August 5, 2022
If you read our first post and were left wanting more... Don't worry, there's more to tell!
If you have previous knowledge of accounting and want to make a more detailed economic-financial plan or if you are requested by the bank or an investor, it is possible to make additional analyses of the economic-financial viability of your project.
By means of the cash account we can analyze the capacity we have to face payments through its liquidity. It represents the cash flow and is obtained as the difference between the income we obtain and the expenses we produce. In this way, we can see all the cash inflows and outflows that we make in a given period of time.
It is important to carry out a control and follow-up every x amount of time to analyze the evolution and deviations from the estimates in order to correct them as soon as possible.
If you read the previous article, you may think that this information has already been provided for in the Profit and Loss account, since both income and expenses appear in one and the other, which could even coincide. What is the purpose of the cash flow account?
The P&L account is on the accrual basis, i.e., revenues and expenses are recorded when they arise, regardless of when they are collected or paid. In the cash flow statement, on the other hand, the strict cash inflow (income) or outflow (expense) principle applies.
In addition, the cash accounts do not include items such as depreciation or stock. Only cash inflows and disbursements are shown.
This gives us an idea of the liquidity needs of the company, i.e. the money needed to carry out the activity.
It is very relevant in the case of projects with a high seasonal load (for example, cosmetics for hair loss have a marked seasonality in autumn and spring, being the winter and summer months much weaker in sales).
It is the inventory where it is collected in an orderly manner, and at a specific moment in time, all the assets and necessary elements that make up our company for the development of the activity.
It is often said that it is a "photograph" of the company at a given time or date. On the one hand, we have the assets, which are made up of all the company's assets and rights, and on the other hand, the liability items, which include the sources of financing of the assets.
Remember: Assets always equal liabilities plus equity.
This exercise will show us the liquidity situation of our venture or the payment capacity, indebtedness, financial independence, capitalization needs, etc.
The analysis can be done with a single balance sheet (called static equity analysis) or, in the case of the economic-financial plan, it is more interesting to see the evolution of the company through several balance sheets (called dynamic equity analysis) with the theoretical data used for the previous analyses.
With these analyses we will know our venture well and we will be able to make better decisions. This knowledge will allow us to reduce the risk or at least take it consciously and face the future in a courageous way.
And as we never tire of saying: Remember! The plan should be as realistic and feasible as possible so that there are no big surprises in the future.
Find out more about Yan Ye, back office at MuttuLab, author of this article.
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