Understanding Financial Statements

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Transcript Understanding Financial Statements

Understanding
Financial Statements
Entrepreneurial Workshop II
How Your Personal and Business
Financial “Pictures” Are Linked
Agenda




What Financial Statements Can
and Can’t do
Determining Your Personal Cash
Flow
The Personal Financial Statement
Pricing
Agenda (con’t.)





Variable and Fixed Costs
Break-even Analysis
Business Cash Flow
The Balance Sheet
The Income Statement
Financial Statements CAN:
• Provide an indication of the value of your
business
• Help you keep track of your income and
expenses
• Reflect profits and losses
• Help you know when you can afford to
borrow money
• Provide you with a sales history for purposes
of anticipating inventory and staffing needs.
Financial Statements CAN NOT:
• Increase or create sales
• Keep your financial records
• Pay your bills
• Pay your taxes
• Collect accounts receivable
• Improve your bottom line
Personal Cash Flow
Estimate Disposable
Income based on past
12 months

Gross Income
less taxes paid
Personal Cash Flow (con’t.)
• Estimate Living Expenses for the past
-
12 months
Housing
Food
Recreation
Transportation
Clothing/Personal Care
Financial/Legal Services
-
Utilities
Insurance
Child Care
Medical Care
Miscellaneous
Personal Financial Statement
•
Reflects your personal assets
and liabilities
•
Can be verified by a personal
credit check
•
Is required for any loan application
•
Must be included in your
business plan
ASSETS
What You Own
Assets






Cash on hand & in banks
Savings Accounts
IRA or other Retirement Accounts
Accounts and Notes Receivable
Life Insurance – cash surrender value only
Stocks and Bonds
Assets (con’t.)
Real Estate
 Automobile- present value
 Other personal property
 Other assets

LIABILITIES
What You Owe
Liabilities
 Accounts Payable
 Notes Payable to Bank and Others
 Installment Account (auto)
 Installment Account (other)
 Loan on Life Insurance
 Mortgages on Real Estate
 Unpaid Taxes
 Other Liabilities
PROPER PRICING:
Can mean the difference between
success and failure
Under-Pricing
Under-pricing can cause
a business to fail:
If products/services are
drastically under-priced, the
business loses money every
time a sale is made.
Over-Pricing
Over-pricing can cause
sales to disappear
altogether, as customers
buy from lower-priced
competitors.
Determining the Right Price
•
Customer Surveys
Ask your potential customers.
•
“Shop” your Competition
Find out how your competitors are
pricing their goods/services and treating
their customers.
Determining the Right Price (con’t.)
 Market Research Sales
Try selling your goods/services on a
temporary basis at a fair or marketplace and
ask for customer feedback.
 Break
Even Analysis
Determine how many products/services you
must sell to cover ALL expenses of your
business.
Expenses
Cost of Goods Sold

Also known as direct or variable
expenses

These are the costs incurred in creating
your product/service. They are directly
related to your sales volume and should
be controlled thus.
Expenses (con’t.)
Fixed Expenses
•
Also known as operating expenses
•
You must pay them every month (or
regularly) regardless of sales levels
•
Some “controllable” fixed expenses are:
advertising, payroll and taxes
A Few More Terms


GROSS INCOME =
the amount of income a business earns before
expenses are considered.
GROSS PROFIT =
(Gross Income - Cost of Goods Sold)
It is from Gross Profit that fixed expenses are paid.

PRE TAX PROFIT =
(Gross Profit - Fixed Expenses)
The Break Even Analysis
The Formula for Break Even is:
Gross Income – Cost of Goods Sold
= Gross Profit
Fixed Expenses ÷ Gross Profit
= Break Even
Cash Flow
 Positive
Cash Flow is achieved when
money comes into your business faster
then it goes out.
 Positive
Cash Flow is a matter of timing.
 Managing
your cash flow is a matter of
planning.
REMEMBER:
Having cash is NOT the same thing as being profitable.
(and vice versa)
Projecting Cash Flow

Don’t Let Your Business Manage YOU.

Cash Flow Projections can help you
anticipate how much money you will
need to cover “short” months.

See Cathy’s Cleaning Service Example
Balance Sheet
The Balance Sheet is a financial “snapshot”
of your business at a given point in time.
It tells you (as of a specific date)…
What your business owns
The Debt for which your business is
liable
 The Net Worth of your business


Balance Sheet (con’t.)
The information is categorized as follows:
 Assets (What you own)
 Liabilities (What you owe)
 Equity (Your Net Worth)
Note: Assets – Liabilities = Equity
Income Statement
The Income Statement is a financial
“movie” that covers a specific period of
time.
It tells you if your business operated at a
profit or a loss during a specific period of
time:
 Income (Revenue generated)
 Expenses (Cost of Operations)
 Profit or Loss (Difference between
income and expenses)
Mary’s Financial Picture
1.
2.
3.
4.
5.
Mary’s take-home pay is $4,000/mo.
Her living expenses total $3,600/mo.
The difference between her income
and expenses is $400.
Mary puts her monthly “profit” into a
savings account.
She just bought a used car for $6,000.
Mary (con’t.)
6. She put $1,000 down to buy the car.
7. She has an auto loan with a balance of
$5,000.
8. Mary is buying a house. The purchase
price is $300,000.
9. She put $30,000 down on the house.
10. She has a mortgage balance of
$270,000.
Mary’s Balance Sheet
ASSETS
Bank Balance
Car
House
$
400
6,000
300,000
TOTAL Assets
$ 306,400
LIABILITIES
Mortgage loan
Car Loan
Liabilities
$ 270,000
5,000
275,000
EQUITY (net worth)
Home Equity
$ 30,000
Car Equity
1,000
Profit
400
EQUITY
$ 31,400
Total Liabilities & Equity
$ 306,400
Mary’s Income Statement
INCOME
Salary
$4,000
EXPENSES
Mortgage Payment
Food
Utilities
Insurance
Auto Payment
Miscellaneous
$2,000
500
400
100
300
300
TOTAL EXPENSES
Profit (Loss)
$3,600
$ 400
In Conclusion
Predicting the future is never easy.
However, by following these
“dos” and “don’ts” for financial
projections, you can avoid some
common mistakes.
“Dos” and “Don’ts”

Don’t provide only an income statement,
include a balance sheet and cash flow
statement too;

Do provide monthly data for the
upcoming year and annual data for
succeeding year;

Don’t provide more than three years
worth of projections unless your lender
or investor has asked for them;
“Dos” and “Don’ts” (con’t.)

Don’t provide more than two scenarios in
your projections;

Do ensure that the numbers reconcile;

Don’t be too optimistic about sales growth
or gross and operating profit margins;

Do account for reasonable interest expense
on your income statement if you have debt
on your balance sheet;
“Dos” and “Don’ts” (con’t.)

Don’t include every individual line item
for each expense, asset and liability
figure;

And finally, be as prepared and honest
as you can be ~ you may be meeting a
long-time advisor and friend. Commercial
lending is a relationship business!
Thank You for
Your Attention!
Questions?
SEED Corporation
80 Dean Street
Taunton, MA 02780
P:(508) 822-1020
F: (508) 880-7869
www.seedcorp.com