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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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How to Prepare a Financial Plan for Startup Business (w/ example)

Free Financial Statements Template

Ajay Jagtap

• December 7, 2023

13 Min Read

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

• Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
• Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
• Preparing a financial plan is easier and faster when you use a financial planning tool.
• Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

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Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

• Cost of goods or cost of sale
• Gross margin
• Operating expenses
• Revenue streams
• EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

• Indicates the capital need of the business
• It helps to identify the allocation of resources
• It calculates the requirement of seed money you put up, and
• How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

• Fixed costs: fixed expenses that stay the same no matter what.
• Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

Start Forecasting

4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

• Market analysis
• Sales forecast
• Pricing strategy
• Growth assumptions
• Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

• Fixed costs
• Variable costs
• Employee costs or payroll expenses
• Operational expenses
• Marketing and advertising expenses
• Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

• The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
• The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
• The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
• Sales are cash basis – nonaccrual accounting
• Moderate ramp- up in staff over the 5 years forecast
• Barista salary in the forecast is $36,000 in 2023.
• In general, most cafes have an 85% gross profit margin
• In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Cash-Flow Statement

Projected Profit & Loss Statement

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.

So what are you waiting for? Try Upmetrics and create your financial plan in a snap.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

• Net profit margin
• Current ratio
• Quick ratio
• Working capital
• Return on equity
• Debt-to-equity ratio
• Return on assets
• Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:

• base-case (expected) scenario
• Worst-case scenario
• best case scenario.

About the Author

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

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More From Forbes

Basics of a business plan financials section.

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A good business plan is an entrepreneur’s best friend. It’s an indispensable document, and every section matters, from the executive summary to the market analysis to the appendix; however, no section matters as much as the financials section. You’re in business to make money, after all, and your business plan has to clearly, numerically reflect a lucrative business pursuit, preferably with visuals, especially if you want funding.

The financials section of your business plan tells you and your potential investors, loan providers or partners whether your business idea makes economic sense. Without an impressive financials section, you’re looking at an uphill battle when it comes to scoring capital; underwhelming financials may indicate a need to make some revisions to your approach.

Basic Financials

So, how to build an impressive financials section? As with all things in small business, there’s no one-size-fits-all approach; it varies by business and field. But there are some general guidelines that can give you a clear idea of where to start and what kind of data you’ll need to gather.

You need to include at least three documents in the financials section of your business plan:

1. Income statement: Are you profitable?

2. Cash flow statement: How much cash do you have on hand?

3. Balance sheet: What’s your net worth?

There’s other financial information you can — and often should — add to your business plan, like sales forecasts and personnel plans. But the income statement, cash flow projections and balance sheet are the ones you can’t leave out.

Here's a brief run-down of the three major data sets.

Income Statement

Also called a profit/loss statement, here’s where your reader can see if your business is profitable. If you’re not operating the business yet, this will be a projected income statement, based on a well-informed analysis of your business’s first year.

The income statement is broken down by month and shows revenue (sales), expenses (costs of operating) and the resulting profit or loss for one fiscal year. (Revenue - expenses = profit/loss.)

Cash Flow Statements

Here’s where your reader can see how much money you’re going to need in the first year of operations. If you’re not yet up and running, you’ll only have projections.

For cash flow projections, you’ll predict the cash money that will flow into and out of your business in a particular month. You’ll need a year’s worth of monthly projections. If you’re already operating, also include cash flow statements for past months showing actual numbers.

Cash flow statements have three basic components: cash revenues, cash disbursements and reconciliation of revenues to disbursements. For each month, you start with your previous month’s balance, add revenues and subtract disbursements. The final balance becomes the opening balance for the following month.

Balance Sheet

Here’s where your reader sees your business’s net worth. It breaks down into monthly balance sheets and a final net worth at the end of the fiscal year. There are three parts to a balance sheet:

• Accounts receivable

• Inventory, equipment

• Real estate

2. Liabilities

• Accounts payable

• Loan debts

3. Equity: Total assets minus total liabilities (Assets = liabilities + equity.)

It’s good to offer readers an analysis of the three basic financial statements — how they fit together and what they mean for the future of your business. It doesn’t have to be in depth; focus is good. Just interpret the data from each statement, putting it in context and indicating what the reader should take away from the financials section of your business plan.

Other Financial Documents

These are the basics of your financials, but you’ll need to fill out the section with other data based on the specifics of your business and your capital needs. Other financial information you might provide includes:

• Sales forecast: Estimates of future sales volumes

• Personnel plan: Who you plan to recruit/hire and how much it will cost

• Breakeven analysis: Projected point at which your sales will match your expenses

• Financial history: Summary of your business finances from the start of operations to the present time

Make It Easy

A lot of this can be made easier with business planning software, which can not only guide you through the process and make sure you don’t leave anything else but may also generate graphs, charts and other visuals to accompany the data in your financials section. Those types of visuals are highly recommended because some readers will skim. Anything you can do to convey information in a glance imparts a benefit.

Revisit Monthly

Once in operation, don’t forget to go back into your financials every month to update your projections with actual numbers and then adjust any future projections accordingly. Regular updates will tell you if you’re on track with your predictions and hitting your goals, as well as whether you need to make adjustments. Don’t forget this part — when you’re starting out, planning really is your best friend.

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How to Craft the Financial Section of Business Plan (Hint: It’s All About the Numbers)

Writing a small business plan takes time and effort … especially when you have to dive into the numbers for the financial section. But, working on the financial section of business plan could lead to a big payoff for your business.

Read on to learn what is the financial section of a business plan, why it matters, and how to write one for your company.  

What is the financial section of business plan?

Generally, the financial section is one of the last sections in a business plan. It describes a business’s historical financial state (if applicable) and future financial projections. Businesses include supporting documents such as budgets and financial statements, as well as funding requests in this section of the plan.  

The financial part of the business plan introduces numbers. It comes after the executive summary, company description , market analysis, organization structure, product information, and marketing and sales strategies.

Businesses that are trying to get financing from lenders or investors use the financial section to make their case. This section also acts as a financial roadmap so you can budget for your business’s future income and expenses. 

Why it matters 

The financial section of the business plan is critical for moving beyond wordy aspirations and into hard data and the wonderful world of numbers. 

Through the financial section, you can:

• Forecast your business’s future finances
• Budget for expenses (e.g., startup costs)
• Get financing from lenders or investors
• Grow your business

• Growth : 64% of businesses with a business plan were able to grow their business, compared to 43% of businesses without a business plan.
• Financing : 36% of businesses with a business plan secured a loan, compared to 18% of businesses without a plan.

So, if you want to possibly double your chances of securing a business loan, consider putting in a little time and effort into your business plan’s financial section. 

Writing your financial section

To write the financial section, you first need to gather some information. Keep in mind that the information you gather depends on whether you have historical financial information or if you’re a brand-new startup. 

Your financial section should detail:

• Business expenses 

Financial projections

Financial statements, break-even point, funding requests, exit strategy, business expenses.

Whether you’ve been in business for one day or 10 years, you have expenses. These expenses might simply be startup costs for new businesses or fixed and variable costs for veteran businesses. 

Take a look at some common business expenses you may need to include in the financial section of business plan:

• Licenses and permits
• Cost of goods sold 
• Rent or mortgage payments
• Payroll costs (e.g., salaries and taxes)
• Utilities 
• Equipment 
• Supplies 
• Advertising 

Write down each type of expense and amount you currently have as well as expenses you predict you’ll have. Use a consistent time period (e.g., monthly costs). 

Indicate which expenses are fixed (unchanging month-to-month) and which are variable (subject to changes). 

How much do you anticipate earning from sales each month? 

If you operate an existing business, you can look at previous monthly revenue to make an educated estimate. Take factors into consideration, like seasonality and economic ups and downs, when basing projections on previous cash flow.

Coming up with your financial projections may be a bit trickier if you are a startup. After all, you have nothing to go off of. Come up with a reasonable monthly goal based on things like your industry, competitors, and the market. Hint : Look at your market analysis section of the business plan for guidance. 

A financial statement details your business’s finances. The three main types of financial statements are income statements, cash flow statements, and balance sheets.

Income statements summarize your business’s income and expenses during a period of time (e.g., a month). This document shows whether your business had a net profit or loss during that time period. 

Cash flow statements break down your business’s incoming and outgoing money. This document details whether your company has enough cash on hand to cover expenses.

The balance sheet summarizes your business’s assets, liabilities, and equity. Balance sheets help with debt management and business growth decisions. 

If you run a startup, you can create “pro forma financial statements,” which are statements based on projections.

If you’ve been in business for a bit, you should have financial statements in your records. You can include these in your business plan. And, include forecasted financial statements. 

You’re just in luck. Check out our FREE guide, Use Financial Statements to Assess the Health of Your Business , to learn more about the different types of financial statements for your business.

Potential investors want to know when your business will reach its break-even point. The break-even point is when your business’s sales equal its expenses. 

Estimate when your company will reach its break-even point and detail it in the financial section of business plan.

If you’re looking for financing, detail your funding request here. Include how much you are looking for, list ideal terms (e.g., 10-year loan or 15% equity), and how long your request will cover. 

Remember to discuss why you are requesting money and what you plan on using the money for (e.g., equipment). 

Back up your funding request by emphasizing your financial projections. 

Last but not least, your financial section should also discuss your business’s exit strategy. An exit strategy is a plan that outlines what you’ll do if you need to sell or close your business, retire, etc. 

Investors and lenders want to know how their investment or loan is protected if your business doesn’t make it. The exit strategy does just that. It explains how your business will make ends meet even if it doesn’t make it. 

When you’re working on the financial section of business plan, take advantage of your accounting records to make things easier on yourself. For organized books, try Patriot’s online accounting software . Get your free trial now!

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4 Key Financial Statements For Your Startup Business Plan

• September 12, 2022
• Fundraising

If you’re preparing a business plan for your startup, chances are that investors (or a bank) have also asked you to produce financial projections for your business. That’s absolutely normal: any startup business plan should at least include forecasts of the 3 financial statements.

The financial projections need to be presented clearly with charts and tables so potential investors understand where you are going, and how much money you need to get there .

In this article we explain you what are the 4 financial statements you should include in the business plan for your startup. Let’s dive in!

Financial Statement #1: Profit & 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 startup 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.

Expert-built financial model templates for tech startups

Financial Statement #2: Cash Flow

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 . If you sell $100 worth of products in July 2021 and incurred $50 cost to source them from your supplier, your P&L shows $100 revenues minus $50 expenses for that month. But what about if you bought a $15,000 car to deliver these products to your customers? The $15,000 should not be recorded as an expense in your P&L, but a cash outflow instead. Indeed, the car will help you generate revenues, say over the next 5 years, not just in July 2021
• 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.

Financial Statement #3: Balance Sheet

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, equipments, 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.

Financial Statement #4: Use of Funds

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 . If you are raising for your first year of business, and your projected cash flow statement result in a $500k loss (including all revenues and expenses), you will need to raise $500k.

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!

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How to Write the Financial Section of a Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Taking Stock of Expenses

The income statement, the cash flow projection, the balance sheet.

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.

Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:

• Business registration fees
• Business licensing and permits
• Starting inventory
• Rent deposits
• Down payments on a property
• Down payments on equipment
• Utility setup fees

Your own list will expand as soon as you start to itemize them.

Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:

• Salaries (including your own)
• Rent or mortgage payments
• Telecommunication expenses
• Raw materials
• Distribution
• Loan payments
• Office supplies
• Maintenance

Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.

While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.

Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.

The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how  much capital investment  your business idea needs.

For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a  short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.

Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.

There are three parts to the cash flow projection:

• Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
• Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
• Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:

• Assets :  Tangible objects of financial value that are owned by the company.
• Liabilities: Debt owed to a creditor of the company.
• Equity: The net difference when the  total liabilities  are subtracted from the total assets.

The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .

For your  business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.

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How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

• Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
• Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
• Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

• Identify the purpose and timeframe for your projections
• Collect relevant historical financial data and market analysis
• Forecast expenses
• Forecast sales
• Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

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Simple Business Plan Template for Startups, Small Businesses & Entrepreneurs

Financial plan, what is a financial plan.

A business’ financial plan is the part of your business plan that details how your company will achieve its financial goals. It includes information on your company’s projected income, expenses, and cash flow in the form of a 5-Year Income Statement, Balance Sheet and Cash Flow Statement. The plan should also detail how much funding your company needs and the key uses of these funds.

The financial plan is an important part of the business plan, as it provides a framework for making financial decisions. It can be used to track progress and make adjustments as needed.

Why Your Financial Plan is Important

The financial section of your business plan details the financial implications of running your company. It is important for the following two reasons:

Making Informed Decisions

A financial plan provides a framework for making decisions about how to use your money. It can help you determine whether or not you can afford to make a major purchase, such as a new piece of equipment.

It can also help you decide how much money to reinvest in your business, and how much to save for paying taxes.

A financial plan is like a roadmap for your business. It can help you track your progress and make adjustments as needed. The plan can also help you identify potential problems before they arise.

For example, if your sales are below your projections, you may need to adjust your budget accordingly.

Your financial plan helps you understand how much outside funding is required, when your levels of cash might fall low, and what sales and other goals you need to hit to become financially viable.

Securing Funding

This section of your plan is absolutely critical if you are trying to secure funding. Your financial plan should include information on your revenue, expenses, and cash flow.

This information will help potential investors or lenders understand your business’s financial situation and decide whether or not to provide funding.

Include a detailed description of how you plan to use the funds you are requesting. For example, what are the key uses of the funds (e.g., purchasing equipment, paying staff, etc.) and what are the future timings of these financial outlays.

The financial information in your business plan should be realistic and accurate. Do not overstate your projected revenues or underestimate your expenses. This can lead to problems down the road.

Potential investors and lenders will be very interested in your future projections since it indicates whether you will be able to repay your loans and/or provide a nice return on investment (ROI) upon exit.

Financial Plan Template: 4 Components to Include in Your Financial Plan

The financial section of a business plan should have the following four sub-sections:

Revenue Model

Here you will detail how your company generates revenues. Oftentimes this is very straightforward, for instance, if you sell products. Other times, your answer might be more complex, such as if you’re selling subscriptions (particularly at different price/service levels) or if you are selling multiple products and services.

Financial Overview & Highlights

In developing your financial plan, you need to create full financial forecasts including the following financial statements.

5-Year Income Statement / Profit and Loss Statement

An income statement, also known as a profit and loss statement (P&L), shows how much revenue your business has generated over a specific period of time, and how much of that revenue has turned into profits. The statement includes your company’s revenues and expenses for a given time period, such as a month, quarter, or year. It can also show your company’s net income, which is the amount of money your company has made after all expenses have been paid.

