5 Elements That Determine the Health of Your Business

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filadendron / iStock.com

Inside every business plan is a section covering the business’s financial information. These financial documents show numbers contributing to the startup’s future profitability as well as details about current revenue.

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Specific numbers act as measures of success and contribute to the overall financial health of your business. Make sure you have a thorough understanding of the following important elements of any small business.

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Cash Flow

Cash flow is a term referring to the money coming in and going out of a small business during a specific time period. Money coming in is known as revenue, while money going out is referred to as expenses. 

Cash flow is typically presented as a statement in a business plan showing the amount of cash available at the end of a specific time period. Having a healthy cash flow allows small businesses to cover expenses and any outstanding financial obligations in a timely manner. If a small business doesn’t have a positive cash flow, the business may be in financial trouble.

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Profit and Loss Statement

A profit and loss statement, often abbreviated as P&L, provides an overview of the company’s total income, revenue and expenses during a specific time period. 

Reviewing the P&L statement allows you to find the company’s net profit during a specific time and see if the small business is profiting or losing money. You should be able to clearly see whether the business is generating enough income to cover its costs and use a P&L statement as a means of viewing the financial performance of the business over time.

A business which is steadily losing revenue or struggling to earn a profit, for example, may be less likely to receive capital from potential investors reviewing a P&L statement to determine the startup’s risk level. 

A profit and loss statement is also sometimes referred to as an income statement.

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Balance Sheet

Another vital document for understanding the financial health of your business is a balance sheet. 

A balance sheet acts as a snapshot of the startup’s financial position at a specific point in time. Business owners will combine their balance sheet with their income or P&L statements and a cash flow statement in order to better understand the financial standing of the business and deal with the company’s assets and liabilities.

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Business Budget

Similar to creating a personal budget, a business budget helps you create a spending plan specific to the small business. The business budget will allow you to estimate your business spending, predict revenue, identify any available capital and create and set financial goals for the business.

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Sales Forecast

Do you have an understanding of your sales pipeline? A sales forecast should be part of the financial projections in your business plan. This report predicts what members of the sales team will sell on a weekly, monthly, quarterly and/or annually basis. The sales forecast can be determined by using previous performance data from other quarters in business. 

A sales forecast, and understanding the sales pipeline in the business, is a big indicator of an organization’s financial health. Small businesses should know when their offerings are in demand and the cyclical and seasonal preferences of their customer base. 

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