend the time, effort and money to communicate your financial statements clearly and convincingly. It can be the key to making your deal a reality.

Financial Planning – The True Definition

Financial planning is a good idea for anyone with an income. Some people think of it as a synonym for retirement planning. However, financial planners are professionals who assist people in developing plans for many kinds of investments and expenses. Essentially, they help people earn, save and spend their money more wisely than they would if left to their own resources.

What Is Financial Planning?

The work of a financial planner can be broken down into several categories. Some of these categories of planning focus on the future, when a client plans to retire or hand over a business or estate to an heir. Others are focused on issues in the present or the near future, such as tax planning or simple cash flow management. However, all forms of financial planning follow certain elementary steps.

Varieties of Financial Planning

• Investment planning goes beyond simply purchasing financial instruments and other assets. An investment planner helps his or her clients think strategically about an investment portfolio. While an untrained client might let investments sit unprofitably for too long or trade too frequently to properly take advantage of profit margins, a financial planner can guide this client to earn more money from investments.

• A retirement planner assesses a client’s present economic status and prognosticates how much money that the client needs to earn from investments and savings in order to achieve financial independence by a specific age.

• Cash flow management is a type of financial planning which helps a client control income and expenses in order to save money. The goal of this management might simply be improvement in the quality of life for an individual. Financial planners can also help large businesses to improve their efficiency and their balance sheets.

• Estate planning anticipates death or incapacitation of a client and the distribution of his or her assets and belongings. A central part of this sort of work is writing wills and designating executors and heir.

The Financial Planning Process

• In the first step, the financial planner and the client set goals.

• Then the planner gathers financial information and other pertinent data about the client.

• Now the planner analyzes the information and determines what changes must be made to achieve the goals set during step one.

• The fourth step may require resetting goals in light of obstacles discovered during the analysis. Otherwise, client and planner devise a plan for meeting the goals.

• The planning team implements the plan.

• The sixth step is the longest phase of financial planning. The planner monitors progress toward the goals, often over a period of years or decades. Adjustments will probably have to be made as time passes.

Director’s Financial Responsibilities

The new Association director is often thrust into the job with little idea of what his or her duties and responsibilities are, other than the conceptual knowledge that s/he is obligated to serve in the best interest of the Association. Unless s/he has been an active member of CAI (which is not likely if s/he is a first-time director), s/he is not even aware of the educational resources that are available for guidance in learning what a director’s responsibilities are. Further, many directors serve only a one-year term and therefore have little incentive to go through the effort of getting the education necessary for performing their job, since their term will be completed before they can even begin to learn everything they should know.

The purpose of this article is to attempt to provide guidance to the director on his or her financial responsibilities. The most important rule with respect to financial transactions is that they should be well-documented. While the Association may produce monthly financial statements and an annual budget, it is also important to document (preferably in the minutes of the Board of Directors) the following types of financial decisions:

  1. Authorization for new bank accounts
  2. Authorization of changes in signers of bank accounts
  3. Approval of transfers of cash between accounts
  4. Authorization for purchases of major equipment, or major expenditures
  5. Approval of the annual budget
  6. Acceptance of monthly treasurer’s report
  7. Acceptance of monthly interim financial statements from the management company
  8. Approval of the annual audit or review report and tax return
  9. Authorization for an officer of the Association to sign the annual income tax returns
  10. Documentation of board actions and responses with respect to the accountant’s management letter that accompanies the annual audit report
  11. Collection actions (authorization to lien member property, authorization to foreclose on member property)
  12. Documentation of board decisions regarding insurance coverage
  13. Adoption of a conflict of interest policy
  14. Authorization of contract for preparation of a reserve study
  15. Authorization of reserve expenditures
  16. Adoption of reserve policies
  17. Adoption of Revenue Ruling 70-604 Election (This election should be made annually and should preferably be made at the annual membership meeting, then ratified at a Board of Directors meeting.)

Accounting is a complex, technical subject in which very few people have an active interest. However, the impact of financial transactions is something that permeates every aspect of our lives, and certainly that of a community association. While no individual can be given a complete accounting education in a short enough period of time to enable them to gain a complete understanding during their term of office, there are certain things that the director can and should do on a procedural basis that would allow him or her to adequately exercise the oversight of financial responsibilities of the members of the Board of Directors of an Association.