5-Year Balance Sheet

A balance sheet shows a company’s financial position at a specific point in time. The balance sheet lists a company’s assets (what it owns), its liabilities (what it owes), and its equity (the difference between its assets and its liabilities).

The balance sheet is important because it shows a company’s financial health at a specific point in time. A strong balance sheet indicates that a company has the resources it needs to grow and expand. A weak balance sheet, on the other hand, may indicate that a company is struggling to pay its bills and may be at risk of bankruptcy.

5-Year Cash Flow Statement

A cash flow statement shows how much cash a company has on hand, as well as how much cash it is generating (or losing) over a specific period of time. The statement includes both operating and non-operating activities, such as revenue from sales, expenses, investing activities, and financing activities.

While your full financial projections will go in your Appendix, highlights of your financial projections will go in the Financial Plan section.

These highlights include your Total Revenue, Direct Expenses, Gross Profit, Other Expenses, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and Net Income projections. Also include key assumptions used in creating these future projections such as revenue and cost growth rates.

Funding Requirements/Use of Funds

In this section, you will detail how much outside funding you require, if any, and the core uses of these funds.

For example, detail how much of the funding you need for:

• Product Development
• Product Manufacturing
• Rent or Office/Building Build-Out

Exit Strategy

If you are seeking equity capital, you need to explain your “exit strategy” here or how investors will “cash out” from their investment.

To add credibility to your exit strategy, conduct market research. Specifically, find other companies in your market who have exited in the past few years. Mention how they exited and the amounts of the exit (e.g., XYZ Corp. bought ABC Corp. for $Y).  

Business Plan Financial Plan FAQs

What is a financial plan template, how can i download a financial plan template, how do you make realistic assumptions in your business plan.

When forecasting your company’s future, you need to make realistic assumptions. Conduct market research and speak with industry experts to get a better idea of the key trends affecting your business and realistic growth rates.

You should also use historical data to help inform your projections. For example, if you are launching a new product, use past sales data to estimate how many units you might sell in Year 1, Year 2, etc.

Learn more about how to make the appropriate financial assumptions for your business plan.

How Do You Make the Proper Financial Projections for Your Business Plan?

Your business plan’s financial projections should be based on your business model and your market research. The goal is to make as realistic and achievable projections as possible.

To create a good financial projection, you need to understand your revenue model and your target market. Once you have this information, you can develop assumptions around revenue growth, cost of goods sold, margins, expenses, and other key metrics.

Once you have your assumptions set, you can plug them into a financial model to generate your projections.

Learn more about how to make the proper financial projections for your business plan.

What Financials Should Be Included in a Business Plan?

There are a few key financials that should be included in a traditional business plan format. These include the Income Statement, Balance Sheet, and Cash Flow Statement.

Income Statements, also called Profit and Loss Statements, will show your company’s expected income and expense projections over a specific period of time (usually 1 year, 3 years, or 5 years). Balance Sheets will show your company’s assets, liabilities, and equity at a specific point in time. Cash Flow Statements will show how much cash your company has generated and used over a specific period of time.

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How to Complete the Financial Section of Business Plan

A plan intends to explain the business, introduce critical contributors, products and, services and defines the goals for the future. It paints a picture of the founder’s expectations and helps others see their vision. The financial section of the plan provides the proof behind the story. It is the section that investors and lenders are most interested in, and often the first section they read, despite it being near the end of the plan. It also acts as a roadmap and a guide for the direction the company will take into the future.

Financial Section Elements

While it may sound complicated, the financial section of a business plan only contains three documents and a brief explanation of each. It is necessary to prepare an income statement, cash flow projection and a balance sheet either using spreadsheets, or software that does all of the calculations automatically. Before beginning this statement, it’s necessary to gather the following information:

Business Start-Up Expenses

This list of all of the costs associated with getting the business up and running comprises what primarily are one-time fees such as registering the company. Following is only a partial list of possible start-up costs, every business is unique, and the list may, or may not, contain these items and more.

• Business registration fees
• Licensing and permits
• Product inventory
• Deposit on rental property
• Down payment to purchase property
• Down payment on machines and equipment
• Set-up fees for utilities

Business Operating Costs

As the name implies, operating costs are the ongoing expenses that need to be paid to keep the business running. These expenses are usually monthly bills, and for a start-up, estimate six months worth of these costs. A company’s list of operating expenses might include:

• Monthly mortgage payment or rent
• Logistics and distribution
• Marketing and promotion
• Loan paymentsRaw materials
• Office supplies
• Building/vehicle maintenance

The Income Statement

This financial statement details the company’s revenues, expenses, and profit for a set period. Established businesses generated these annually, or semi-annually, based on actual performance. Start-ups with no previous years to look at have to use statistical data within the industry to make reasonable projections. A start-up will also produce monthly versions of this statement to show the forecast of growth. This section will include the data such as:

• Gross revenue (sales, interest income and sales of assets)
• General and administrative expenses (start-up and operating costs)
• Corporate tax rate (expected tax liabilities)

The math is simple here: subtract the expenditures from the revenue, and the remaining number is profit. When put into the proper format, an income statement gives a clear view of the financial viability of a company.

Cash-Flow Projection

This statement shows how you expect cash to flow in to, and out of, your business. It’s an essential internal cash management tool and a source of data that shows what your business’s capital needs will be in the near future. For investors and bank loan officers, it helps determine your creditworthiness and amount you can borrow. The cash-flow projection contains three parts:

• Cash revenues — This part details the incoming cash from sales for specific periods of time, usually monthly. It is an estimate, based upon past performance and future projections for current businesses, and industry averages for start-ups.
• Cash disbursements — Every monthly bill or other expense that is paid out in cash gets listed in this section. As with revenue, these are estimates, either based upon historical data, current data, or industry data.
• Cash flow projection — This merely is a reconciliation of the cash revenues to cash disbursements. Adding the current month’s revenues to the carried-over balance, then subtracting the month’s disbursements creates estimated cash flow.

The Balance Sheet

The final financial statement required for the business plan’s financial section is a balance sheet. This statement is a snapshot of the company’s net worth at a given point in time. Established businesses produce a balance sheet annually. Information from the income statement and cash flow projection are used to complete this statement. It summarizes the business’s financial data into three main categories:

• Assets — This is the total of all of the tangible items that the company owns that hold monetary value. That includes equipment, property, and cash-on-hand, for example.
• Liabilities — This is the total amount of debt that the company owes its creditors. You’ll include every debt, whether recurring, one-time, fixed, or variable.
• Equity — This is merely the difference between the company’s assets, including retained earnings and current earnings, and its liabilities.

Side-Notes and Details

In some cases, it may be necessary to explain details within the financial statements. Denote these instances within the statement and include a brief explanation sheet as an attachment. It may also be useful to add information on the process used to estimate revenues and expenses, which will show interested parties the intent and help them better understand the data.

Don’t Sweat the Process

It’s important to note that the order in which these financial statements is created may vary from the way they are presented here. This is to be expected. In fact, most business plan creators end up going back and forth with these statements as the numbers reveal the business’s financial reality. It paints a crystal clear picture of its economic viability, which can present to a lender, investor, or shareholder with confidence.

All of these financial documents can be created by using accounting and business software readily available online. Even so, some people aren’t entirely comfortable creating financial statements for their business plan, and outsource this critical task to a professional. Even the largest corporations struggle with financial planning and reporting, and they often hire the job out to someone more qualified. It’s merely a matter of making sure that the data is accurate, easy to track, and based on sound accounting practices.

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• Business Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

• They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
• Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
• Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. Cash Flow Statement & Projection

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. Balance Sheet Projection

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to Create Financial Projections

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

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How to make financial statements for small businesses.

Information is power. As long as you can make sense of that information. As a business owner, you’ll want to track your financial progress to make informed business decisions about your future. And that involves understanding cash flows, operating expenses, and net profit, all found in your financial statements.

Even if you delegate the bookkeeping to a professional, and don’t prepare financial statements yourself, you’ll need to know what your CPA is talking about when they walk you through your balance sheet.

In this article, you’ll learn about the 3 principal financial statements—income statements, balance sheets, and cash flow statements—and how to interpret them.

Here’s what we’ll cover: Income Statement (Profit and Loss Statement) Balance Sheet Difference Between an Income Statement and a Balance Sheet Cash Flow Statement Financial Statements Are Fundamental

Income Statement (Profit and Loss Statement)

An income statement shows a company’s financial performance by revealing whether it’s made a profit or a loss. 

Without an income statement, you’d be in the dark about the profitability of your business. An income statement is also known as a profit and loss statement, profit and loss account, or P&L.

The reporting period for an income statement is typically one fiscal year.

What Goes on an Income Statement?

Let’s now jump to the format of an income statement.

In most cases, it will look something like this:

Now, let’s dig into what an income statement covers.

Revenues (or Sales)

This is the top line on your income statement. It’s the total amount for the year of all the things or services you sold. But if you’ve given any discounts, you’ll reduce your sales by the discount amount.

For example, if you sold $100 in t-shirts but offered a 10% discount as a Black Friday incentive, you would record $90 as your net sales amount .

Cost of Goods Sold (or Cost of Sales)

These are the expenses directly related to the sales you’ve made. Suppose you’re selling electronics. The cost of goods sold is the cost of the electronics you sell within a financial year. And this is important. It’s not the cost of the electronics you bought in the year. 

In a service-related business, a consultancy, for example, the cost of sales is often termed direct costs. Hence, you’ll include costs directly related to your service.

Gross Profit

Gross profit is the profit that results directly and specifically from the trading activity of buying and selling. You calculate the gross profit by subtracting the cost of goods sold from revenues. 

Selling, General, and Administrative Expenses

All other expenses like salaries, rent, or travel merely facilitate the main trading activity of your business and are often categorized under selling, general, or administrative (SG&A) expenses.

You can have as many categories of SG&A expense as is necessary and helpful for running your business. Some of the common ones are:

• Office supplies
• Salaries and wages
• Marketing and advertising

Operating Income

Next is operating income. As the name implies, it’s the profit your business has earned from its operations when considering all the revenue and expenses necessary to run your business. 

Finance Costs

Finance costs represent the costs of financing arrangements, such as interest on bank loans. You’ll want to strip financing costs away from SG&A expenses because they don’t represent the costs necessary for producing the goods or services you sell. 

Net Income 

After factoring in finance costs, you’re left with net income (or net loss). This is the much-talked-about bottom line. Your net income is how much your company has earned throughout the year.

What About Income Taxes?

You may ask yourself, why didn’t we include taxes? A small business isn’t burdened with income tax unless it’s structured as a C-corporation (which few small businesses are due to their complexity and maintenance costs). Instead, the business profits pass through to the owner and get taxed on the individual Form 1040. 

Balance Sheet

Also known as the statement of financial position, the balance is an organization’s most important financial report because it shows the company’s financial health.

A balance sheet reports data for a specific point in time, often the last day of a fiscal year.

What Goes on a Balance Sheet?

Balance sheets contain 3 sections: assets, liabilities, and equity.

These are the resources your company owns that have a current or future economic value. These include cash, equipment (such as computers), and vehicles.

Assets can be broken down into:

• Current assets: This is anything you own that can be converted to cash within one year (e.g., accounts receivable and inventory). Also called short-term assets.
• Non-current assets: These are assets that can’t be quickly converted into cash, like computers, equipment, and vehicles, or intangible assets, like trademarks and copyrights. Also called fixed assets or long-term assets.

2. Business Liabilities

These are amounts your business owes other entities such as banks, employees, and suppliers.

• Current liabilities: Amounts you owe that are due within one year (e.g., accounts payable and payroll liabilities)
• Non-current (long-term) liabilities: Debts that will be repaid in more than one year

3. Owner Equity or Shareholder Equity

This is the value of the owner’s or shareholders’ investment in the business after liabilities are subtracted from assets. It may also be called owner’s or shareholders’ capital.

Purpose of a Balance Sheet

The balance sheet shows anyone what your business is worth. Lenders, investors, partners, and potential buyers will want to review your balance sheet.

The overall worth of your business can be measured or estimated by the total value of its assets, which are recorded and presented on the balance sheet.

But even more important, your balance sheet shows your business’s net worth , which is the owner’s equity (or shareholder’s equity). This is a business’s residual value after removing its liabilities . It’s what ultimately belongs to the business owner.

Format of a Balance Sheet

Balance sheets are prepared based on the accounting equation, which is:

Traditionally, before accounting software was developed and bookkeeping was done with pencil and paper, assets were put on the left side of the balance sheet, while equity and liabilities went to the right side. 

Today, however, a balance sheet will almost always look like this:

Now here’s something to remember.

The net income (your income statement bottom line) is annually transferred to your balance sheet, where it will appear as retained earnings. So retained earnings are a running total of your company’s profitability from day 1. 

Difference Between an Income Statement and a Balance Sheet

If you want to know how your business has performed over a span of time (a year, month, or quarter), you’ll want to refer to your income statement. 

On the flip side, if you want to know your business’s financial health, to know its value or worth at a particular point since it was established, the balance sheet is the report you’ll want to refer to.

Cash Flow Statement

A cash flow statement shows the movement of cash, the cash inflows and outflows within the business, based on 3 cash sources and cash expenditure categories: operations, investing, and financing.

This is an extremely important financial statement because, ultimately, cash is the best indicator of the financial health of an enterprise.

The reporting period for a cash flow statement is often one fiscal year but could be a quarter, month, or any reporting period that makes sense for your business.

Why Do You Need a Cash Flow Statement?

You already have an income statement that shows you the profits you’ve made. Why do you still need a cash flow statement?

An income statement is prepared based on the accrual method of accounting . This means your sales are recorded when you earn them, not when your business receives the actual cash. 

This creates a timing difference. A sales amount of $10,000 on your income statement, for example, doesn’t always mean this amount is in your bank account. It may be an invoice you sent to your customer, and you’re still awaiting payment.

The same goes for expenses. In accrual-basis accounting, expenses are recorded when your business incurs them and not when you pay out the cash.

But what about the cash figure on the balance sheet? While the balance sheet captures the cash balance, which can be meaningful, this balance sheet figure doesn’t tell us the source of the cash. 

The cash could be from a windfall, like an insurance claim, which is a one-time event and unsustainable. Or it could be from normal day-to-day business operations, which are more sustainable.

Sections of a Cash Flow Statement

A cash flow statement has 3 sections:

• Cash from operations (or from operating activities)
• Cash from investing activities
• Cash from financing activities

And this is what a typical cash flow statement looks like:

Cash From Operating Activities

Cash from operations is the first section of a cash flow statement, revealing its relative importance in the cash flow statement hierarchy. Cash from operating activities is the most meaningful because this is cash from your day-to-day trading activities.

