How does a small business owner like Ryan Armstrong go about creating financial statements for their small business?
The creation of pro-formal financial statements that hold up to the scrutiny of lenders looking to lend business loans, or potential partners looking to invest in the business, is one of the most important elements of successful business plans. We recommend than before small business owners like Ryan Armstrong embark on writing their business plan, they first spend some time laying out some very well planned pro-forma financial statements.
The first step in creating the financial statements if of course to use our financial statements template that gives a small business owner like Ryan Armstrong the ability to very efficiently craft a full set of pro-forma financials that include annual profit and loss statement, monthly profit and loss statement, balance sheet and cash flow for three years.
You will find detailed instructions on how to fill out templates in the Template section - here we will be discussing the various inputs that you will have to plan and enter into the template to make the financials come to life. Let's start with the modules tab.
Modules - Company name:
The company name for any mortgage broker business is of course the name of a business like Real Estate Funding Solutions In the case of an existing business, you would simply enter in the name of the business. In the event the business is a new enterprise, and you have not yet come up with a name, we highly recommend that you take some time to think of a relevant name and also look into forming a legal entity for the business. To get a better sense of the options available to you, please read our incorporation guide.
Modules - First year of pro-forma financials:
Typically all business plans have to have financial projections for three years just as in the case of Real Estate Funding Solutions where we have created financials for 2012, 2013 and 2014. Once the first year has been entered by you, our templates will automatically enter the other two subsequent years.
Modules - Sales forecast for Years 1, 2 and 3:
Sales forecasts are the begining number for all financial statements analysis and here is where a small business owner like Ryan Armstrong is asked to enter the sales forecast for three years out. These sales forecasts come from the templates 5.7, 5.8 and 5.9, each of which allow you to plan for the monthly, quarterly and annual sales of your goods or service. In the case of our plan for Real Estate Funding Solutions the sales forecast are $125,000, $175,000 and $225,000 for the years 2012, 2013 and 2014 respectively.
Modules - Personnel summary and compensation forecast:
The personnel summary and compensation section of the modules tab is where the management and staff compensation costs for a small business like Real Estate Funding Solutions will be input. Business loan lenders and potential partners always look at this section carefully to see if the estimates for compensation are reasonable. If you show very little or no compensation for the staff, it will not make much sense, since no one is going to work for a small business like Real Estate Funding Solutions if the compensation is not appropriate.
What a business owner like Ryan Armstrong can do if they are trying to preserve cash and lower expenses in the first and second year of the business is to not take any compensation or take a very small token compensation as owners for the first and second year of the business plan and then by year three start taking out a normal compensation. - this shows the personal commitment that the small business owner like Ryan Armstrong is ready to make to the business.
Staff compensation as mentioned earlier needs to be realistic. We recommend that before you go go about putting these numbers into the plan template, you go a fairly detailed estimate of the amount you will be paying your staff per hour, and then come up with an annual rate of that compensation for the total hours that all the staff is anticipated to work.
Modules - Capital structure summary:
The capital structure section is where a small business owner like Ryan Armstrong of Real Estate Funding Solutions is able to show the potential lenders and partners just how much money owners or partners will be bringing to the table. It should not come as a surprise to anybody that banks and partners like to see if small business owners like Ryan Armstrong have some skin in the game. The more of contribution that business owners make to their businesses, the better it makes their commitment look. We have also not included any section for distributions since most lenders and potential partners do not like to distributions of capital 3 years being projected in the financials. If you have to work distributions into the business plan, we recommend that you adjust the contributions to show them to be net of distributions.
Modules - Loan & Interest Expense summary:
Business loans and financing is the mother's milk of capitalism - there are very few businesses that are able to get off the ground, and grow without having to borrow some money at some point in their business. We have always advised small business owners like Ryan Armstrong that like most other things, loans and lines of credit if used judiciously can prove to be an extremely valuable source of funding for both temporary business needs and long time asset purchases.
There are two kinds of loans and lines that a mortgage broker business will most probably be able to access. The first is of course the traditional line of credit which requires the payment of principal and interest every month and amortizes like a term loan over the course of between 4 to 7 years. On the other hand, a small business may also be able to access a line of credit where the payment requirements are interest only. In an interest only payment, the principal balance remains untouched unless specific payments are made to pay the principal down - instead the the bank requires only the payment of intrest that is calculated on a simple interest basis on the balance outstanding of the principal.
In the event a small business like Real Estate Funding Solutions needs financing and is not able to access any kind of loans and lines, a small business owner like Ryan Armstrong may decide to use either personal or corporate credit cards to come up with the financing. While credit cards can be useful for short term financing needs, they are not good to use for long term loans and financing. We recommend that a credit card be paid off just like a four or five year term loan and entered into our template in like manner.
