Financial Statements 101 - PowerPoint Presentation

1. Financial Statements 101

2. WKU Small Business Development CenterFree and Confidential Consulting to Small BusinessPartner with the SBACore ServicesStart Up AssistanceFeasibility AssessmentAccess to CapitalMarket ResearchManaging and Growing a Business

3. What are some of the financial information you might like to know about your business?

4. What are some of the financial information you might like to know about your business?Did I make a profit?Is my business financially healthy?Do I have enough cash to pay my bills?Could I afford another loan?What is the net worth of my business?What is my break even point?What is my profit margin?What would happen if my sales were to decline by 20%?

5. Financial Statements: Your ScorecardBalance SheetIncome StatementCash Flow Statement

6. Balance Sheet: Shows(At Single Point in Time)What You Own: AssetsWhat You Owe: LiabilitiesNet Worth: Equity in BusinessAssets = Liabilities + EquityWhat You OwnHow You Paid for It

7. Balance Sheet FormatAssets Current Assets Long-Term Assets Total AssetsLiabilities Current Liabilities Long-Term Liabilities Total LiabilitiesOwners Equity (Net Worth)

8. Balance Sheet ExampleXYZ CompanyBalance SheetAssets Current AssetsCash $ 10,000 Accounts Receivable $ 75,000 Inventory $ 85,000 Total Current Assets $ 170,000 Long Term AssetsFixed Assets $ 140,000 Less Accumulated Depreciation $ (25,000)Net Fixed Assets $ 115,000 Total Assets $ 285,000 LiabilitiesCurrent LiabilitiesAccounts Payable $ 41,000 Current Portion of LT Debt $ 6,000 Note Payable $ 100,000 Total Current Liabilities $ 147,000 Long Term LiabilitesLong Term Loan $ 54,000 Total Long Term Liabilities $ 54,000 Total Liabilities $ 201,000 Capital or Net WorthOwner Investment $ 20,000 Retained Earnings $ 64,000 Total Net Worth $ 84,000 Total Liabilities and Net Worth $ 285,000 Converts to Cash in 1 YearConverts to Cash in over 1 YearLiabilities < 1 YearLiabilities > 1 YearTotal of everything ownedEquity in Business

9. What Can We Learn from the Balance Sheet?What we own and how we financed it.How Risky is the BusinessToo much debtDebt not structured properlyDifficulty in paying short term debtRatio Analysis can reveal other issuesUses both balance sheet and income statement info together.

10. Income Statement aka: Profit and Loss Statement (P&L)Covers a period of time... Ex: Jan – Dec 2013Shows both amount and changes in:RevenuesExpensesProfitDoes NOT ShowIs your overall financial condition weak or strong (balance sheet)How much $$ is tied up in Accounts Receivable (what others owe YOU) and Accounts Payable (what you owe OTHERS)Your Assets (what you own) and Liabilities (what you owe)

11. Income Statement FormatRevenuesLess Cost of Goods= Gross Profit (Margin)Less Operating Expenses (Rent, Utilities…)Less Interest= Net Profit before TaxesLess Taxes= Net Profit after Taxes

12. What Can I Learn from P&L?Did I make a profit?Are my profits going up or down?What is my Gross Margin %What are my Expenses?Are my expenses going up or down?What are my Expenses as a % of Sales?What is my break even point?What happens to my profits is sales rise or fall by 10%

13. Income Statement (P&L) ExampleXYZ CompanyIncome StatementNet Sales $ 900,000 Less Cost of Goods Sold $ 540,000 60%Gross Profit $ 360,000 40%Operating ExpensesWages $ 175,000 Rent $ 24,000 Utilities $ 6,000 Interest Expense $ 5,000 Depreciation $ 10,000 Other $ 50,000 Total Expenses $ 270,000 30%Net Profit before Taxes $ 90,000 10%Less Income Taxes $ 10,000 Net Profit After Taxes $ 80,000 Materials + Direct Labor Profit MarginOther ExpensesProfit after all Expenses

14. P & L: Special NotesP & L often seen from a TAX Perspective: Shows what your Taxable Income isThus drives what your income tax will beFrom a tax perspective, you like to show high expenses2 Special Business Expenses to note:Depreciation: a special deduction allowed to reflect “use up” of Fixed Assets… is part of the expenses on a P&L. But, you do not write a “check” to pay depreciation.Principal Payments on Loans: are NOT shown on P&L… they are not tax deductible expenses. But you do write a “check” to pay principal payments.

15. Cash Flow Statement (Cash is King to Small Business)Cash Flow Statement is Critical to Small Business because it shows:Cash coming in to the businessCash going out of the businessYour ability to pay your billsThe maximum loan payments you can affordShows both interest and principal on loan paymentsDoes Not ShowAccounts Receivable and PayableAssets and LiabilitiesDepreciation on Equipment

16. Cash Flow FormatBeginning Cash+Cash Received=Total Cash Available-Less Cash Going Out= Ending Cash

17. What can I learn from the Cash FlowDo I have enough cash to pay my bills?I am generating cash or burning cash?What time periods will I need extra cash to pay bills?How much cash will I need?Do I need to find additional financing so I do not run out of cash?

18. Cash Flow ExampleXYZ Company Cash FlowJanFebMar…..Cash on Hand at beginning of Month $ 5,000 $ 2,500 $ (1,000)Cash Receipts Cash Sales $ 15,000 $ 13,000 $ 20,000 Collections from Acct. Payable $ 20,000 $ 19,000 $ 25,000 Loans or other cash injections $ - Total Cash Receipts $ 35,000 $ 32,000 $ 45,000 $ - Total Cash Available $ 40,000 $ 34,500 $ 44,000 $ - Cash Paid Out Purchases (COG, Materials) $ 10,000 $ 8,000 $ 11,000 Gross Wages (excludes owners withdrawal) $ 15,000 $ 15,000 $ 15,000 Supplies $ 2,000 $ 2,000 $ 2,000 Rent, Utilities, Insurance, etc. $ 5,000 $ 5,000 $ 5,000 Interest (on loans) $ 1,000 $ 1,000 $ 1,000 Subtotal Cash Out $ 33,000 $ 31,000 $ 34,000 $ - Other Cash Out Expenses Principal Payments on Loans $ 500 $ 500 $ 500 Capital Purchases (eg: new equipment) $ - $ - $ - Owners Withdrawal $ 4,000 $ 4,000 $ 4,000 Other $ - Total Cash Paid Out $ 37,500 $ 35,500 $ 38,500 Net Change in Cash $ (2,500) $ (3,500) $ 6,500 Cash Position at End of Month $ 2,500 $ (1,000) $ 5,500 Cash at start of month to pay billsCash Received from all sourcesTotal Cash Available during month to pay billsAll Cash going out during monthCash flow for the monthCash available at end of monthProblem !!!

19. SummaryAccurately Track PerformanceFrequently Review PerformanceConsider all 3 financial statementsLook for ways to improveSeek help as needed…. Hint: the WKU SBDC is a good resource

20. WKU Small Business Development Center2413 Nashville RoadBowling Green, KY 42101270-745-1905www.wkusbdc.com