These include cash received from sales, set off against cash expenses like the cost of goods sold, utility expenses, and rent.

It also takes into account non-cash items, like depreciation , that are included in net income but don’t involve any actual cash movement. And it considers any changes in your assets and liabilities during the time period, like an increase in accounts receivable .

Since operating activities are the mainstay of a business, a company with positive cash flow from operating activities will be more sustainable.

Cash From Investing Activities

The main source and use of cash from investing activities are purchasing and selling fixed assets. Common examples of fixed asset items are things like buildings, vehicles, computer equipment, or machinery.

But other investment items can appear in the investing activity section, such as buying stocks and bonds for investment purposes.

Cash From Financing Activities

All cash inflows and outflows from financing activities will be captured in this last section of cash flow statements. 

If you’ve taken out a bank loan to purchase equipment, the cash the bank provided you will show up in this section. And when you begin making loan payments, these will be included here. To learn more about this follow our guide on Loan Repayment Entry , which provide you with the right steps.

Financial Statements Are Fundamental

In Sam Walton’s autobiography Made In America , here’s what Al Johnson, the CEO of Walmart at one time, revealed about Walmart’s owner and founder:

“Every Friday morning for six years, I would take my columnar pad with all the numbers on it into Sam’s office for him to review. Sam would jot them down on his own pad and work through the calculations himself. I always knew I could not just go in there and lay a sheet of numbers in front of him and expect him to just accept it.”

As a small business owner, you should be able to make sense of your financial statements. It will ensure you ask the right questions and follow important clues and cues. 

You can make financial statements manually in a spreadsheet, but accounting software automates everything, so it’s faster and easier and leaves less room for error. With all your financial information in one place, you can immediately access your financial data whenever you or your accountant needs it.

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Run » finance, how to create a financial forecast for a startup business plan.

Financial forecasting allows you to measure the progress of your new business by benchmarking performance against anticipated sales and costs.

When starting a new business, a financial forecast is an important tool for recruiting investors as well as for budgeting for your first months of operating. A financial forecast is used to predict the cash flow necessary to operate the company day-to-day and cover financial liabilities.

Many lenders and investors ask for a financial forecast as part of a business plan; however, with no sales under your belt, it can be tricky to estimate how much money you will need to cover your expenses. Here’s how to begin creating a financial forecast for a new business.

[Read more: Startup 2021: Business Plan Financials ]

Start with a sales forecast

A sales forecast attempts to predict what your monthly sales will be for up to 18 months after launching your business. Creating a sales forecast without any past results is a little difficult. In this case, many entrepreneurs make their predictions using industry trends, market analysis demonstrating the population of potential customers and consumer trends. A sales forecast shows investors and lenders that you have a solid understanding of your target market and a clear vision of who will buy your product or service.

A sales forecast typically breaks down monthly sales by unit and price point. Beyond year two of being in business, the sales forecast can be shown quarterly, instead of monthly. Most financial lenders and investors like to see a three-year sales forecast as part of your startup business plan.

Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign.

Tim Berry, president and founder of Palo Alto Software

Create an expenses budget

An expenses budget forecasts how much you anticipate spending during the first years of operating. This includes both your overhead costs and operating expenses — any financial spending that you anticipate during the course of running your business.

Most experts recommend breaking down your expenses forecast by fixed and variable costs. Fixed costs are things such as rent and payroll, while variable costs change depending on demand and sales — advertising and promotional expenses, for instance. Breaking down costs into these two categories can help you better budget and improve your profitability.

"Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Tim Berry, president and founder of Palo Alto Software, told Inc . "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such."

Project your break-even point

Together, your expenses budget and sales forecast paints a picture of your profitability. Your break-even projection is the date at which you believe your business will become profitable — when more money is earned than spent. Very few businesses are profitable overnight or even in their first year. Most businesses take two to three years to be profitable, but others take far longer: Tesla , for instance, took 18 years to see its first full-year profit.

Lenders and investors will be interested in your break-even point as a projection of when they can begin to recoup their investment. Likewise, your CFO or operations manager can make better decisions after measuring the company’s results against its forecasts.

[Read more: ​​ Startup 2021: Writing a Business Plan? Here’s How to Do It, Step by Step ]

Develop a cash flow projection

A cash flow statement (or projection, for a new business) shows the flow of dollars moving in and out of the business. This is based on the sales forecast, your balance sheet and other assumptions you’ve used to create your expenses projection.

“If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months,” wrote Inc . The cash flow statement will include projected cash flows from operating, investing and financing your business activities.

Keep in mind that most business plans involve developing specific financial documents: income statements, pro formas and a balance sheet, for instance. These documents may be required by investors or lenders; financial projections can help inform the development of those statements and guide your business as it grows.

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What Are Financial Statements?

• Their Purpose
• Balance Sheet

Income Statement

• Cash Flow Statement

Statement of Changes in Shareholder Equity

Statement of comprehensive income, nonprofit financial statements.

• Limitations

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Financial Statements: List of Types and How to Read Them

• Valuing a Company: Business Valuation Defined With 6 Methods
• Valuation Analysis
• Financial Statements CURRENT ARTICLE
• 6 Basic Financial Ratios
• 5 Must-Have Metrics for Value Investors
• Earnings Per Share (EPS)
• Price-to-Earnings Ratio (P/E Ratio)
• Price-To-Book Ratio (P/B Ratio)
• Price/Earnings-to-Growth (PEG Ratio)
• Fundamental Analysis
• Absolute Value
• Relative Valuation
• Intrinsic Value of a Stock
• Intrinsic Value vs. Current Market Value
• Equity Valuation: The Comparables Approach
• 4 Basic Elements of Stock Value
• How to Become Your Own Stock Analyst
• Due Diligence in 10 Easy Steps
• Determining the Value of a Preferred Stock
• Qualitative Analysis
• Stock Valuation Methods
• Bottom-Up Investing
• Ratio Analysis
• What Book Value Means to Investors
• Liquidation Value
• Market Capitalization
• Discounted Cash Flow (DCF)
• Enterprise Value (EV)
• How to Use Enterprise Value to Compare Companies
• How to Analyze Corporate Profit Margins
• Return on Equity (ROE)
• Decoding DuPont Analysis
• How to Value Private Companies
• Valuing Startup Ventures

Financial statements are written records that convey the financial activities of a company. Financial statements are often audited by government agencies and accountants to ensure accuracy and for tax, financing, or investing purposes. For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set of financial statements.

Key Takeaways

• Financial statements provide interested parties with a company's overall financial condition and profitability.
• Statements required by Generally Accepted Accounting Principles are the balance sheet, the income statement, and the statement of cash flows, but you'll likely see more in reports.
• The balance sheet provides an overview of assets, liabilities, and shareholders' equity as a snapshot in time.
• The income statement primarily focuses on a company's revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company's profit figure called net income.
• The cash flow statement (CFS) tracks how a company uses its cash to pay its debt obligations and fund its operating expenses and investments.

Investopedia / Julie Bang

Understanding Financial Statements

Investors and financial analysts rely on financial data to analyze a company's performance and make predictions about the future direction of its stock price. One of the most important resources of reliable and audited financial data is the annual report , which contains the firm's financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.

Not all financial statements are created equally. The rules used by U.S. companies are called Generally Accepted Accounting Principles, while the rules often used by international companies are International Financial Reporting Standards (IFRS). In addition, U.S. government agencies use a different set of financial reporting rules.

The balance sheet provides an overview of a company's assets, liabilities, and shareholders' equity at a specific time and date. The date at the top of the balance sheet tells you when this snapshot was taken; this is generally the end of its annual reporting period. Below is a breakdown of the items in a balance sheet.

• Cash and cash equivalents  are liquid assets, which may include Treasury bills and certificates of deposit.
• Accounts receivable  are the amount of money owed to the company by its customers for the sale of its products and services.
• Inventory is the goods a company has on hand, intended to be sold as a course of business. Inventory may include finished goods, work in progress that is not yet finished, or raw materials on hand that have yet to be worked.
• Prepaid expenses are costs paid in advance of when they are due. These expenses are recorded as an asset because their value has not yet been recognized; should the benefit not be recognized, the company would theoretically be due a refund.
• Property, plant, and equipment are capital assets owned by a company for its long-term benefit. This includes buildings used for manufacturing or heavy machinery used for processing raw materials.
• Investments are assets held for speculative future growth. These aren't used in operations; they are simply held for capital appreciation.
• Trademarks, patents, goodwill, and other intangible assets can't physically be touched but have future economic (and often long-term benefits) for the company.

Liabilities

• Accounts payable are the bills due as part of a business's operations. This includes utility bills, rent invoices, and obligations to buy raw materials.
• Wages payable are payments due to staff for time worked.
• Notes payable are recorded debt instruments that record official debt agreements, including the payment schedule and amount.
• Dividends  payable are dividends that have been declared to be awarded to shareholders but have not yet been paid.
• Long-term debt can include a variety of obligations, including sinking bond funds, mortgages, or other loans that are due in their entirety in more than one year. Note that the short-term portion of this debt is recorded as a current liability.

Shareholders' Equity

• Shareholders' equity is a company's total assets minus its total liabilities.  Shareholders' equity (also known as stockholders' equity ) represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all debts paid off.
• Retained earnings  are part of shareholders' equity and are the amount of net earnings that were not paid to shareholders as dividends.

Example of a Balance Sheet 

Below is a portion of ExxonMobil Corporation's  (XOM)  balance sheet for fiscal year 2021, reported as of Dec. 31, 2021.

• Total assets were $338.9 billion.
• Total liabilities were $163.2 billion.
• Total equity was $175.7 billion.
• Total liabilities and equity were $338.9 billion, which equals the total assets for the period.

Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income, and earnings per share.

Operating revenue is the revenue earned by selling a company's products or services. The  operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company.

Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Some non-operating revenue examples include:

• Interest earned on cash in the bank
• Rental income from a property
• Income from strategic partnerships like royalty payment receipts
• Income from an advertisement display located on the company's property

Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.

Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D).

Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation.

Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.

The main purpose of the income statement is to convey details of profitability and the financial results of business activities; however, it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods.

Investors can also see how well a company's management is controlling expenses to determine whether a company's efforts in reducing the cost of sales might boost profits over time.

Example of an Income Statement

Below is a portion of ExxonMobil Corporation's income statement for fiscal year 2021, reported as of Dec. 31, 2021.

• Total revenue was $276.7 billion.
• Total costs were $254.4 billion.
• Net income or profit was $23 billion.

The cash flow statement (CFS) shows how cash flows throughout a company. The cash flow statement complements the balance sheet and  income statement .

The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing.

The cash flow statement contains three sections that report on the various activities for which a company uses its cash. Those three components of the CFS are listed below.

Operating Activities 

The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in cash accounts receivable, depreciation, inventory, and  accounts payable . These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.

Investing Activities

Investing activities include any sources and uses of cash from a company's investments in its long-term future. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition are included in this category.

Also, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section. In short, changes in equipment, assets, or investments relate to cash from investing.

Financing Activities

Cash from financing activities includes the cash from investors or banks and the cash paid to shareholders. Financing activities include debt issuance, equity issuance, stock repurchases, loans, dividends paid, and debt repayments.

The cash flow statement reconciles the income statement with the balance sheet in three major business activities.

Example of a Cash Flow Statement

Below is a portion of ExxonMobil Corporation's cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their results.

• Operating activities generated a positive cash flow of $48 billion.
• Investing activities generated cash outflows of -$10.2 billion for the period. Additions to property, plant, and equipment made up the majority of cash outflows, which means the company invested in new fixed assets.
• Financing activities generated cash outflows of -$35.4 billion for the period. Reductions in short-term debt and dividends paid out comprised most of the cash outflows.

The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet.

The formula for changes to shareholder equity will vary from company to company; in general, there are a couple of components:

• Beginning equity : This is the equity at the end of the last period that simply rolls to the start of the next period.
• (+) Net income : This is the amount of income the company earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end.
• (-) Dividends : This is the amount of money that is paid out to shareholders from profits. Instead of keeping all of a company's profits, the company may choose to give some profits away to investors.
• (+/-) Other comprehensive income : This is the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity.

In ExxonMobil's statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activities. This information is useful for analyzing how much money is being retained by the company for future growth as opposed to being distributed externally.

An often less utilized financial statement, the statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income (OCI). Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement. This financial statement shows a company's total change in income, even gains and losses that have yet to be recorded in accordance with accounting rules.

Examples of transactions that are reported on the statement of comprehensive income include:

• Net income (from the statement of income)
• Unrealized gains or losses from debt securities
• Unrealized gains or losses from derivative instruments
• Unrealized translation adjustments due to foreign currency
• Unrealized gains or losses from retirement programs

In the example below, ExxonMobil has over $2 billion of net unrecognized income. Instead of reporting just $23.5 billion of net income, ExxonMobil reports nearly $26 billion of total income when considering other comprehensive income.

Nonprofit organizations record financial transactions across a similar set of financial statements. However, due to the differences between a for-profit entity and a purely philanthropic entity, there are differences in the financial statements used. The standard set of financial statements used for a nonprofit entity includes:

• Statement of Financial Position: This is the equivalent of a for-profit entity's balance sheet. The largest difference is nonprofit entities do not have equity positions; any residual balances after all assets have been liquidated and liabilities have been satisfied are called "net assets."
• Statement of Activities: This is the equivalent of a for-profit entity's statement of income. This report tracks the changes in operation over time, including the reporting of donations, grants, event revenue, and expenses to make everything happen.
• Statement of Functional Expenses: This is specific to nonprofit entities. The statement of functional expenses reports expenses by entity function (often broken into administrative, program, or fundraising expenses). This information is distributed to the public to explain what proportion of company-wide expenditures are related directly to the mission.
• Statement of Cash Flow: This is the equivalent of a for-profit entity's statement of cash flow. Though the accounts listed may vary due to the different nature of a nonprofit organization, the statement is still divided into operating, investing, and financing activities.

The purpose of an external auditor is to assess whether an entity's financial statements have been prepared following prevailing accounting rules and whether any material misstatements are impacting the validity of results.

Limitations of Financial Statements

Although financial statements provide a wealth of information on a company, they do have limitations. The statements are often interpreted differently, so investors often draw divergent conclusions about a company's financial performance.

For example, some investors might want stock repurchases , while others might prefer to see that money invested in long-term assets. A company's debt level might be fine for one investor, while another might have concerns about the level of debt for the company.

When analyzing financial statements , it's important to compare multiple periods to determine any trends and compare the company's results to its peers in the same industry.