Modules - Fixed Asset & Depreciation summary:
The fixed asset depreciation summary is where a small business like Real Estate Funding Solutions is able to project the purchase of fixed assets and the extent to which they will be depreciated for the three years in the business plan. A fixed asset is defined as an asset that cannot be easily converted to cash by a small business owner like Ryan Armstrong. Items that have been purchased by a small business with the intention of using them over an extended period of time can be classified as fixed assets and so a small business owner like Ryan Armstrong would classify all purchases of land, building, automobiles, office furniture, office equipment, computers, plant and machinery as fixed assets. In the case of the business plan for Real Estate Funding Solutions the total fixed assets for the years 2012, 2013 and 2014 are $36,093, $32,360 and $28,628 respectively.
Once a fixed asset is purchased it is not worth the same amount as it was the day a small business like Real Estate Funding Solutions purchased it. As time progresses, the asset devalues due to age and obsolescence and in order to be able to absorb this loss, a business has the ability to write off a part of that depreciation every year. The rate of depreciation of course depends on the kind of asset itself. Typically all items like computers and office equipment be depreciated over 5 years at 20% a year; machinery is depreciated over 7 years at 14.28% a year; Leasehold improvement depreciate over 10 years at 10% per year; residential buildings depreciate over 27.5 years at 3.63% per year and commercial buildings depreciate over 40 years at 2.5 percent per year.
In order to find out the exact rate of depreciation for your particular fixed asset we recommend that you touch base with your CPA and also visit IRS websites which often contain a wealth of information. In the business plan for Real Estate Funding Solutions you will see that the depreciation for the years 2012, 2013 and 2014 was $3,733, $3,733 and $3,733 respectively.
The depreciation for Real Estate Funding Solutions in our plan is calculated on a straight line method where the same rate of depreciation is used each year to calculate the depreciation for all fixed assets. Fixed assets like the purchase price paid to buy a new business cannot be depreciated as they are intangible. Land is another example of a fixed asset that does not depreciate.
Modules - Purchases, Inventory & Cost of Goods Sold summary:
This section of the modules gives a small business owner like Ryan Armstrong the ability to input the purchases made by a small business like Real Estate Funding Solutions to facilitate the production of goods or service; this section is also where the cost of goods sold are calculated and opening and closing inventory are entered.
Purchases of raw material and other items that go into the production of goods which are the final output of a small business is what we are referring to when we look at purchases. These purchases are different from operating expenses that a small business like Real Estate Funding Solutions had to incur during the day to day operations of the business. Typically if your small business is a restaurant, the cost of all the food items that you have to buy before you turn them into the food you serve is what you would list here; if you were a small manufacturing firm, then all the raw material that you purchased along with the cost of acquiring these materials would be included in the Purchases section. In the service business like that of a lawyer, realtor, broker, there are very few items that can qualify as a purchase.
Inventory deals with the items that you keep on hand so that you can facilitate the production of goods and services. Thus when you begin a new restaurant, you may go out and buy a whole bunch of food which you can use to cook and serve your clientele - that would constitute the opening inventory. Later at the end of a year, you may have some raw material left over on hand - that would be your closing inventory.
In the case of service oriented companies, there is typically no inventory and so if you were writing a business plan for a realtor's office, your inventory would be $0 as would be your purchases.
Modules - Accounts Receivable summary:
When a small business like Real Estate Funding Solutions sells its good or services, a small business owner like Ryan Armstrong can expect that there will be some customers who will not always pay the business on time. In many instances, a small business has no choice but to carry their customers for a while and provide them with lenient payment terms due to the business conditions and to stay competitive. As with most businesses, there is a good chance at the end of every year, there will be some customers who have not yet paid the business and these become the accounts receivable for the business. It is recommended that the AR for most businesses should not exceed more than 5% of the total sales, but each industry has its own acceptable ranges. We recommend that as a general rule just like Ryan Armstrong you set the accounts receivable to be around 1/2% to 3/4% of the annual sales every year in the pro-forma financial statements.
Modules - Accounts Payable summary:
Just like the AR process. Every small business like Real Estate Funding Solutions makes purchases of goods and raw materials and operating expenses from other vendors and has to pay these vendors. Sometimes certain vendors may offer good terms of payment wherein a small business owner like Ryan Armstrong can extend out the time taken to make these payments out to as much as 90 days. This is of course a good strategy in times when the cash collection is slow and you need to conserve as much cash as possible by making purchases and paying for them later down the line. These payments that are due to vendors by you become the accounts payable (AP). It is recommended that you always project a small token AP amount which is as a percentage of purchases.
Very large accounts payable amounts (say more than 15% of purchases) may show that you are having trouble with cash flow and many business loan lenders and potential partners don't like to see that in the pro-forma financial statements.
Modules - Security Deposit:
Unless you own the property where you are conducting your business, just like any mortgage broker business and its owner Ryan Armstrong, you will probably have to pay rent. Almost all rental agreements require a security deposit of some sort and this section is where you project what that security deposit will be. Don't take this section of the modules tab lightly, location is one of the key parameters for success in many small businesses that we have consulted with, and one of the key factors in getting a good location is making sure that the lease and security deposit are structured in a manner which will provide maximum leverage to the small business.