The director needs complete financial information in order to perform an adequate review of transactions. Accordingly, the monthly financial reporting package for a community Association should generally include the following documents:

Monthly financial statements

a. Balance Sheet on an accrual basis

b. Income Statement on an accrual basis with budget-to-actual comparisons ( The income statement should include both current month and year-to-date amounts.<

  • General Ledger
  • Cash Disbursements Journal
  • Aged Assessments Receivable Listing
  • Copies of all bank reconciliations
  • Copies of all bank statements
  • Copies of paid invoices

While the above list may seem like overkill to some, these documents should be distributed to the board members prior to the Board meeting so that they have an adequate opportunity to review them and be ready at the time of the meeting to either approve the reports or ask the necessary questions. It is not reasonable to expect even a CPA to be given a set of financial statements during a Board meeting and on the spot, have to review, understand, and approve the financial statements and, by inference, the underlying transactions.

For the director to competently review this financial package, he must have a basic understanding of each of the documents.

The balance sheet is a statement that reflects the financial status of the Association at a specific point in time (generally month-end or year-end). Common components of a balance sheet are:

Assets

Cash – Petty cash on hand or in checking accounts, savings accounts, or other types of accounts with a financial institution

Assessments Receivable – Amounts owed by members to the Association as of the date of the financial report

Fixed Assets – Property acquired by the Association with a useful life greater than one year and of significant cost

Prepaid Expenses – Payments of expenses in the current period that will benefit more than one period, such as insurance, which is often paid in a single payment for an annual premium

Liabilities

Accounts Payable – Expenses incurred, but not yet paid

Prepaid Assessments – Dues/assessments paid in advance

Income Taxes Payable – Income taxes due for the current year and any prior years

Fund Balances

Operating Fund – Accumulated earnings or losses of the Association from the current and prior years.

Replacement Fund – Amount set aside for future repairs and replacements (this balance should have an equal amount of cash set aside to accumulate for major expenses).

The income statement reflects, for a period of time, the income and expense activities of the Association. A preferred format would reflect both the current month’s and year-to-date budgeted and actual activities. Revenues generally consist of member assessments, fines, vending machine, parking, or other income and interest income. Expenses would include operating maintenance costs, utilities, management company fees, and other administrative and operating fees. Amounts transferred to reserves are generally reflected as an expense of the operating budget, unless financial statements are prepared on a fund basis.

The general ledger is a document which underlies the financial statements and summarizes all activity by account. For instance, if three different checks during the month were written for repairs, they would be grouped into the repairs expense account (even though the checks were not in sequential order). The total of those three checks would represent the current month’s total repair expense, which should agree with the income statement. This document can be used by the director to research questions such as “what is in utility or repair expense this month?”, and “why is it so high compared to prior months or prior years?” The general ledger should provide sufficient detail for you to find the answer to that question.

The cash disbursements journal is simply a listing of checks in numerical order for the current month, listing the date, payee, and amount.

The other reports are self-explanatory.

The procedures that the director might employ in analyzing these documents should consist of:

  1. Examine the balance sheet and compare it against prior periods to see that cash balances and assessments receivable balances appear reasonable. Note if there are any significant fluctuations between restricted reserves in the current period versus prior periods.
  2. Examine the bank reconciliations and see that they agree to the amounts reflected as cash on the balance sheet. Investigate any differences. Also, make sure they agree with the bank statements. The bank reconciliation should begin with cash per bank and reconcile down to cash per financial statements and general ledger. The reconciling items will generally consist of deposits in transit and outstanding checks. Investigate and question any large or old outstanding checks.
  3. Review the bank statements to ascertain that all interest income has been recorded in the financial statements.
  4. Make sure that all bank accounts are recorded in the general ledger of the Association.
  5. Examine the aged assessments receivable listing and compare it to the balance sheet. The total of assessments receivable should agree with the balance sheet.
  6. Review the aged assessments receivable listing and question any assessments receivable that are more than 30 days old. The Association should adopt a strict collection policy that would consist of assessment of late charges, warning letters, filing of a lien, and ultimately foreclosing on member property for non-payment of assessments. There should be no exceptions to these rules, especially for directors of the Associa­tion.
  7. Review the income statement comparison of budgeted to actual activity both for the current month and the year-to-date, and question any significant variations.
  8. For any questioned income or expense items, trace the account to the general ledger and review the detail for that account.
  9. Review the cash disbursements journal for the month and challenge the propriety of all expenses. For instance, if any checks are written to any director of the Association, find out why. If the management company is being paid more than their contractual fee, find out why.

It will take some time for the director to perform all of the above procedures, but it will provide you with insight as to the financial transactions of the Association, and a greater understanding of how your Association operates. While this may seem like too much work to be done on a monthly basis, you as a director have an obligation to the members of the Association to safeguard the assets of the Association. Only through diligence and a step-by-step procedural review of transactions can this be done.