Lastly, financial statements are only as reliable as the information fed into the reports. Too often, it's been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown.

What Are the Main Types of Financial Statements?

The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues, and costs, as well as its cash flows from operating, investing, and financing activities.

What Are the Benefits of Financial Statements?

Financial statements show how a business operates. It provides insight into how much and how a business generates revenues, what the cost of doing business is, how efficiently it manages its cash, and what its assets and liabilities are. Financial statements provide all the details on how well or poorly a company manages itself.

How Do You Read Financial Statements?

Financial statements are read in several different ways. First, financial statements can be compared to prior periods to understand changes over time better. Financial statements are also read by comparing the results to competitors or other industry participants. By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry.

What Is GAAP?

Generally Accepted Accounting Principles (GAAP) are the rules by which publicly-owned United States companies must prepare their financial statements. It is the guideline that explains how to record transactions, when to recognize revenue, and when expenses must be recognized. International companies may use a similar but different set of rules called International Financial Reporting Standards (IFRS).

Financial statements are the ticket to the external evaluation of a company's financial performance. The balance sheet reports a company's financial health through its liquidity and solvency, while the income statement reports its profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, these financial statements attempt to provide a more clear picture of a business's financial standing.

U.S. Securities and Exchange Commission. " Exxon Mobile Corporation Form 10-K for the Fiscal Year Ended Dec. 31, 2021 ."

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What Is a Balance Sheet? Definition, Formulas, and Example

Trevor Betenson

10 min. read

Updated May 2, 2024

Business financial statements consist of three main components: the income statement , statement of cash flows , and balance sheet. The balance sheet is often the most misunderstood of these components—but also extremely beneficial if you understand how to use it.

Check out our free downloadable Balance Sheet Template for more, and keep reading to learn the different elements of a balance sheet, and why they matter.

• What is a balance sheet?

The balance sheet provides a snapshot of the overall financial condition of your company at a specific point in time. It lists all of the company’s assets, liabilities, and owner’s equity in one simple document.

A balance sheet always has to balance—hence the name. Assets are on one side of the equation, and liabilities plus owner’s equity are on the other side.

Assets = Liabilities + Equity

• What is the purpose of the balance sheet?

Put simply, a balance sheet shows what a company owns (assets), what it owes (liabilities), and how much owners and shareholders have invested (equity).

Including a balance sheet in your business plan is an essential part of your financial forecast , alongside the income statement and cash flow statement.

These statements give anyone looking over the numbers a solid idea of the overall state of the business financially. In the case of the balance sheet in particular, what it’s telling you is whether or not you’re in debt, and how much your assets are worth. This information is critical to managing your business and the creation of a business plan.

The balance sheet includes spending and income that isn’t in the income statement (also called a profit and loss statement). For example, the money you spend to repay a loan or buy new assets doesn’t show up in the income statement. And the money you take in as a new loan or a new investment doesn’t show up in the income statement either. The money you are waiting to receive from customers’ outstanding invoices shows up in the balance sheet, not the income statement.

Among other things, your balance sheet can be used to determine your company’s net worth. By subtracting liabilities from assets, you can determine your company’s net worth at any given point in time.

• Key components of the balance sheet

Typically, a balance sheet is divided into three main parts: Assets, liabilities, and owner’s equity.

Assets on a balance sheet or typically organized from top to bottom based on how easily the asset can be converted into cash. This is called “liquidity.” The most “liquid” assets are at the top of the list and the least liquid are at the bottom of the list.

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In the context of a balance sheet, cash means the money you currently have on hand. In business planning, the term “cash” represents the bank or checking account balance for the business, also sometimes referred to as “cash and cash equivalents” or “CCE.”

A cash equivalent is an asset that is liquid and can be converted to cash immediately, like a money market account or a treasury bill.

Accounts receivable

Accounts receivable is money people are supposed to pay you, but that you have not actually received yet (hence the “receivables”).

Usually, this money is sales on credit, often from business-to-business (or “B2B”) sales, where your business has invoiced a customer but has not received payment yet.

Inventory includes the value of all of the finished goods and ready materials that your business has on hand but hasn’t sold yet.

Current assets

Current assets are those that can be converted to cash within one year or less. Cash, accounts receivable, and inventory are all current assets, and these amounts accumulated are sometimes referenced on a balance sheet as “total current assets.”

Long-term assets

Long-term assets are also referred to as “fixed assets” and include things that will have a long-standing value, such as land or equipment. Long-term assets typically cannot be converted to cash quickly.

Accumulated depreciation

Accumulated depreciation reduces the value of assets over time. For example, if a business purchases a car, the car will lose value as time goes on.

Total long-term assets

Total long-term assets is used to describe long-term assets plus depreciation on a balance sheet.

Liabilities

Like assets, liabilities are ordered by how quickly a business needs to pay them off. Current liabilities are typically due within one year. Long-term liabilities are due at any point after one year.

Accounts payable

Accounts payable is the money that your business owes to other vendors, the other side of the coin to “accounts receivable.” Your accounts payable number is the regular bills that your business is expected to pay.

Pay attention to whether this number is exceedingly high, especially if your business doesn’t have enough to cover it.

Sales taxes payable

This only applies to businesses that don’t pay sales tax right away, for example, a business that pays its sales tax each quarter. That might not be your business, so if it doesn’t apply, skip it.

Short-term debt

This is debt that you have to pay back within a year—usually any short-term loan. This can also be referred to on a balance sheet as a line item called current liabilities or short-term loans. Your related interest expenses don’t go here or anywhere on the balance sheet; those should be included in the income statement.

Total current liabilities

The above numbers added together are considered the current liabilities of a business, meaning that the business is responsible for paying them within one year.

Long-term debt

These are the financial obligations that it takes more than a year to pay back. This is often a hefty number, and it doesn’t include interest. For example, this number reflects long-term loans on things like buildings or expensive pieces of equipment. It should be decreasing over time as the business makes payments and lowers the principal amount of the loan.

Total liabilities

Everything listed above that you have to pay out or back is added together.

This is the sum of all shareholder money invested in the business and accumulated business profits. Owner’s equity includes common stock, retained earnings, and paid-in-capital.

Paid-in capital

Money is paid into the company as investments. This is not to be confused with the par value or market value of stocks. This is actual money paid into the company as equity investments by owners.

Retained earnings

Earnings (or losses) that have been reinvested into the company, that have not been paid out as dividends to the owners. When retained earnings are negative, the company has accumulated losses. This can also be referred to as “shareholder’s equity.”

This doesn’t apply to all legal structures for a business; if you are a pass-through tax entity , then all profits or losses will be passed on to owners, and your balance sheet should reflect that.

Net earnings

This is an important number—the higher it is, the more profitable your company is. This line item can also be called income or net profit. Earnings are the proverbial “bottom line”: sales less costs of sales and expenses.

Total owner’s equity

Equity means business ownership, also called capital. Equity can be calculated as the difference between assets and liabilities. This can also be referred to as “shareholder’s equity” or “stockholder’s equity.”

Total liabilities and equity

This is the final equation I mentioned at the beginning of this post, assets = liabilities + equity.

• How to use the balance sheet

Your balance sheet can provide a wealth of useful information to help improve financial management. For example, you can determine your company’s net worth by subtracting your balance sheet liabilities from your assets, as noted above.

Overall, the balance sheet gives you insights into the health of your business. It’s a snapshot of what you have (assets) and what you owe (liabilities). Keeping tabs on these numbers will help you understand your financial position and if you have enough cash to make further investments in your business.

Perhaps the most useful aspect of your balance sheet is its ability to alert you to upcoming cash shortages. After a highly profitable month or quarter, for example, business owners sometimes get lulled into a sense of financial complacency if they don’t consider the impact of upcoming expenses on their cash flow .

There are two easy-to-figure ratios that can be computed from the balance sheet to help determine whether your company will have sufficient cash flow to meet current financial obligations:

Current ratio

This measures liquidity to show whether your company has enough current (i.e., liquid) assets on hand to pay bills on-time and run operations effectively. It is expressed as the number of times current assets exceeds current liabilities.

The higher the current ratio, the better. A current ratio of 2:1 is generally considered acceptable for inventory-carrying businesses, although industry standards can vary widely. The acceptable current ratio for a retail business, for example, is different from that of a manufacturer.

Current ratio formula

Current Assets / Current Liabilities

Quick ratio

This ratio is similar to the current ratio but excludes inventory. A quick ratio of 1.5:1 is generally desirable for non-inventory-carrying businesses, but—just as with current ratios—desirable quick ratios differ from industry to industry.

Quick ratio formula

Current Assets – Inventory / Current Liabilities

Knowing your industry’s standards is an important part of evaluating your business’s balance sheet effectively.

• The limits of the balance sheet

Remember, the balance sheet alone doesn’t give you a complete view of your business finances. You’ll want to keep tabs on your profit & loss statement (income statement) and cash flow as well.

Your profit & loss statement will show you the sales you are making and your business expenses and calculates your profitability. This is crucial for understanding the core economics of your business and if you’re building a profitable business, or not.

Your cash flow forecast shows how cash is moving in and out of your business and can help you predict your future cash balances. Fast growth can reduce cash quickly, especially for businesses that carry inventory, so this is a crucial statement to pay attention to as well.

The three statements all work together to provide you with a complete picture of your business. The balance sheet also helps illustrate how cash and profits are very different things .

• Example of a balance sheet

Large businesses will have longer and more complex balance sheets for their businesses, sometimes having separate balance sheets for different segments or departments of their business. A small business balance sheet will be more straightforward and have fewer line items.

Here is a balance sheet from Apple, for example. You’ll see that it includes a complex stockholder’s equity section and several specifically itemized types of long-term assets and liabilities.

Apple’s balance sheet .

You’ll also notice that it says “Period Ending” at the top; this indicates that these numbers are reflective of the time up until the date listed at the top of the column. This terminology is used when you are reporting actual values, not creating a financial forecast for the future.

• Get familiar with your balance sheet

Most companies should update their balance once a month, or whenever lenders ask for an updated balance sheet. Today’s accounting software programs will create your balance sheet for you, but it’s up to you to enter accurate information into the program to generate useful data to work from.

The balance sheet can be an extremely useful financial tool for businesses that understand how to use it properly. If you’re not as familiar with your balance sheet as you’d like to be, now might be a good time to learn more about the workings of your balance sheet and how it can help improve financial management.

Create your balance sheet easily by downloading our Balance Sheet Template , and check out our full guide to write your financial plan.

Trevor is the CFO of Palo Alto Software, where he is responsible for leading the company’s accounting and finance efforts.

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What is an income statement?

• Key components of an income statement 
• Why they matter
• How to read an income statement 

What is an Income Statement?

Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

• An income statement is a financial document that details the revenue and expenses of a company.
• Some investors and analysts use income statements to make investing decisions.  
• The income statement, along with additional financial documents, is required to be filed with the Securities and Exchange Commission (SEC).

An income statement is one of three major financial statements used to evaluate the health of a company, along with the balance sheet and cash flow statement . There are several terms you'll need to understand in order to know how to read an income statement. 

An income statement is a financial statement that outlines a company's gains, losses, revenue, and expenses during a specific period. 

Also called a Profit and Loss (P&L) Statement or a statement of revenue and expense, the income statement is one of three major documents, along with the cash flow statement and the balance sheet , that provide information on a company's financial results during a specified time frame. 

Key components of an income statement  

There are several key components of an income statement, and knowing them can go a long way toward helping you interpret one of these documents effectively. 

Revenue 

Revenue is the amount of money the company brought in during the reporting period. With revenue, it may be important to note any trends to determine whether the company is making more money over time or if sales are slowing down. 

Expenses 

This section, crucial to analyzing an income statement, details how much the company has spent. Similar to revenue, it may be important to note trends to see if the company is spending more or if they're becoming more efficient over time. When looking at expenses, "We should consider whether the expenses grow in proportion to revenue and the drivers of these expenses," says Patrick Badolato, PhD, CPA, an associate professor in the accounting department at the McCombs School of Business at the University of Texas. 

Expenses can include many different line items, for example interest paid on debt, depreciation and amortization, rent and overhead, as well as money paid toward salaries and benefits. 

For the sake of clarity, depreciation is an accounting measure to account for the cost in the loss of value for tangible assets of the company, whereas amortization is an accounting technique to lower the book value of debt over time. 

Expenses also include cost of goods sold (COGS), which is the amount spent on the production of the products or services sold. For a company like Apple, it would include the glass to make the phone screen or the chips that go into the iPhone. 

Other costs that would be counted under expenses would be operating and non-operating expenses. Operating expenses are the cost to bring the product to the market. This could include things like marketing, payroll, and overhead expenses, such as insurance and rent. Non-operating expenses could include things that do not directly relate to core business functions. It may include things like contributions to pension plans or dividends to shareholders. 

Another major consideration is taxes, which of course cuts into any financial results a company generates. 

Net income 

Net income represents the total income left over after all deductions and expenses, including taxes, have been taken out. This is the last line on the income statement, frequently referred to as the bottom line, and it tells you what a company's profit or loss was during a specific time period. 

Why income statements matter

The income statement is important for a wide range of parties, including investors and people responsible for running a company (its executives and managers). 

"The income statement should be used by anyone trying to understand the business conducted as well as the profitability of a company," says Badolato. 

Assesses profitability

One simple way an income statement can come in handy is by providing a sense of just how profitable a company really is. Is the company in question making money? 

Income statements can help answer this question, along with providing some excellent insight into why, exactly, a company is experiencing its current financial performance. 

Informs business decisions 

By reviewing a company's income statement, you can quickly pinpoint areas that have room for improvement. For example, a company could cut costs in one area and put more money into others, such as sales and marketing, that could potentially fuel expansion. 

Attract investors 

Investors may use income statements, along with other financial statements, to make investing decisions and determine the financial health of a company. 

For example, an increasing amount of sales from year to year might be attractive for a potential investor and can be found in the first line of an income statement. Conversely, if costs are rising this can also be seen on the income statement and may lead an investor to ask more questions about the long-term profitability of the company. 

Investors and financial analysts also use the income statement to derive popular financial ratios like Earnings Per Share (EPS) .

Earnings per share is a measure that compares a company's net income compared to the outstanding shares. The price-to-earnings ratio, or P/E ratio , is another commonly used metric that factors in the company's stock price in relation to EPS. When comparing companies, EPS and the P/E ratio can help differentiate two companies in the same category and help an investor make a more sound investing decision, but both use information provided through the income statement. 

"The equation driving the Income Statement is: Revenues – Expenses + Gains – Losses = Net Income," says Badolato. 

