The 3 Crucial Elements of Financial Planning
When it comes to running a small business, keeping track of your finances isn’t just a good habit—it’s essential for survival and growth. Financial planning documents help you understand where your business stands and guide you on where it's headed. Accounting expert Yemi Ajala, who led our recent Fundamentals Of Business Finance masterclass, broke down three key financial planning documents that every business owner should know: the cash flow statement, balance sheet, and profit and loss statement. These are more than just paperwork; they’re the backbone of sound financial decision-making.
1. Cash flow statement: Manage your incomings and outgoings
The cash flow statement is like the heartbeat of your business. It shows the cash moving in and out over a set period. This document doesn’t focus on your profits, but on whether you have enough cash to keep the lights on. As Yemi says, the cash flow statement is vital for making short-term decisions and planning ahead.
He describes how the statement is broken into three sections:
Operating activities: This covers the day-to-day running of your business—things like sales, marketing, and admin costs
Investing activities: Long-term investments, such as buying property or new equipment, fall under this section
Financing activities: This involves any dealings with stakeholders, like loans or payments to owners
Yemi emphasises that maintaining a positive cash flow is critical. If more money is going out than coming in, you risk running into trouble. “Cash is the bloodline of the business,” he says. This mean that, even though you could have payments due, what matters is what’s sitting in your bank account.
2. Balance sheet: Understand what you own - and what you owe
Yemi explains that a balance sheet is often referred to as the statement of financial position, because it provides a snapshot of what your business owns versus what it owes at any given time. A positive balance sheet shows you’re in a stronger position to seek loans, leases, or even investments.
The balance sheet is split into three main categories:
Assets: What your business owns, including cash, inventory, and accounts receivable (money owed to you)
Liabilities: What your business owes, such as debts, loans, and any taxes due
Owner’s equity: This is what’s left after liabilities are deducted from assets. It represents the net worth of your business, and it can be reinvested or withdrawn as dividends by the owner
A top-heavy balance sheet—one where assets exceed liabilities—strengthens the credit profile of your business, making it easier to secure funding or finance equipment. A negative balance sheet, on the other hand, can hurt your chances of getting the financial support you need.
3. Profit and loss statement: Are you making money?
The profit and loss statement (also called the income statement) is what investors and creditors often look at first. It shows whether your business is making a profit or running at a loss by comparing your revenue to your expenses. Yemi describes it as essentially a report on the effectiveness of your trading activities.
It breaks down into:
Revenue: Money coming into your business from sales and other activities
Cost of Sales: Direct costs associated with generating that revenue, like raw materials or labour
Administrative Expenses: Overheads such as rent, utilities, and marketing
At the bottom of the statement, you’ll either see a profit or a loss. A healthy profit not only helps you pay taxes and attract investment but also proves that your business model is working. “Profitable businesses attract investors,” Yemi says, because investors know they’re more likely to see a return on their money.
Why these documents matter
Each of these financial statements gives you a different view of the health of your business.
The cash flow statement helps you manage day-to-day operations and plan for the short term. The balance sheet gives a snapshot of your overall financial health and helps with long-term planning, while the profit and loss statement shows whether your business is generating a profit from its activities.
As Yemi points out, businesses that understand and leverage these documents are more likely to make informed financial decisions. Whether you're planning to expand, seeking investment, or just trying to keep the lights on, these documents are your best financial allies. So, if you haven’t already, get into the habit of reviewing them regularly—they’ll keep your business on track.
