Mobile apps are gaining popularity more than ever as technology developed. And for an application to be successful, having a mobile app version can capture more users since it is accessible whenever and wherever they want to use it.
You may think that it is unnecessary to prepare a financial plan when you are starting or at an early stage of the mobile app business, especially that you are not yet earning. However, having a laid-out plan and testing your project’s “what ifs” sets the direction you want your business to go. A financial plan is a crucial financial planning tool to help you execute your plan and assess every possible variable that can happen.
To evaluate how the mobile app operates in terms of its financial aspect, we will evaluate one of its financial statements, the balance sheet. The primary balance sheet sections are assets, liabilities, and equity, in which assets = liabilities + equity. We will assess what makes up the mobile app balance sheet.
Cash is derived from cash flow ending balance and is affected chiefly by operating expenses. Software development cost is the major component of cash outflow during the development stage. Inflows are derived from the owner’s investment and fundraising.
2. Customer Deposits
If you sell one-year subscriptions, you collect the money upfront, and the Customer Deposits account is activated, similar to a SaaS financial plan. It provides additional funding to finance business operations.
3. Net Working Capital
Net working capital for the mobile app focuses on accounts receivable and accounts payable. There is no inventory since sales are generated through paid downloads, subscription services, selling products via in-app purchases, or clicks for advertisements or affiliates.
When computing accounts receivable, we multiply the sales by the number of days outstanding divided by 360 days (standard number of days) or divided by 12 months for monthly accounts receivable. Account receivable is even shorter when payments are received through a company’s account, such as PayPal or Stripe.
To compute for accounts payable annual position, we multiply the number of days outstanding to the direct costs divided by 360 days.
4. Fixed Assets
Fixed assets for mobile app development are minimal. At most are the building improvements, computers and hardware, and office furniture and fixture. Fixed assets are depreciated over the asset’s estimated useful life. Net fixed assets recorded in the balance are computed by deducting the accumulated depreciation from the gross fixed assets.
5. Software Development Costs
Software development costs can either be capitalized through the projected years or accounted as an outright expense. Capitalizing the costs increased the Asset position in the balance sheet, and the Amortization decreases taxable income. However, it is more straightforward to account for the costs as an outright expense, especially if it is not that significant.
6. Financial Debt
Banks do not consider Mobile App businesses creditworthy. Some investors are willing to invest in convertible loans with liquidation preference over regular investors. Convertible loans are activated under the Liability section. But once they are converted into equity, liability disappears while Equity position increases under long-term commitments.
The initial funding raised mostly composes the Equity position of mobile app businesses. Mobile app development, marketing, and other operating expenses constitute the high costs during its first months or year. Accumulated losses are booked as negative retained earnings. Once the business starts to break even, it’s the time that the losses are offset, showing positive retained earnings. Withdrawals and dividends are unexpected in the first year as the owner strives to improve mobile app features and accelerate downloads. It is rare that a mobile business app business already distributes dividends to its investors in the first year.
It is easy to prepare a balance sheet for a mobile app business and will reflect professionalism in analyzing the project. A convenient way to assess business prospects is using a financial model template, which includes the balance sheet as one of the three financial statements.