Income statements are also important to regulators. All public companies are required to file a Form 10-K each year with the Securities and Exchange Commission (SEC) and Form 10-Q each quarter which include the income statement and other financial documents and disclosures. 

Income statement analysis

When analyzing income statements, there are two primary methods that are used: vertical analysis and horizontal analysis.

Vertical analysis shows each item on a financial statement as a percentage. An example of this would be the COGS expressed as 35% of the total revenue. This type of analysis can be useful when comparing with other companies in the industry. 

Horizontal analysis is used to review a company's performance over two or more periods by stacking each line item directly next to each other from the previous period. Instead of looking at one income statement at a time from different periods, horizontal analysis compares them side-by-side in one view. 

How to read an income statement 

Below is the 2021 quarterly income statement from Ford's Form 10-Q . One of the first things that you will notice is that the report is using horizontal analysis. This is because the report is comparing the second quarter of 2020 to the second quarter of 2021 as well as the first half of 2020 and the first half of 2021. 

In the first section under Revenues, you'll see each of Ford's major revenue streams, including car sales under Automotive, Ford Credit, and Mobility. In the notes section of the 10-Q, the Mobility line refers to Ford's autonomous vehicles and related business as well as its equity stake in Argo AI.

Next in the cost and expenses section, you'll notice where Ford is spending its cash. The bulk of those expenses fall under cost of sales, which is another name for the cost of goods sold. You can also see that costs have increased from the second quarter of 2020 to the second quarter of 2021 resulting in a net income of $561 million during the second quarter and $3.8B during the first half of 2021 in the final column on the right. 

Income statement vs. balance sheet 

Both income statements and balance sheets provide important details about how a company uses its cash and other assets, but there are a few key differences between the two.

Think of an income statement like a financial timeline, whereas a balance sheet is a snapshot at one point in time. This is because income statements provide details on the amount of money made and spent during a period. The income statement essentially answers the following questions: How much money did the company make? How was that money spent? Did the company make a profit? 

The balance sheet, on the other hand, tells you how much the company has in assets, liabilities and shareholder's equity. The balance sheet follows a simple formula:

Asset = Liabilities + Shareholder's equity

Like the name mentions, the figures on the balance sheet must match as any increases or decreases must be offset. Unlike the income statement, it does not provide information on how much money the company has made or lost, it only provides the amount of debt, cash and other assets that the company owns at that point in time. 

While these financial statements are different, both the income statement and balance sheet along with the cash flow statement are still linked and should be used together to determine a more holistic financial picture of a company. 

Income statements: Conclusion

The income statement is a good entry point to understand and evaluate a company's revenue and costs, but it's important to keep in mind that it's not a document that can tell the full story. 

"Financial statements are designed to work as a system and not as stand-alone statements," adds Badolato. "The Income Statement is only one piece in understanding the financial performance of a business. Using one financial statement without the others and other publicly available information — such as the footnotes in a financial filing — would be similar to betting before looking at one's cards."

The frequency can vary, but usually, companies prepare income statements either quarterly or annually. 

An income statement shows a company's financial performance during a specific time frame, whereas a balance sheet shows a company's assets and liabilities at one point. 

Companies release income statements in their financial reports, and you can also find them on the investor relations sections of corporate websites. 

An income statement can display a negative net income, which indicates that a company suffered a loss during a specific period. 

You can use the information on an income statement to calculate key ratios like gross margin, operating margin and earnings per share. 

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2024 Investment Climate Statements: Finland

• EXECUTIVE SUMMARY

Finland is a Nordic country situated north of the Baltic states, bordering Russia, Sweden, and Norway. It has excellent transportation links within the Nordic-Baltic region and is a member of the Schengen Zone within which internal border controls have been, for the most part, eliminated. In 2023, the population was around 5.6 million, with over 85 percent residing in cities in the country’s south. Helsinki is the capital and largest city, with a population of around 675,000 in the city and 1.5 million in the metropolitan area.

Finland is a member of the European Union and a part of the Euro area. In 2023, Finland joined NATO and concluded negotiations on a bilateral Defense Cooperation Agreement (DCA) with the United States. NATO membership and the DCA should benefit the country economically by increasing regional security and stability; and investments in the defense industry will create jobs and stimulate economic growth and trade. According to Finnish Customs, the United States was Finland’s biggest trading partner for exports in 2023.

As a modern, stable economy, Finland offers a well-developed digital infrastructure with stability, functionality, and a high standard of living. The country has a highly skilled, educated, and multilingual labor force with solid expertise in Information Communications Technology (ICT) and emerging technologies, including microelectronics; quantum and supercomputing; shipbuilding; forestry; and renewable energy. Finland and the United Sates are intensifying cooperation in various fields, including cybersecurity, 6G networks, nuclear, climate, energy, health, biotechnology, space, quantum technology, artificial intelligence, and other emerging technologies through bilateral joint statements and agreements.

In 2021, emerging from the pandemic, Finland’s economy recovered swiftly from recession to moderate growth of 2.6 percent, but growth slowed after Russia’s February 2022 full-scale invasion of Ukraine. The center-right government of Prime Minister Petteri Orpo, formed in June 2023 following parliamentary elections in April 2023, aims to improve weak economic growth through changes to structural policies, including balancing public finances; spurring investment in education, research, and development; accelerating the green transition; and introducing labor market reforms. Labor unions engaged in a series of political strikes aimed at blocking the implementation of the labor market reforms during the spring of 2024.

At the same time, an aging population and a shrinking workforce are the most pressing demographic concerns for economic growth. According to the Foreign Direct Investment (FDI) Barometer 2023, over three-quarters of businesses report experiencing a talent shortage, with large foreign-owned companies being most negatively affected. In response, Finland aims to increase work- and education-based immigration through the Talent Boost program, revised for the years 2023-2027. The aim is to attract and improve the employment of international specialists immigrating to Finland.

Finland has set a target of becoming carbon neutral by 2035. To accelerate the green transition, the government is prioritizing investment projects in renewable energy production, industrial electrification, hydrogen economy, carbon capture and storage, and battery production to grant quicker permit processing times. The current pipeline of green investments amounts to approximately 230 billion euros ($247 billion), including projects by domestic and multinational companies. The high share of carbon-free electricity production in the domestic energy mix, which was 94 percent in 2023, facilitates the green transition.

The European Central Bank has tightened monetary policy in the euro area in response to high inflation, which has also slowed economic growth in Finland during the past two years. Industrial production and construction are sensitive to interest rate movements, which have reduced private consumption, investment, and the demand for housing in Finland. The Bank of Finland’s interim forecast indicates Gross Domestic Product (GDP) will decrease by 0.5 percent in 2024. Economists predict the economy will bounce back towards the end of the year, and GDP will grow by 1.7 percent in 2025. Inflation is projected to decline to below one percent during 2024, improving employees’ actual earnings and consumers’ purchasing power.

Russia’s war against Ukraine has impacted Finland’s economic activity and inflation through higher energy and commodity prices, the disruption of international commerce, and weaker confidence in the economy. Finnish Customs indicates the value of Finland’s exports of goods to Russia and Central Asia amounted to 1.2 billion euros ($1.3 billion) in 2023, a decrease of 50.5 percent compared to 2022. The overall economic effects of the war on the private sector have remained relatively small as companies have replaced Russian trade with other markets.

1. Openness To, and Restrictions Upon, Foreign Investment

• Policies Towards Foreign Direct Investment

The Finnis government is open to foreign investment. As an EU member state, Finland is committed to the free movement of goods, capital, persons, and certain services. Companies benefit from trade arrangements through EU and World Trade Organization (WTO) membership, and the protection offered by Finland’s bilateral investment treaties with sixty-three countries.

Private ownership and the participation of foreign companies or individuals are unrestricted, and the government promotes trade and foreign direct investment. Business Finland helps foreign investors set up businesses and provides free services ranging from data collection and matchmaking to location management. The organization offers funding for research and development work carried out by companies, research organizations, and public sector service providers in Finland: https://www.businessfinland.com/  

• Limits on Foreign Control and Right to Private Ownership and Establishment

The Act on Monitoring Foreign Corporate Acquisitions (172/2012) governs foreign investments in Finland. The Ministry of Economic Affairs and Employment monitors and confirms foreign corporate acquisitions and decides whether an acquisition conflicts with securing national defense and safeguarding public order and security. If the ministry finds a critical national interest jeopardized, it must refer the matter to the Council of State, which may refuse to approve the acquisition. For more information: https://tem.fi/en/acquisitions  

In the non-military sector, Finnish companies considered critical for securing vital functions are subject to screening, which applies to foreign owners residing or domiciled outside the EU or the European Free Trade Association (EFTA). The Ministry of Economic Affairs and Employment provides instructions for preparing the application/notification. The application and statement must also be accompanied by a form containing specific information required by EU regulation.

For defense acquisitions, monitoring applies to all foreign owners, who must apply for prior approval. “Defense” includes all entities that supply or have supplied goods or services to the Finnish Ministry of Defense, the Finnish Defense Forces, and the Finnish Border Guard, as well as entities dealing in dual-use goods.

Finland requires non-EU/European Economic Area (EEA) foreign individuals or entities to receive Defense Ministry permission before they purchase real estate. Companies registered in Finland with decision-making bodies of at least one-tenth non-EU/EEA origin must seek a permit. More information is available here: https://www.defmin.fi/en/licences_and_services/authorisation_to_non-eu_and_non-eea_buyers_to_buy_real_estate#a6591279  

In 2022, the European Commission published guidance for EU member states on assessing and preventing threats to EU security and public order from Russian and Belarusian investments. The direction highlights the increased risk from investments subject to Russian or Belarusian government influence in the context of Russia’s invasion of Ukraine and calls for close cooperation between authorities involved in investment screening and those responsible for enforcing sanctions.

• Other Investment Policy Reviews

Finland is considered one of the most open economies in the OECD area with a stable economy and society, strong institutions, and low corruption that attracts foreign investors. Knowledge and innovation capacity are among the most critical factors bringing foreign firms to the Finnish economy, and salaries for high-skilled workers are considered relatively competitive compared to other Nordic states.

In 2021, the OECD launched the Impact of Regulation on International Investment in Finland report to analyze FDI flows toward Finland and other Nordic-Baltic countries and discuss the benefits of foreign investment for the Finnish economy. The OECD noted that several challenges may prevent Finland from exploiting its full potential as a destination for FDI.

The OECD recommended reviewing and streamlining inefficient and burdensome policies, diminishing red tape, and fostering competition to encourage new international investment and enhance the economic performance of existing players. Complex administrative procedures to recruit foreign talent and stringent labor market conditions affect growth prospects. Further policy responses that help businesses deal with skill shortages are essential to ensure attractiveness as an investment location. More information is available here: https://www.oecd.or g/publications/the-impact-of-regulation-on-international-investment-in-finland-b1bf8bee-en.htm  

Over the past three years, Finland has not undergone an investment policy review by the WTO or the United Nations Committee on Trade and Development (UNCTAD).

• Business Facilitation

All businesses in Finland must be publicly registered at the Finnish Trade Register. The website is: https://www.prh.fi/en/kaupparekisteri.html .

The Business Information System (BIS) is an online service enabling investors to start a business or organization, report changes, close down a business, or conduct searches: https://www.prh.fi/en/kaupparekisteri/rekisterointipalvelut/ytj.html  

All businesses must also enter the VAT, Prepayment, and Employer Registers of Tax Administration. Instructions for registering a company can be found at this website: https://www.vero.fi/en/businesses-and-corporations/business-operations/tax-administrations-registers–business/  

Entrepreneurs can apply for a residence permit in Finland. Before a permit can be issued, entrepreneurs usually need to enter their business in the Trade Register maintained by the Finnish Patent and Registration Office. https://migri.fi/en/entrepreneur  

In 2022, Finland introduced a long-term “D” visa for students, researchers, persons in managerial positions in companies, and their family members to increase the immigration of skilled labor. With a “D” visa, applicants can enter Finland immediately after receiving a favorable decision on the residence permit application, and the “D” visa sticker has been attached to the passport. For more information: https://migri.fi/en/d-visa  

• Outward Investment

International trade and external economic relations are central to Finland’s foreign and security policy. The Ministry for Foreign Affairs prepares and implements Finland’s trade policy within the framework of the EU.

Team Finland is a network of public sector bodies dedicated to helping Finnish companies grow and be successful in their dealings abroad. It also promotes the country’s image and attracts foreign investments and experts to Finland. The network offers tailor-made service packages for companies’ internationalization needs based on the services provided by the network actors. Service packages typically combine services provided by the Center for Economic Development, Transport and the Environment, Business Finland, Finnvera, and the Ministry for Foreign Affairs. https://www.team-finland.fi/en/network-services-for-companies  

Business Finland is a public-sector operator and part of the Team Finland network. It helps Finnish Small- and Medium-Sized Enterprises (SMEs) go international, encourages foreign direct investment in Finland, and promotes tourism. The organization focuses on agricultural technology, clean technology, connectivity, e-commerce, education, information and communication technology, digitalization, mining, and mobility. While many of Business Finland’s programs are export-oriented, they also seek to offer business and network opportunities within Finland that are not necessarily focused on exports. The organization employs 760 specialists at 40 foreign locations and 16 offices in Finland. https://www.businessfinland.fi/en/for-finnish-customers/home  

The government generally allows domestic investors to invest abroad, with some exceptions. The defense ministry approves arms exports for military use, the National Police Board grants permission to export civilian weapons, and the foreign ministry oversees exports of dual-use products.

