Microloan Readiness Series - PowerPoint Presentation

Slide1

Microloan Readiness Series

Profit and Loss

Today’s Agenda:

Financials’ Role in Lending

ABCs of P&L

Tools for P&L Analysis

What a lender looks forSlide2

Understanding Financials

Increase your ability to see what a lender wantsQuality of your referrals affects your agency’s relationship with lendersPrep clients so that they have a good chance of succeeding – don’t want to discourageSlide3

What Can Financials Tell Us?

ProfitablePricing to cover all costsManaging

inventory

well

Sufficient

equity

in business

Which products contribute most to the bottom lineCan business finance its own growth or need financingIf yes: how much, what type, does biz qualifyAnd much more!Slide4

Which “financials”?

Example levels of financial information requiredLoans under $15,000: 2 months bank statements, one pay stub, one year tax returns

Loans between $15,000 - $50,000: 3 bank statements, 2 years tax return, one year P&L

Over $50,000: 4 bank statements, 3 years tax returns, 3 years P&L, 3 years Balance Sheets

Each level requires increasing skills to create quality financials

and

to interpret for credit analysis.Slide5

Two Caveats

QuickBooks P&L – high bar for start-up microMicrolenders often just use bank statements, pay stubs, tax returnSmart phone apps for basic income and expense:

Freshbooks

, Wave,

SageOne

Takes more than one hour webinar

The how and what for creating a quality P&L

How to interpret for lending capacityas well as business decisionsSlide6

What are lenders looking for?

Accurate: Clean P&L with proper set up and consistent data inputBusiness success: Growing sales, margins good for industry, smart expenditures…

N

et Profit and Cash FlowSlide7

Getting to Quality P&L

Know proper QuickBooks set up* Know Profit & Loss and Balance Sheet rules/structureData entry accurate

and consistent

Might need to create new QB company

*Includes knowing what other reports owner needs for managementSlide8

Common QB Mistakes

Overlapping income/expense accountsToo many income/expense accountsRelationship between COGS and inventory

Debt: entered as income; principle/interest not split

Balance Sheet accounts on P&L

Equity accounts don’t match legal

structureSlide9

Profit and Loss

The Profit and Loss Statement measures revenues and expenses over a period of time 

Measures profitability:

whether the business is making

a profit on what it sellsSlide10

Profit and Loss

Shows the ability to successfully manage the buying and selling process.

Measures the ability to grow,

support

owner

and repay debt service.

Important report from accounting software program Slide11

Profit and Loss Structure

Basic formula+ Sales - Cost of Goods Sold

=

Gross Profit

-

Overhead

=

Net ProfitSlide12

SalesIncome = Sales = Revenue

The revenue earned from the sale of goods and services.Slide13

Cost of Goods Sold

Expenses incurred that are directly associated with the production or service delivery for sales in that period.

Also called variable expense.Slide14

Cost of Goods Sold

Manufacturing: Direct materials, direct labor, shippingRetail:

Wholesale

cost of inventory, shipping

Service:

Usually

don't have COGS,

but in some cases labor and other costs are directly associated with service delivery.Slide15

Gross Profit

Gross Profit = Sales - COGSDemonstrates the ability to control direct production costs:Labor and materials

Also indicates viability

of

pricingSlide16

Overhead

Those expenses which do not vary directly with production. Also called fixed expenses.Everything except direct expenses.All expenses needed to run the business,

keep the doors open, etc.

Tailored to each business

Don’t use QB suggested accounts without editing – keep total P&L to one pageSlide17

Net Profit

Net profit = Gross Profit - OverheadPays for (sole proprietor)Owners Draw

Future expansion

Principal Loan Repayment

Income TaxesSlide18

Bad Company

Let’s look at a poorly structured P&L, typical of many microenterprisesHow many errors can you find?Could a lender proceed with this?

How would you help this borrower get to clean P&L?Slide19

Key P&L Indicators

Sales: GrowingCOGS: Stable / FallingGross Profit: RisingNet Profit: Rising

Cash available to pay new debt service beyond owner’s draw, taxes and existing debtSlide20

Covering Debt Service

Global Cash assessment (Oct. 16th)Looking for 1.25 coverage for monthly loan paymentSlide21

Trend Analysis

Trend Analysis: Create spreadsheet to compare last 3 years to see trendsDollar Analysis: Measure progress by looking at total sales, expenses and net profit

side by side in a spreadsheet Slide22

Margin AnalysisConvert the P&L numbers into percentages of total sales for more complete

analysis.COGS/Sales = COGS margin Overhead/Sales = Overhead marginNet Profit/Sales = Net Profit margin

Again, each year, side by side in a spreadsheetSlide23

Trend & Margin Analysis

Track productivityAnalyze business managementSet goals

Bring

more $ to bottom

line

Best way to test for debt service capacity for larger deals

Ideally have three years of financials for trend and margin analysisSlide24

Good Sample P&L

Let’s look at a accurate, well-structured P&LLet’s analyze at dollars, trends and margins to gauge business performance and “

lendability

”Slide25

Borrowing ‘Red Flags’

Use short-term financing or operating cash for long-term assetsDon’t invest in such a way as to increase productivity

, efficiency and

profitability

Use loan funds to compensate

for

low profitability - credit cardSlide26

Discussion

Q

uestions

? Other perspectives to offer?

If you would like more in-depth training on

financial statements and credit analysis, please contact me.

Susan

Brown,

susan@susanrileybrown.com

530-925-2530