Transcript Financial Statements for Small Business Management

Dr. Alex White
Ag & Applied Economics
[email protected]
540-231-3132
http://faculty.agecon.vt.edu/alexwhite/
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Why you need financial statements
What financial statements you need
Construction of statements
◦ Start-up capital exercise
◦ Labor cost exercise
◦ Balance sheet exercise
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Breakeven analysis
Ratio Analysis
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Applying for loans
◦ Start-up loans, operating loans/lines, etc.
◦ Typical loan application (“loan app”)
 2-3 years of balance sheets, income statements
 Historical, projected
◦ Impress your lender with:
 Cash flow statement and breakevens
 Best/worst case scenarios
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Powerful management tools
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Compare the business to the industry averages
Identify strengths/weaknesses of the business
Identify trends within the business
Identify strategies to improve
Enterprise analysis!! (woo hoo!!)
Helps with tax preparation
◦ Improved recordkeeping
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Balance sheet
◦ Listing of what you own and how you paid for it
 Assets = Liabilities + Net Worth
 Value of Assets = Debt financing + “Owner financing”
◦ Tells lender
 Liquidity and solvency position
 Outstanding debts, creditors
 Assets available for collateral
◦ Not a useful day-to-day tool for managers
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Income Statement
◦ Shows the economic profit for the period (year)
 Revenues – COGS – Overhead = EBT
◦ Cash vs accrual accounting
◦ Lenders & managers use to assess:
 Profitability, Repayment ability, and Financial efficiency
 Breakevens, sensitivity analysis
◦ Retail operations usually do a weekly income
statements
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Cash Flow Statement (Budget)
◦ Shows all cash coming in/going out and the timing
◦ Helps the lender and manager:
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Estimate cash surplus/deficits for each period
Shift the timing of cash flows
Determine when to schedule loan payments
Determine operating loan needs and terms
◦ IMO – the most powerful statement for managers
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Calculate ratios and measures
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Compare to benchmarks (RMA, S&P, etc.)
◦ Available at libraries
 Usually at the reference desk
 Robert Morris Associates – Annual Statement Studies
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Look for trends over time
◦ Compare years side-by-side
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Alex’s preferred method
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Start-up capital worksheet
Labor cost budgets
Balance sheet (Day 1, Year 1)
Projected cash flow statement
Projected income statement
Projected balance sheet (Day 1, Year 2)
Yadda yadda yadda
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Makes you think about all the assets you will
need before opening the doors
◦ How you will pay for each item
 Owner capital (cash or net worth)
 Term loan
 “Hard assets” - machinery, equipment, real estate,
improvements
 Operating loan/line
 “Operating assets” – inventory, prepaids, etc.
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Use a 10-25% fudge factor
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For each “type” of employee
◦ Manager, cashier, etc.
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Estimates the payroll taxes
◦ FICA, FUTA, Medicare, worker’s comp.
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Estimates cost of non-cash benefits
◦ Insurance, retirement, uniform, company car, etc.
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Determines $cost/hour and $value/hour
◦ Useful in budgeting and negotiation!
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Assets = Value of things used in the business
◦ Only what you have that day!!
◦ Current Assets = life of about 1 year or less
 Cash, savings, inventory, A/Rec., prepaids, supplies, etc.
◦ Non-current Assets = life greater than 1 year
 Machinery, equipment, real estate, improvements
◦ List each at its purchase cost
 Lenders want market value instead!
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Liabilities = what you owe as of that day
◦ Current Liabilities = owed within 1 year
 Operating loan, A/Pay., principal due, accrued interest
◦ Non-current liabilities = owed AFTER 1 year
 Remaining principal balances
◦ List the actual dollar amount owed as of that day
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Net Worth = owner’s investment as of that day
◦ Original cash invested – withdrawals + additions
◦ Retained Earnings ~ net income from previous years
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Cash “Budget”
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List cash inflows WHEN they occur
List cash outflows WHEN they occur
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Bottom half deals with operating loan
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◦ Thank goodness for computers!
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Helps you do your projected balance sheet &
income statement
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List of revenues and expenses
“Cheater’s” method = use total column of
cash flow statement
◦ Except for principal payments, income taxes
◦ Add depreciation
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For “accrual” statements
◦ Need to account for changes in inventories,
payables, receivables, etc.
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From cash flow stmt
◦ Cash balance
◦ Operating loan balance & accrued interest
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Adjust other asset values as needed
◦ Add another year of depreciation on hard assets
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From income statement
◦ Net income helps determined retained earnings
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4-step process for loans
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Measure of minimum performance needed
1,000s of ways to calculate BEs
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Key equation
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◦ (Price – COGS) x Qty sold – Overhead = $0
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BE qty. = Overhead / (Price – COGS)
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BE Price = Overhead / Qty Sold + COGS
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RMA Annual Statement Studies
◦ Indexed by NAICS codes
 By Sales, by Assets, by Year
◦ Top, middle, bottom quartiles
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Compare ratios to benchmarks
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Look for trends over time
◦ That’s why lenders want 2-3 years of statements
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Identify strengths and weaknesses
Develop strategies to improve the financial
condition
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Cost control
Pricing
Marketing
Debt structure
Labor efficiency, etc.
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Liquidity – ability to meet current obligations
◦ Current Ratio
◦ Quick Ratio
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current assets/current liabilities
(current asset – inventory)/cur. liab.
Solvency – ability to meet all debts
◦ Debt/Asset
total liabilities/total assets
◦ Debt/Worth
total liabilities/net worth
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Repayment ability
◦ EBIT/Interest
EBIT/Interest
◦ Debt Coverage Ratio
(EBT + other income + Depreciation + Interest Expense
– Taxes & Family Living) / Annual P&I payments
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Profitability
◦ ROA
EBT/Total Assets
◦ ROE
EBT/Net Worth
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Financial Efficiency
◦ Sales/Total Assets
◦ COGS/Sales
◦ Operating Exp/Sales
◦ Operating Profit Margin
EBT/Sales
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http://faculty.agecon.vt.edu/alexwhite/
◦ Go to the Small Business tab
◦ Built as a teaching tool for start-up businesses
 Excel 2003
◦ Can be used for existing businesses