• 2. Bilateral Investment and Taxation Treaties

Finland has 55 Bilateral Investment Treaties in force but does not share a BIT or Free Trade Agreement (FTA) with the United States. As an EU member state, Finland is a signatory to any treaty or agreement signed by the EU, including free trade agreements. A complete list of Finland’s investment agreements can be found at: https://investmentpolicy.unctad.org/international-investment-agreements/countries/71/finland  

Finland and the United States signed a convention to avoid double taxation and prevent fiscal evasion concerning taxes on income and capital (TIAS 12101) that entered into force in 1990. In 2014, the two countries signed an intergovernmental agreement to implement the U.S. Foreign Account Tax Compliance Act (FATCA), which fights tax evasion and fraud. For more information: https://www.vero.fi/en/businesses-and-corporations/business-operations/financial-sector/fatca-crs-and-dac2/general-information/   https://home.treasury.gov/system/files/131/FATCA-Agreement-Finland-3-5-2014.pdf

Finland is a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting and a party to the two-pillar plan to address the tax challenges arising from the digitalization of the economy. For a list of Finland’s bilateral tax agreements, see: https://www.vero.fi/en/detailed-guidance/guidance/49062/tax_treatie/  

3. Legal Regime

• Transparency of the Regulatory System

In Finland, competition policy aims to create and maintain an environment where enterprises have a level playing field and an opportunity to succeed due to their expertise. The Competition Act (948/2011) is the base for the national competition policy, seeking to ensure sound and effective economic competition. The Finnish Competition and Consumer Authority is responsible for applying the legislation. For more information: https://www.kkv.fi/en/competition-affairs/competition-act/  

Finland is subject to accounting, auditing, and financial reporting requirements established through EU regulations and directives as transposed into national laws and regulations. Finland has fully aligned its legal framework with the EU acquis communitaire related to accounting and auditing. For more information: https://www.ifac.org/about-ifac/membership/profile/finland#:~:text=In%20Finland%2C%20the%20Accounting%20Act,European%20Commission%20(EC)%20Regulations  

Finnish law does not require institutional investors and financial intermediaries to consider Environmental, Social, and Governance (ESG) factors when making investment decisions. Most institutional investors and financial intermediaries have signed the UN Principles for Responsible Investment and also consider sustainable development goals in their investment decisions. However, the Finnish Corporate Governance Code considers certain ESG factors in its recommendations, such as the composition of the company’s board of directors concerning gender. The Corporate Governance Code applies to all companies listed on Nasdaq Helsinki. https://cgfinland.fi/en/corporate-governance-code/  

In September 2021, the Ministry of Economic Affairs and Employment released a Sustainable Development Goals (SDG) finance roadmap, called the “Finnish Roadmap for Financing a Decade of SDG Action 2021.” The roadmap aims to support Finnish stakeholders with a goal of increasing financing for solutions to reach the SDGs in Finland and globally. More information can be found here: https://tem.fi/en/developing-finlands-sustainable-finance-ecosystems  

The Act on the Openness of Public Documents establishes the openness of all records in the possession of officials of the state, municipalities, registered religious communities, and corporations that perform legally mandated public duties, such as pension funds and public utilities. Exceptions can only be made by law or by an executive order for reasons such as national security. https://oikeusministerio.fi/en/act-on-the-openness-of-government-activities  

The Ministry of Justice maintains an online Finlex Data Bank database of up-to-date legislative and judicial information. Most of the databases are only available in Finnish and Swedish, but some translations of Finnish acts and decrees are also available in English and other languages. Case law in the legal literature database is also available in English. https://finlex.fi/en/  

The Ministry of Justice provides an online service to request and give statements electronically in connection with draft regulations, legislation, and other government documents. Public administration authorities can publish draft bills and regulations for public consultation. The service is available in Finnish and Swedish: https://www.lausuntopalvelu.fi/FI  

The Parliamentary Ombudsman exercises oversight to ensure that those who perform public tasks comply with the law and fulfill their responsibilities. The Ombudsman investigates complaints, conducts on-site inspections, and makes statements on legislative proposals. The scope of the Ombudsman’s oversight includes courts, authorities, and public servants, as well as other persons and organizations that perform public tasks. The Ombudsman submits an annual report to Parliament, including observations on the state of the administration of justice and any shortcomings in legislation. https://www.oikeusasiamies.fi/en/eoa  

The status of Finland’s public finances is available at Statistics Finland, Finland’s official statistics agency: https://www.stat.fi/en/topic/national-economy  

The status of Finland’s national debt is available at the State Treasury: https://www.treasuryfinland.fi/statistics/statistics-on-central-government-debt/  

• International Regulatory Considerations

Finland follows EU internal market practices, which define Finland’s trade relations both inside the EU and with non-EU countries. As a member of the WTO, Finland reports under the Agreement on Technical Barriers to Trade (TBT Agreement) all proposed technical regulations that could affect trade with other member countries. In 2021, Finland submitted two notifications of technical regulations and conformity assessment procedures to the WTO. It has submitted 105 notifications since 1995. Finland is a signatory to the WTO Trade Facilitation Agreement (TFA), which entered into force on February 22, 2017.

• Legal System and Judicial Independence

Finland has a civil law system. European Community (EC) law is directly applicable in Finland and takes precedence over national legislation. The Market Court is a special court for rulings in commercial law, competition, and public procurement cases, and may issue injunctions and penalties against the illegal restriction of competition. It also governs mergers and acquisitions, may overturn public procurement decisions, and require compensatory payments. More information about the court is available here: https://oikeus.fi/tuomioistuimet/en/index.html  

Finland has been a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1962. The provisions of the convention have been included in the Arbitration Act (957/1992).

The Oikeus.fi website https://oikeus.fi/en/index.html   contains information about the Finnish judicial system and links to the websites of the independent courts, the public legal aid and guardianship districts, the National Prosecution Authority, the National Enforcement Authority Finland, and the Criminal Sanctions Agency.

• Laws and Regulations on Foreign Direct Investment

The Ministry of Economic Affairs and Employment monitors foreign corporate acquisitions and is a national contact point for the EU screening regulation. The purpose of the Act on the Monitoring of Foreign Corporate Acquisitions in Finland (127/2012) (hereafter the Act) is to monitor and, if vital national interests so require, to restrict the transfer of influence to foreigners and foreign organizations and foundations. More information about the Act is available here: ihttps://tem.fi/en/acquisitions.

Under the Act, corporate acquisition refers to activities in which a foreign owner gains control of at least one-tenth, at least one-third, or at least one-half of the aggregate number of votes conferred by all shares in the company or a holding that otherwise corresponds to decision-making authority in a limited liability company or other monitored entity. For more information: https://tem.fi/documents/1410877/0/Kysymyksi%C3%A4+ja+vastauksia_en.pdf/0ef51799-6c84-9251-6cfe-188bc91c6f83/Kysymyksi%C3%A4+ja+vastauksia_en.pdf?t=1636548655250  

There is no primary or “one-stop-shop” website that provides all relevant laws, rules, procedures, and reporting requirements for investors. A non-European Economic Area (EEA) resident (persons or companies) operating in Finland must obtain a license or a notification when starting a business in a regulated industry. For more information: https://tem.fi/en/regulation-of-business-operations  

• Competition and Antitrust Laws

The Finnish Competition and Consumer Authority (FCCA) protects competition by intervening in cases regarding restrictive practices, such as cartels and abuse of dominant position, and violations of the Competition Act and the Treaty on the Functioning of the European Union (TFEU). Investigations occur both on the FCCA’s initiative and based on complaints. Where necessary, the FCCA makes proposals to the Market Court regarding penalties.

The FCCA requires notification on mergers and acquisitions that exceed certain turnover thresholds. The FCCA will intervene in the transaction if it deems it to prevent effective competition in Finland. The FCCA would investigate transactions where the parties’ combined turnover generated in Finland exceeds EUR 100 million and the total turnover generated in Finland of at least two parties exceeds EUR 10 million per party.

In international competition matters, the FCCA’s key stakeholders are the European Commission (DG Competition), the OECD Competition Committee, the Nordic competition authorities, and the International Competition Network (ICN). FCCA rulings and decisions can be found in the archive in Finnish. More information is available at: https://www.kkv.fi/en/facts-and-advice/competition-affairs/

• Expropriation and Compensation

Finnish law protects private property rights. Citizen property is protected by the constitution, which includes basic provisions in the event of expropriation. Private property is only expropriated for public purposes (eminent domain), in a non-discriminatory manner, with reasonable compensation, and in accordance with established international law.

Expropriation is usually based on a permit given by the government or on a confirmed plan and is performed by the District Survey Office. An expropriation permit granted by the government may be appealed to the Supreme Administrative Court. Compensation is awarded at full market price but may exclude the rise in value due only to planning decisions.

Besides normal expropriation according to the Expropriation Act, a municipality or the state has the right to expropriate land for planning purposes. Expropriation is mainly for acquiring land for common needs, such as street areas, parks, and civic buildings. The method is rarely used: less than one percent of land acquired by the municipalities is expropriated. Credendo Group ranks Finland’s expropriation risk as low (1), on a scale from 1 to 7: https://credendo.com/en/country-risk/finland  

Dispute Settlement

• ICSID Convention and New York Convention

In 1969, Finland became a member state of the World Bank-based International Center for Settlement of Investment Disputes (ICSID; Washington Convention). Finland is a signatory to the Convention of the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

• Investor-State Dispute Settlement

The Finnish Arbitration Act (967/1992) applies to domestic and international arbitration without distinction. Sections 1 to 50 apply to arbitration in Finland, and Sections 51 to 55 apply to arbitration agreements providing for arbitration abroad and the recognition and enforcement of foreign arbitral awards in Finland. Of 229 parties in 2021, the majority (208) were from Finland.

In 2021, a Chinese investor brought the first known investment treaty claim against Finland. He was detained and had his business center raided and shut down on suspicion it was facilitating illegal immigration. The proceedings were ultimately settled between Finland and the claimant. For more information: https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/1192/wang-v-finland  

• International Commercial Arbitration and Foreign Courts

Finland has a long tradition of institutional arbitration, and its legal framework dates to 1928. Today, arbitration procedures are governed by the 1992 Arbitration Act (as amended), which largely mirrors the UNCITRAL Model Law on International Commercial Arbitration of 1985 (with amendments, as adopted in 2006). However, the UNCITRAL Model law has yet to be incorporated into Finnish law.

Finland’s Act on Mediation in Civil Disputes and Certification of Settlements by Courts (394/2011) aims to facilitate alternative dispute resolution (ADR) and promote amicable settlements by encouraging mediation and applies to settlements concluded in other EU member states: https://www.finlex.fi/en/laki/kaannokset/2011/en20110394.pdf

In June 2016, the Finland Arbitration Institute of the Chamber of Commerce (FAI) launched its Mediation Rules under which FAI will administer mediation: https://arbitration.fi/mediation/mediation_rules/  

Any dispute in a civil or commercial matter, international or domestic, which can be settled by agreement may be referred to arbitration. Arbitration is frequently used to resolve commercial disputes and is usually faster than court proceedings. An arbitration award is final and binding. FAI promotes the settlement of disputes through arbitration, commonly using the “FAI Arbitration/Expedited Arbitration Rules,” which were updated in 2020: https://arbitration.fi/en/arbitration/rules-and-guidelines/  

The Finland Arbitration Institute (FAI) appoints arbitrators both to domestic and international arbitration proceedings and administers domestic and international arbitrations governed by its rules. It also appoints arbitrators in ad hoc cases when the arbitration agreement provides and acts as appointing authority under the UNCITRAL Arbitration Rules. The Finnish Arbitration Act (967/1992) states that foreign nationals can act as arbitrators. For more information: https://arbitration.fi/en/arbitration/  

Finland signed the UN Convention on Transparency in Treaty-based Investor-State Arbitration (“Mauritius Convention”) in March 2015. Under these rules, all documents and hearings are open to the public, interested parties may submit statements, and protection for confidential information has been strengthened.

• Bankruptcy Regulations

The Bankruptcy Act (120/2004) governs bankruptcy proceedings aimed at liquidating the assets of an insolvent company to satisfy its creditors and dissolve the company. The act was amended in 2019 to simplify, digitize, and speed up bankruptcy proceedings. The amended act allows administrators to send notices and invitations to creditor addresses registered in the Trade Register. This improves accessibility for foreign companies that have established a branch in Finland. For more information: https://www.finlex.fi/en/laki/kaannokset/2004/en20040120.pdf

The Bankruptcy Ombudsman is an independent authority that supervises the administration of bankruptcy estates in Finland . The Office of Bankruptcy Ombudsman is a member of the International Association of Insolvency Regulators (IAIR). For more information: https://www.konkurssiasiamies.fi/en/index.html  

The Reorganization of Enterprises Act (1993/47) establishes a legal framework for reorganization with the aim to provide an alternative to bankruptcy proceedings. The act excludes credit and insurance institutions and certain other financial institutions. Recognition of restructuring or insolvency processes initiated outside of the EU requires an exequatur from a Finnish court. https://www.finlex.fi/fi/laki/kaannokset/1993/en19930047  

4. Industrial Policies

• Investment Incentives

Foreign-owned companies in Finland are eligible for government and EU incentives on an equal footing with Finnish-owned businesses. Companies receive support through grants, loans, tax benefits, equity participation, guarantees, and employee training.

The income tax rate for limited liability companies and other corporate entities is 20 percent. According to the 2023 International Tax Competitiveness Index, the Finnish tax system is the 19th best tax code among 38 OECD countries. For more information: https://www.vero.fi/en/businesses-and-corporations/business-operations/foreign-business-in-finland/taxation-in-finland/   and https://taxfoundation.org/location/finland/  

Startups, SMEs, and large companies can benefit from Business Finland’s incentives: https://www.businessfinland.fi/en/do-business-with-finland/invest-in-finland/business-environment/incentives/incentives-short   and https://www.businessfinland.fi/48d8e1/globalassets/julkaisut/invest-in-finland/business-guides-and-fact-sheets/iif_factsheet_incentives.pdf

Centers for Economic Development, Transport, and the Environment (ELY Centers) support the establishment, growth, and development of SMEs by providing advisory, training, and expert services, and by granting funding for investment and development projects. Large companies may also qualify for assistance or funding if they significantly increase employment in their region of operation. Startups can receive subsidies to establish and expand business operations during their first 24 months. For more information: http://www.ely-keskus.fi/en/web/ely-en/business-and-industry;jsessionid=0B09A1B237B74FAC485AAD7C8E068DBF  

As part of its Sustainable Growth Program, which is funded by the EU Recovery Plan, Finland is promoting energy investments and energy infrastructure projects that reduce greenhouse gas emissions in Finland and support Finland’s target to be carbon neutral by 2035. For more information: https://tem.fi/en/-/energy-investments-of-finland-s-sustainable-growth-programme-promote-the-green-transition   and https://www.businessfinland.fi/en/for-finnish-customers/services/funding/energy-aid  

Government aid is available for the implementation of energy audits, investments that conserve energy, and investments related to the use of renewable energy, as well as for European Skills, Competences, Qualifications and Occupations (ESCO) projects. For more information: https://www.motiva.fi/en/solutions/policy_instruments/energy_aid  

Finnvera offers loans, domestic guarantees, export credit guarantees, and other services associated with financing exports: https://www.finnvera.fi/eng  

• Foreign Trade Zones/Free Ports/Trade Facilitation

The EU Customs Code (UCC), which entered into force on May 1, 2016, harmonized free trade zone area regulations in the EU.

