Financial diligence is required to ensure the fiscal health of your company. This diligence includes establishing budgets, creating forecasts, monitoring cash flow, and understanding the three basic financial statements: profit and loss (P&L or income) statement, balance sheet and cash flow statement.
Budgets are typically established on an annual basis prior to the upcoming fiscal year. Existing companies will use data from previous years to help determine the dollar targets for revenue, costs of goods/services, and expenses. Startup companies will require more research to set their benchmarks and on the outset will usually have a higher level of uncertainty in the numbers.
Financial forecasts are simply time phased budgets. Monthly forecasts are created for the P&L statement and the cash flow statement for the upcoming fiscal year. A corresponding year-end balance sheet is also produced. Generally, annual P&L projections for the subsequent three years are shown also.
Understanding the basic financial statements is essential in determining the financial health of your business. Analysis of these statements will aid in the development of your strategic plan. By comparing the forecasts to the actuals, business leaders can effectively make decisions to better manage the business and maintain positive cash flow.