Entrepreneurship, Second Edition

8.6. Building Integrated Financial Statements

Once you have a baseline income statement, the next step is to construct monthly income and cash-flow statements for two years (followed by years 3 through 5 on a yearly basis) and a yearly balance sheet for all five years. Five years is standard for many business plans because it usually takes new firms some time to build sales and operate efficiently. Five years also gives the entrepreneur a sense of whether her investment of time and energy will pay off. Can the business not only survive but also provide the kind of financial return to make the opportunity costs of leaving an existing job worthwhile?

The income statement, cash-flow statement, and balance sheet are the core statements for managing any business. Changes in one statement affect all others. Understanding how these changes affect your business can mean the difference between survival and failure. Many entrepreneurs will find their businesses on the verge of failure, even if they are profitable, because they fail to understand how the income statement is related to the cash-flow statement and balance sheet. How is that possible, you might ask?

Entrepreneurs need to finance rapid growth. For example, a bookstore needs to buy inventory in advance of selling to its customers. The owner needs to ensure that he has enough books and other products on hand that he doesn't lose a sale because a customer is frustrated that the book isn't in stock. (Americans are notorious for ...