The Åland Islands are one of the unique fiscal territories within Finland and the EU. The tax border separates the Åland Islands from the VAT and excise territory of the EU. VAT and excise are levied on goods imported across the tax border, but no customs duty is levied. In tax border trade, goods can be sold with a tax-free invoice in accordance with the detailed taxation instructions of the Finnish Tax Administration. Trade between Åland and non-EU countries is subject to the same regulations and instructions as trade between the EU and third countries. For more information: https://tulli.fi/en/businesses/aland-businesses  

• Performance and Data Localization Requirements

As an EU member state, Finland adheres to the General Data Protection Regulation (Regulation (EU) 2016/679) (GDPR), an EU law that entered into force in 2016, and, following a two-year transition period, became law on May 25, 2018, without requiring EU member states to change national laws.

Finland’s Data Protection Act (1050/2018) supplements the GDPR. The Data Protection Ombudsman is a national supervisory authority that supervises compliance with data protection legislation. The office has approximately 45 specialists, including the Data Protection Ombudsman and two Deputy Data Protection Ombudsmen. For more information: https://tietosuoja.fi/en/home   and https://www.finlex.fi/en/laki/kaannokset/2018/en20181050.pdf

5. Protection of Property Rights

• Real Property

The Finnish legal system protects and enforces property rights and secured interests in property, both movable and real. Mortgages exist in Finland and can be applied to both owned and rented real estate. In Finland, real property formation, development, land consolidation, cadastral or boundary mapping, registration of real properties, ownership and legal rights, real property valuation, and taxation are all combined within one basic cadastral system (i.e. real estate register) maintained by the National Land Survey: https://www.maanmittauslaitos.fi/en/apartments-and-real-property  

Finland is not a contracting party to the 2001 Cape Town Convention on Mobile Equipment (CTC) and the Protocol on Matters Specific to Aircraft Equipment (Aircraft Protocol).

• Intellectual Property Rights

Finland is not included on USTR’s Special 301 Report or Notorious Markets List..

USTR’s 2022 Notorious Markets List mentions Finland for reportedly hosting a Flokinet server associated with infringing activity and reportedly hosting an FLVTO web server, a platform that allows the user to download music from YouTube and convert it to an mp3.

The Finnish legal system protects intellectual property rights (IPR), and Finland adheres to numerous international agreements. Finland ranked first among 129 countries in the Property Rights Alliance 2023 International Property Rights Index (IPRI), which concentrates on a country’s legal and political environment, physical property rights, and IPR: https://www.internationalpropertyrightsindex.org/  

IPR enforcement in Finland is based on EU Regulation 608/2013. For more information, see: https://taxation-customs.ec.europa.eu/customs-4/prohibitions-and-restrictions/counterfeit-piracy-and-other-ipr-violations_en  

IPR must be registered in Finland to be enforced under local laws, such as the Copyright Act, the Registered Designs Act, and the Patents Act. Patent rights in Finland are consistent with international standards, and a granted patent is valid for 20 years. The Finnish Patent and Registration Office (PRH) website contains unofficial translations in English of the Patents Act, Patents Decree, and Patent Regulation. For more information: https://www.prh.fi/en/index.html  

The Finnish Trademarks Act was enacted in May 2019 to implement the revised EU Trademark Directive. The act includes provisions concerning collective marks and control marks. It includes amendments to related legislation such as the Finnish Company Names Act, the Criminal Code, and relevant procedural acts. Trademark applicants or proprietors not domiciled in Finland must have a representative resident in the European Economic Area. Finland is a party to the Madrid Protocol.

Finnish Customs supervises counterfeit products that are imported to, exported from, and transited via Finland and other products that violate IPR. Custom officers have the authority to seize and destroy counterfeit goods. Customs has intensified the control of counterfeit goods by conducting a risk analysis of postal traffic. The long-term trend indicates a decline in counterfeit goods detected in large-volume shipments: https://www.vero.fi/en/grey-economy-crime/prevention/preventionstatistics/  

Finland is a member of the World International Property Organization (WIPO) and party to a several other treaties, including the Berne Convention, the Paris Convention, the Patent Cooperation Treaty, the WIPO Copyright Treaty, the WIPO Performances and Phonograms Treaty, and the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (Rome Convention). Finland is a party to the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at: https://www.wipo.int/directory/en/details.jsp?country_code=FI  

6. Financial Sector

• Capital Markets and Portfolio Investment

Finland is open to foreign portfolio investment and has an effective regulatory system. Credit is allocated on market terms and made available to foreign investors non-discriminately, and private sector companies have access to various credit instruments. Legal, regulatory, and accounting systems are transparent and consistent with international norms.

The Helsinki Stock Exchange is part of OMX, referred to as NASDAQ OMX Helsinki (OMXH). NASDAQ OMX Helsinki is part of the NASDAQ OMX Nordic division, together with the Stockholm, Copenhagen, Iceland, and Baltic (Tallinn, Riga, and Vilnius) stock exchanges.

Finland accepts the obligations under IMF Article VIII, Sections 2(a), 3, and 4 of the IMF Articles of Agreement. It maintains an exchange system free of restrictions on payments and transfers for current international transactions, except for those measures imposed for security reasons by the Regulations of the Council of the European Union.

• Money and Banking System

Finland has a resilient, digitally advanced, and well-capitalized banking sector characterized by cooperative banking and pan-Nordic groups. Banking is open to foreign competition, and the industry is one of Europe’s most prominent relative to the size of the national economy. Four significant banks (OP Financial Group, Nordea, Municipality Finance, and Danske Bank) dominate the banking sector, holding 80 percent of the market. The Bank of Finland is the national monetary authority and the central bank of Finland: https://www.suomenpankki.fi/en  

The Financial Supervisory Authority (FIN-FSA) supervises Finland’s financial and insurance sectors, including banks, insurance and pension companies, other companies operating in the insurance sector, investment firms, fund management companies, and the Helsinki Stock Exchange: https://www.finanssivalvonta.fi/en/  

In 2023, the financial sector’s capital position remained strong despite the gloomier economic environment. Finland’s banks met the requirements for liquid bank holdings under Basel III standards, which compare a bank’s assets with its capital to see if the bank would withstand a financial crisis. The sector’s operating environment weakened as the Finnish economy slid into a recession. Despite increased credit risks in corporate and household loans, the Finnish banking sector’s non-performing loans and loan losses were still among the lowest in Europe.

Foreign companies and nationals can, in principle, open bank accounts in the same manner as Finnish nationals. However, banks must identify customers, and this may prove more difficult for foreign nationals. In addition to personal and address data, the bank often needs to know the person’s identifier code (i.e. social security number). Several banks require a work permit, a certificate of studies, a letter of recommendation from a trustworthy bank, and details regarding the nature of transactions to be made with the account. All authorized deposit-taking banks are members of the Deposit Guarantee Fund, which guarantees customers’ deposits to a maximum of EUR 100,000 ($109,000) per depositor.

The Act on Virtual Currency Providers (572/2019) entered into force in May 2019. FIN-FSA is the registration authority for virtual currency providers. The primary objective of the act is to introduce virtual currency providers into the scope of anti-money laundering regulation. Only virtual currency providers meeting statutory requirements can carry on their activities in Finland, and only a FIN-FSA registered virtual currency provider may market its currency and services in Finland. The Finnish Tax Administration released guidelines on the taxation of cryptocurrency, available here: https://www.vero.fi/en/detailed-guidance/guidance/48411/taxation-of-virtual-currencies3/  

Foreign Exchange and Remittances

• Foreign Exchange

Finland adopted the Euro as its official currency in January 1999. Finland maintains an exchange system free of restrictions on making payments and transfers for international transactions, except for those measures imposed for security reasons. Currency transfers are protected by Article VII of the IMF Articles of Agreement: http://www.imf.org/External/Pubs/FT/AA/index.htm#art7  

• Remittance Policies

There are no legal obstacles to direct foreign investment in Finnish securities or exchange controls regarding payments into and out of Finland. Banks must identify their customers and report suspected cases of money laundering or the financing of terrorism. Banks and credit institutions must also report single payments or transfers of EUR 15,000 ($16,000) or more. If the origin of funds is suspicious, banks must immediately inform the National Bureau of Investigation. There are no restrictions on current transfers or repatriation of profits. Residents and non-residents may hold foreign exchange accounts. There is no limit on dividend distributions as long as they correspond to a company’s official earnings records. Travelers carrying more than EUR 10,000 ($11,000) must make a declaration upon entering or leaving the EU.

• Sovereign Wealth Funds

Solidium is a holding company fully owned by the Finnish government. It is a minority owner of nationally listed companies operating in clusters significant to the national economy, such as the forest industry. Solidium’s ownership stake of these companies is usually over 10 percent but rarely exceeds 20 percent. According to Solidium’s investment strategy, future investments may include companies that seek to implement green transition strategies or solutions related to the platform economy. Solidium aims to strengthen and stabilize Finnish ownership in the companies and increase the value of their holdings. In 2023, Solidium paid the Finnish government approximately $374 million as a dividend. For more information: https://www.solidium.fi/en/  

7. State-Owned Enterprises

The government of Finland owns directly or through Solidium the shares of 15 listed companies on the Helsinki stock exchange. In general, State-Owned Enterprises (SOEs) are open to competition except where they have a monopoly position, namely in alcohol retail and gambling. SOEs in Finland operate in chemicals, petrochemicals, plastics, and composites; energy and mining; environmental technologies; food processing and packaging; industrial equipment and supplies; marine technology; media and entertainment; metal manufacturing and products; services; and travel. The market value of all state direct shareholdings was approximately $24 billion as of March 2024. For more information, see: https://vnk.fi/en/government-ownership-steering/companies   https://vnk.fi/en/government-ownership-steering/value-of-state-holdings  

The Ownership Steering Department in the Prime Minister’s Office has ownership steering responsibility for Finnish SOEs, and is responsible for Solidium. The State Shareholdings and Ownership Steering Act (1368/2007) and the Act Amending the State Shareholdings and Ownership Steering Act (1315/2016) regulate the administration of state-owned companies. For more information, see: https://www.finlex.fi/en/laki/kaannokset/2007/en20071368   https://www.finlex.fi/fi/laki/alkup/2016/20161315  

Finnish state ownership steering complies with the OECD Principles of Corporate Governance. The Parliamentary Advisory Council in the Prime Minister’s Office serves in an advisory capacity regarding SOE policy; it does not make recommendations regarding any business in which the individual companies are engaged. The government has proposed changing its ownership levels in several companies and increasing the number of companies the Prime Minister’s Office steers. Parliament decides from which companies the state may relinquish its sole ownership (100 percent), its control of ownership (50.1 percent), or minority ownership (33.4 percent of votes). For more information: https://vnk.fi/en/government-ownership-steering/ownership-policy  

Finland opened domestic rail freight to competition in early 2007, and in July 2016, Fenniarail Oy, the first private rail operator on the Finnish market, began operations. In November 2020, Estonian-based Operail, which works in Finland’s rail freight operations, started a subsidiary in Finland as Operail Finland. In 2023, Operail Finland’s share was sold to Nurjminen Logistics. Passenger rail transport services will be opened to competition in stages, starting with local rail services in southern Finland. Based on an agreement between Finnish State Railways (VR) and the Ministry of Transport and Communications, VR has exclusive rights to provide passenger transport rail services in Finland until the end of 2030. For more information, see: https://lvm.fi/en/-/nine-year-contract-between-the-ministry-of-transport-and-communications-and-vr-for-purchasing-rail-transport-services-1643706  

The exclusive right applies to all passenger rail transport in Finland, excluding the commuter train transport services provided by the Helsinki Regional Transport Agency (HSL). In February 2020, HSL put its commuter train transport services out for tender; VR won the tender and will continue to provide passenger rail service for the next ten years. The value of southern Finland commuter train services is $67 million per year, with 200,000 daily passengers.

• Privatization Program

Parliament makes all decisions identifying the companies in which the state may relinquish sole ownership (100 percent of the votes) or control (minimum of 50.1 percent of the votes), while the government decides on the actual sale. The state has privatized companies by selling shares to Finnish and foreign institutional investors through both public offerings and directly to employees. Sales of the state’s direct holdings totaled $2.89 billion (2007 – 2018).

The government issued a new resolution on state-ownership policy in April 2020, seeking to maximize overall social and financial benefits; use corporate assets to promote domestic ownership; and diversify the economy, create innovations, and support sustainable structural change. For more information, visit https://vnk.fi/en/government-ownership-steering  

8. Responsible Business Conduct

Finland has long traditions in compliance with labor, occupational safety, health, and environmental legislation. Finnish companies recognize that their due diligence to comply with laws and regulations is central to responsible business conduct and corporate responsibility. The Finnish Business & Society (FIBS) is the largest corporate responsibility network in the Nordic countries and has more than 300 members: https://www.fibsry.fi/briefly-in-english/  

Finland is committed to implementing the OECD Guidelines for Multinational Enterprises, the ILO Declaration on Fundamental Principles and Rights at Work, and the ILO’s tripartite declaration of principles concerning multinational enterprises and social policy. The government promotes Corporate Social Responsibility (CSR) through the Ministry of Employment and the Economy CSR Guidelines. or more information: https://tem.fi/en/key-guidelines-on-csr  

Finland ranks first in the UN’s Sustainable Development Report, which compares 193 UN member states based on 17 sustainability goals. Finland launched a new sustainable development strategy built around the UN’s Sustainable Development Goals (SDG). More information is available here: https://dashboards.sdgindex.org/profiles/finland  

The Directive of the European Parliament and the Council on the disclosure of non-financial information has been implemented via amendments to the Finnish Accounting Act, requiring affected organizations to report on their CSR. The obligation to report non-financial information and corporate responsibility reports applies to significant public interest entities, i.e., listed companies, credit institutions, and insurance companies with more than 500 employees. In addition, turnover must be greater than $45.4 million, or the balance sheet must exceed more than $22.7 million. For more information: https://tem.fi/en/accounting  

Currently, there are no other mandatory human rights-related due diligence requirements apart from those set out in the Act on the Placing on the Market of Conflict Minerals and Their Ores (1196/2020) (the Conflict Minerals Act), which improved the transparency of supply chains and brought Finland’s conflict minerals regime into line with EU regulations. Businesses importing conflict minerals (tin, tantalum, tungsten, and gold) from conflict-affected areas into the EU that exceed certain volume thresholds are subject to due diligence requirements. The Finnish Safety and Chemicals Agency and Finnish Customs are competent authorities in implementing the act. For more information: https://tukes.fi/en/industry/conflict-minerals  

Finland has joined the Extractive Industries Transparency Initiative (EITI), which supports improved governance in resource-rich countries. Finland is not a member of the Voluntary Principles on Security and Human Rights Initiative. The Human Rights Center (HRC), administratively linked to the Office of the Parliamentary Ombudsman, encourages foreign and local enterprises to follow the most important international norms: https://www.humanrightscentre.fi/  

Finland participates in the Montreux Document on pertinent international legal obligations and good practices for states related to private military and security company operations during armed conflict. However, Finland is not a member of ICoCA, the International Code of Conduct for Private Security Service Providers’ Association.