Annual Profit & Loss Statement:
The profit and loss statement for any mortgage broker business like Real Estate Funding Solutions gives the reader of the business plan a clear idea of the anticipated financial health of the business in the coming years as projected by a small business owner like Ryan Armstrong. Our free financial statements template gives a small business owner the ability to quickly construct pro-forma profit and loss statements by inputting some basic information about operating expenses and letting our templates do the rest.
Annual P&L - Employer Tax Rate for a mortgage broker business:
The employer tax rate is one of the first items that to be input by a small business owner like Ryan Armstrong in the annual profit and loss statement tab. This employer tax rate is the rate of employment taxes that a small business like Real Estate Funding Solutions can be expected to pay and it is recommended that all items like FUTA, SUTA, Medicare and others be entered into this one combined number. This number can range from 7.5% to 9.5% depending on the state the business is located in and we recommend that you do some research online and consult with your CPA if you want a precise number. While it is good to be as detailed and specific as possible when projecting pro-forma annual profit and loss statements, a general estimated employer tax rate of 7.5% a base number to show that your planning has realistically anticipated every possible operating expense a small business like Real Estate Funding Solutions may encounter in the three years being projected in the plan.The statutory deductions that every small business owner like Ryan Armstrong is required to withhold from their employees taxes are:
Annual P&L - Income Tax Rate for a mortgage broker business:
The federal income tax rate for a small business like Real Estate Funding Solutions will vary depending on factors like the amount of income and state income tax rates, we recommend that you do some research online or consult with a CPA before inputting this number in the financial statements template. Our template uses this number to come compute the net profit for your firm.
Annual P&L - Operating Expenses for a mortgage broker business:
The operating expenses for a business like Real Estate Funding Solutions are the costs that a small business faces during its regular course of its operations. Thus any cost that is required to operate the business is classified into an operating expense. Remember that the distinction between an operating expense and purchasing cost is that purchases are expenses that are made to procure goods and or services that serve as the raw material that is needed by the small business so that they can in turn use that raw material and turn it into a finished product.
Thus day to day expenses that a small business like Real Estate Funding Solutions faces like cost of selling, marketing, administration would typically be classified as operating expenses and these are different from purchases and also different from capital expenses which are expenses that a small business like Real Estate Funding Solutions has to undertake in order to acquire the items that will give them the means to produce their goods or services. Plant, machinery, furniture, copy machines etc are capital expenditures into fixed assets that are different from operating expenses.
While different businesses have different operating expenses, there are some generic operating expenses that are borne by almost all small business owners like Ryan Armstrong as follows:
Besides the regularly occurring operating expenses there are others that are unique to each business, thus if you are a restaurant you will have operating expenses like kitchen utensils, linen and laundry, musicians, decorations; if you are an auto repair shop you may encounter expenses like disposal of used motor oil, lift maintenance, state inspection sticker purchases etc. Make sure that add all these operating expenses to the annual profit and loss expenses. For all expenses that you add, you have the ability to add a description and then select them to be a percentage of the annual sales along with a stipulated annual increase in the amount of expenses to account for inflation. Alternatively, you can always enter a manual number for each of the three years of the operating expense that you are inputting.
Other Items like Sales, Cost of Goods Sold, Depreciation, Gross Wages, Employer taxes, interest expenses and provisional taxes are computed automatically based on inputs made in the Modules tab of the financial statement template. Once done all you have to do is to navigate to the output tab to copy and paste the fully prepared pro-formal annual profit and loss statement into your business plan word document.
Monthly Profit and Loss statement for a mortgage broker business:
In the monthly profit and loss statement tab of our financial statement template, a small business owner like Ryan Armstrong has to perform only two tasks as follows:
While having a montthly profit and loss statement is not mandatory, a detailed and well thought out statement shows the a business loan lender or potential partner you have done your homework and have thought about your plan in a careful and deliberate manner.
Once these two tasks of monthly sales allocation and monthly expense allocations are completed by the small business owner the template does the rest and the final monthly profit and loss statement can be copied and pasted from the outut tab directly into the business plan word document.
Balance Sheet for a mortgage broker business:
The balance sheet is the snapshot of the financial health of a business and every small business like Real Estate Funding Solutions has to have a pro-forma balance sheet for each of the three years that are being projected in the financials. Our templates have been strcutured to automatically create the balance sheet for a small business like Real Estate Funding Solutions based on the information entered into the modules, annual and monthly profit and loss accounts. Thus a small business owner like Ryan Armstrongdoes not have to do much else but copy and paste the final balance sheet from the output tab.
On the rare instance that there is the need to add a manual entry or change any of the automatically calcualted numbers manually, we have provided users with the facility to do just that. Please ensure that your asets equal your liabilities for each of the three years for which projections are being made. Thus as in the case of Real Estate Funding Solutions the total assets for 2012, 2013, and 2014 are $48,913, $70,182 and $80,377 and you will have to make sure that the total liabilities will be the same.
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