Profit and Loss
Cash Flow Statement
Balance Sheet
Use of Funds
1. Profit and Loss
The profit and loss (P&L), also referred to as “income statement”, is a summary of all your revenues and expenses over a given time period .
By subtracting expenses from revenues, it gives a clear picture of whether your business is profitable, or loss-making. With the balance sheet and the cash flow statement, it is one of the 3 consolidated financial statements every business must produce every fiscal year.
Most small businesses produce a P&L on a yearly basis with the help of their accountant. Yet it is good practice to keep track of all revenues and expenses on a monthly or quarterly basis as part of your budget instead.
When projecting your financials as part of your business plan , you must do so on a monthly basis. Usually, most startups project 3 years hence 36 months. If you have some historical performance (for instance you started your business 2 years ago), project 5 years instead.
2. Cash Flow Statement
Whilst your P&L includes all your business’ revenues and expenses in a given period, the cash flow statement records all cash inflows and outflows over that same period.
Some expenses are not necessarily recorded in your P&L but should be included in your cash flow statement instead. Why is that? There are 2 main reasons:
Your P&L shows a picture of all the revenues you generated over a given period as well as the expenses you incurred to generate these revenues
Note: we call expenses such as the car purchase “capital expenditures”
Some expenses in your P&L are not necessarily cash outflows. Think depreciation and amortization expenses for instance: they are pure artificial expenses and aren’t really “spent”. As such, whilst your P&L might include a $100 depreciation expense, your cash flow remains the same.
Note: Depreciation and Amortization expenses are used in accounting to reflect the “loss” in value of an asset. For instance, the $15,000 car you just bought, like any other asset, will depreciate over time. Assuming a 5 years depreciation schedule, your car would be deemed worthless in 5 years time.
Whilst the P&L and cash flow statement are a summary of your financial performance over a given time period, the balance sheet is a picture of your financials at a given time.
The balance sheet lists all your business’ assets and liabilities at a given time (at end of year for instance). As such, it includes things such as:
Assets: patents, buildings, equipment, customer receivables, tax credits etc. Assets can be either tangible (e.g. buildings) or intangible (e.g. customer receivables).
Liabilities: debt, suppliers payables, etc.
Equity : the paid-in capital invested to date in the company (from you and any other potential investors). Equity also includes the cumulative result of your P&L: the sum of your profits and losses to date
Whilst P&L and cash flow statement are fairly simple to build when preparing your business plan, you might need help for your balance sheet.
The use of funds is not a mandatory financial statement your accountant will need to prepare every year. Instead, you shall include it in your startup business plan, along with the 3 key financial statements.
Indeed, the use of funds tells investors where you will spend your money over a given time frame. For instance, if you are raising $500k to open a retail shop, you might need $250k for the first year lease and another $250k for the inventory.
Use of funds should not be an invention from you: instead it is the direct result of your cash flow statement
Remember: always include a buffer in your use of funds.
For instance, using the example above, if you need $500k over the next 12 months, raise $600k or so instead. Indeed, better be on the safe side in case things do not go as expected!