• Additional Resources

Department of State

• Country Reports on Human Rights Practices ;
• Trafficking in Persons Report ;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises ; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions

Department of Labor

• Findings on the Worst Forms of Child Labor Report ;
• List of Goods Produced by Child Labor or Forced Labor ;
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain .

Finland participates in international climate negotiations as an EU member state. It is firmly committed to the EU’s joint reduction target under the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement. The core elements of EU climate policy are the EU Emissions Trading System (EU ETS); national targets for sectors excluded from EU ETS (effort sharing); and obligations concerning the Land Use, Land-Use Change, and Forestry sector (LULUCF). The EU ETS covers more than 40 percent of the total greenhouse gas emissions in the EU and just under half of the greenhouse gas emissions in Finland. For more information, see: https://tem.fi/en/emissions-trading  

The National Climate Act is another fundamental pillar of Finland’s climate policy. The act aims to reduce greenhouse gas emissions for 2030 (-60 percent), 2040 (-80 percent), and 2050 (-95 percent) compared to 1990 levels. According to the act, Finland must be carbon neutral by 2035. For more information, see: https://ym.fi/en/climate  

Finland reduces carbon emissions by increasing clean energy production, investing in the hydro economy, and augmenting the carbon sequestration of the industrial and land use sectors. Renewables have replaced imported fossil fuels in domestic electricity production. In 2023, the share of carbon-free electricity production was 94 percent. The primary energy sources of electricity production were nuclear power at 41 percent, hydropower at 18.8 percent, wind at 18.1 percent, and biomass at 13.3 percent, while the share of imported electricity was 2.2 percent.

In 2024, the government reserved EUR 14.1 million ($15.3 million) in national energy aid to promote the production of renewable energy, renewable hydrogen and hydrogen-refined fuels, energy saving or more efficient energy production or use, utilization of waste heat, and the transition towards a low-carbon energy system. The government will prioritize investment projects promoting new technology, its commercialization, and the capacity of the electricity system. In addition, REPowerEU aid supports investments in new energy technology and the production and storage of renewable hydrogen, funded by the EU Recovery and Resilience Facility. REPowerEU aims to reduce dependence on Russian fossil fuels by fast forwarding the clean transition and joining forces to achieve a more resilient energy system and a true Energy Union. For more information, see: https://tem.fi/en/-/ministry-of-economic-affairs-and-employment-sets-energy-aid-priorities-for-2024  

The Finnish Climate Fund is a state-owned company that focuses on combating climate change, boosting the low-carbon industry, and promoting digitalization. Companies targeted by the fund typically receive the funding in installments over several years when meeting conditions specified in the financing agreements. For more information, see: https://www.ilmastorahasto.fi/en/  

The National Forest Strategy contains the critical outlines of Finland’s forest policy. For more information, see: https://mmm.fi/en/forests/strategies-and-programmes  

Finland also aims to increase ecological public procurement. Finland’s first National Public Procurement Strategy, launched in September 2020, focuses on developing strategic management and promoting procurement expertise. For more information, see: https://vm.fi/en/-/national-public-procurement-strategy-identifies-concrete-ways-in-which-public-procurement-can-help-achieve-wider-goals-in-society  

On MIT’s Green Future Index 2023, Finland ranked second among 76 leading countries and territories. The index measures progress and commitment towards building a low-carbon future. According to the index, Finland fosters an extensive green tech R&D ecosystem with leading-edge renewables and food tech.

9. Corruption

Corruption in Finland is covered by the criminal code and penalties range from fines to imprisonment of up to four years. The bribery offenses criminalized in the criminal code are electoral bribery, bribery violation, the giving of bribes, the acceptance of a bribe, providing bribes to a Member of Parliament, accepting a bribe as a Member of Parliament, giving of bribes in a business transaction, and accepting a bribe in a business transaction. For more information, see: https://korruptiontorjunta.fi/en/national-legislation  

Finland does not have an authority specifically charged to prevent corruption. Instead, several authorities and agencies contribute to anti-corruption work. The Ministry of Justice coordinates anti-corruption matters, but Finland’s EU anti-corruption contact is the Ministry of the Interior. The National Bureau of Investigation also monitors corruption, while the tax administration has guidelines obliging tax officials to report suspected offenses, including foreign bribery, and the Ministry of Finance has guidelines on hospitality, benefits, and gifts. The Ministry of Justice describes its anti-corruption efforts at https://oikeusministerio.fi/en/anti-corruption-activities.

The EU Directive on non-financial reporting supports action against corruption. Implementation of the EU Directive in Finland led to the amendment of the Accounting Act in December 2016. Current legislation imposes obligations on large companies to report on anti-bribery and anti-corruption action policies.

The Ministry of Justice is responsible for monitoring and developing the Transparency Register legislation. The Transparency Register Guide contains a general description, key concepts, related procedures, and published actors. The guide answers questions such as who is subject to the obligation to provide information to the Transparency Register, what kind of information must be provided to the register and when, and how the Transparency Register is monitored. The guide is available in Finnish, Swedish, and English: https://julkaisut.valtioneuvosto.fi/handle/10024/164813  

In 2020, the Ministry of Employment and Economy released an anti-corruption guide intended for companies, especially SMEs, to provide them with guidance and support for promoting sound business practices and corruption-free business relations both in Finland and abroad. Large companies must publish corporate responsibility reports. These reports must briefly describe their business model, explain the risks related to their policies, and describe how they manage these risks. The reporting obligation applies to public interest entities with over 500 employees and a turnover of over 40 million euros ($43 million) or an annual balance sheet of over 20 million euros ($22 million). Smaller companies can report voluntarily. The report can be part of yearly reports or reports on corporate social responsibility. For more information: https://tem.fi/en/-/guide-offers-smes-practical-anti-corruption-tips  

Finland has ratified the following anti-corruption conventions: the Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime; the Council of Europe Civil Law Convention on Corruption; the Criminal Law Convention on Corruption; and the UN Convention against Transnational Organized Crime. Finland has become the 32nd country to sign the United Nations Convention against Corruption (UNCAC) Coalition’s Transparency Pledge, voluntarily committing to a high level of transparency and civil society inclusion in the second cycle of the UNCAC implementation review. Finland is a member of the European Partners against Corruption (EPAC).

Finland is a signatory to the OECD Convention on Anti-Bribery. In October 2020, the OECD working group on bribery said it recognizes Finland’s commitment to combat corruption but is concerned about lack of foreign bribery enforcement. For more information: https://www.oecd.org/daf/anti-bribery/finland-oecdanti-briberyconvention.htm  

• Resources to Report Corruption

Jaakko Christensen Head of Financial Crime Division National Board of Investigation P.O. Box 285, 01310 Vantaa, Finland [email protected]

Jaakko Korhonen Chairperson Transparency Finland [email protected]

• 10. Political and Security Environment

Finland acceded to NATO in April 2023 and signed a bilateral Defense Cooperation Agreement with the United States in December 2023. The Finnish Security and Intelligence Service (SUPO) estimated in the National Security Overview 2023, the most current version released, that Russia’s actions remain the greatest threat to Finland’s national security, with Russia treating Finland as an unfriendly state, and as a target for espionage and malign influence activities. According to SUPO, NATO membership protects Finland from Russia’s measures. SUPO assesses Russia’s use of irregular migration as a way for Russia to indicate its dissatisfaction with Finland’s NATO membership and generally sow the consequences of actions Russia perceives as unfriendly.

SUOP assesses that no significant changes have occurred in the threat of terrorism faced by Finland. The threat of terrorism in Finland remains at level 2, ‘Elevated’, on the four-tier scale. There are probably far-right and radical Islamist operators in Finland with the desire and capacity to carry out violent attacks. Supporters of these ideologies pose the most likely threat, either as individuals or in small groups. Attacks remain unlikely in the short term. .For more information, see: https://supo.fi/en/terrorism-overview  

While instances of political violence in Finland are rare, extremism exists, and anti-immigration and anti-Semitic incidents do occur. The Central Council of Finnish Jewish Communities has noted a rise in anti-Semitism in Finland over the past two decades, with reported instances likely underestimating the prevalence of such cases. Targeted acts of vandalism against the synagogue and property of the Israeli Embassy and random acts of vandalism featuring anti-Semitic language and images have become more common. Hate groups and far-right political parties use anti-Semitic language and Nazi iconography in both online publications and public events. SUPO considers Racially or Ethnically Motivated Violent Extremism (REMVE) online platforms a significant source of radicalization in Finland, and Jewish and Muslim community leaders have identified these websites as contributors to increases in public anti-Semitism.

In 2022, The Ministry of the Interior published the National Counterterrorism Strategy 2022–2025 to guide national and international counterterrorism activities. Finland combats terrorism, violent radicalization, and extremism to safeguard national interests and foster the safety and security of the country and its population. The Ministry of the Interior monitors the achievement of objectives and will prepare an interim report in 2024. For more information, see: https://intermin.fi/en/publication?pubid=URN:ISBN:978-952-324-578-5  

• 11. Labor Policies and Practices

According to Statistics Finland, the population was approximately 5.6 million, and the average number of employed persons aged 15 to 74 was 2,628,000 in 2023. The number of unemployed persons was 204,000. Men’s unemployment rate was 7.9 percent, while women’s unemployment rate was 6.5 percent. In January 2024, the number of unfilled vacancies was 133,400. The working-age population will decrease in the years to come due to an increasing retirement rate caused by Finland’s aging population. At the same time, the number of immigrants is growing, and people are working to a later age in life. In Finland, most job vacancies advertised are in the social healthcare services sector, the construction industry, and the service and retail sectors.

Finland has a long tradition of trade unions. The country has a 60 percent unionization rate, and approximately 90 percent of employees have participated in the collective bargaining system. Extensive tripartite cooperation between the government, employers’ groups, and trade unions characterizes the labor market system in Finland. Trade unions and employers’ associations may make collective agreements, and the ministry decides on the agreements’ validity, determining minimum wages, working hours, and working conditions. The Ministry of Employment and the Economy is responsible for drafting labor legislation, and the Ministry of Social Affairs and Health is responsible for enforcing labor laws and regulations via the Occupational Safety and Health (OSH) authorities of the OSH Divisions at the Regional State Administrative Agencies, which operate under the Ministry of Social Affairs and Health.

To increase the labor market’s flexibility, the government of Prime Minister Petteri Orpo aims to reform the labor market legislation in 2024. As part of the proposed reforms, the government intends to increase local bargaining, which refers to workplace-level agreements on working hours, annual holidays, or wages; tie all sectors’ wage increases to export industry levels; restrict the right to political strikes, including limiting political strikes to 24 hours; and cut social welfare and benefits programs, including unemployment benefits. The government’s proposed labor reforms launched a wave of political strikes in Finland.

In the March 2024 IMF Article IV consultation with Finland, the IMF commended the government’s efforts to boost employment through social benefit reforms, greater flexibility in the labor market, and lowering the labor tax wedge. According to the IMF, the government should establish robust systems to monitor the impact of these reforms on employment closely. Additionally, government policies and procedures should aim to improve higher education, lower skill mismatches, and more effectively attract and integrate international talent.

Finland adheres to most ILO conventions; and enforcement of worker rights is effective. Freedom of association and collective bargaining are guaranteed by law, providing the right to form and join independent unions, conduct legal strikes, and bargain collectively. The law prohibits anti-union discrimination and any obstruction of these rights. The National Conciliator under the Ministry of Employment and the Economy assists negotiating partners with labor disputes. The arbitration system is based on the Act on Mediation in Labor Disputes, and the Labor Court is the highest body for settlement. The ILO’s Finland Country profile can be found here: http://www.ilo.org/dyn/normlex/en/f?p=1000:11110:0::NO:11110:P11110_COUNTRY_ID:102625  

• 12. U.S. International Development Finance Corporation (DFC), and Other Investment Insurance or Development Finance Programs

The U.S. International Development Finance Corporation, DFC, does not operate in Finland.

• 13. Foreign Direct Investment Statistics

* Source for Host Country Data: Statistics Finland

• 14. Contact for More Information

[email protected]  

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Helping our customers through the CrowdStrike outage

Jul 20, 2024 | David Weston - Vice President, Enterprise and OS Security

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On July 18, CrowdStrike, an independent cybersecurity company, released a software update that began impacting IT systems globally. Although this was not a Microsoft incident, given it impacts our ecosystem, we want to provide an update on the steps we’ve taken with CrowdStrike and others to remediate and support our customers.  

Since this event began, we’ve maintained ongoing communication with our customers, CrowdStrike and external developers to collect information and expedite solutions. We recognize the disruption this problem has caused for businesses and in the daily routines of many individuals. Our focus is providing customers with technical guidance and support to safely bring disrupted systems back online. Steps taken have included:  

• Engaging with CrowdStrike to automate their work on developing a solution.   CrowdStrike has recommended a workaround to address this issue and has also issued a public statement. Instructions to remedy the situation on Windows endpoints were posted on the Windows Message Center .   
• Deploying hundreds of Microsoft engineers and experts to work directly with customers to restore services.   
• Collaborating with other cloud providers and stakeholders, including Google Cloud Platform (GCP) and Amazon Web Services (AWS), to share awareness on the state of impact we are each seeing across the industry and inform ongoing conversations with CrowdStrike and customers.  
• Quickly posting manual remediation documentation and scripts found here .
• Keeping customers informed of the latest status on the incident through the Azure Status Dashboard here .  

We’re working around the clock and providing ongoing updates and support. Additionally, CrowdStrike has helped us develop a scalable solution that will help Microsoft’s Azure infrastructure accelerate a fix for CrowdStrike’s faulty update. We have also worked with both AWS and GCP to collaborate on the most effective approaches.    

While software updates may occasionally cause disturbances, significant incidents like the CrowdStrike event are infrequent. We currently estimate that CrowdStrike’s update affected 8.5 million Windows devices, or less than one percent of all Windows machines. While the percentage was small, the broad economic and societal impacts reflect the use of CrowdStrike by enterprises that run many critical services.  

This incident demonstrates the interconnected nature of our broad ecosystem — global cloud providers, software platforms, security vendors and other software vendors, and customers. It’s also a reminder of how important it is for all of us across the tech ecosystem to prioritize operating with safe deployment and disaster recovery using the mechanisms that exist. As we’ve seen over the last two days, we learn, recover and move forward most effectively when we collaborate and work together. We appreciate the cooperation and collaboration of our entire sector, and we will continue to update with learnings and next steps.  

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