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c) The role played by strategy analysis in the construction of your business plan

Before investing the first penny into your business, you will have to elaborate a business plan. A business plan (or economic model) gives the forecasted results of your future company for several years following its startup. Practically, it strives to predict its future financial statements, namely:

-          its balance sheet: the position of the company’s wealth at the end of a fiscal exercise (i.e. usually at the end of a given year)

-          its income statement (also named P&L account, or “Profits & Losses account”): the details of the company’s earnings over the considered fiscal exercise (i.e. usually over the year)

-          its cash flow statement: literally a record of all the cash flows entering and exiting the company’s accounts during the considered fiscal exercise.

Strategy analysis will be very helpful when specifying the hypotheses retained for the elaboration of your business plan: for instance, in order to predict what is going to be the evolution of your sales, you will need to know what kind of production model you will adopt, the number of workers that you will hire, your anticipated market share, etc … it is only after your business plan is complete and confirms the profitability of your project that you will be able to undertake the investment.

The construction of the financial statements will be evoked in the following pages, even though we will try to provide the reader with the general principles underlying their construction, as opposed with formal rules in respect with fixed accounting standards. The reason is that we want to develop an intuition of the business in the reader’s mind, and offer a method which can be replicated within any accounting framework.

Upon discussing the notion of financial statements, we will then deal with financial analysis and will later come back to the notion of business plan (the reason why the notion of business plan will be taught in the end is that you need to be able to read, construct and analyze financial statements in order to build a business plan and decide whether it is good or not, i.e. whether you should invest your money or just run away).

As promised, let’s now turn to the study of financial statements.