Financial Statements 101

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

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%?

Financial Statements: Your Scorecard Balance Sheet Income Statement Cash Flow Statement

Balance Sheet: Shows (At Single Point in Time) What You Own: Assets What You Owe: Liabilities Net Worth: Equity in Business Assets = Liabilities + Equity What You Own How You Paid for It

Balance Sheet Format Assets Current Assets Long-Term Assets Total Assets Liabilities Current Liabilities Long-Term Liabilities Total Liabilities Owners Equity (Net Worth)

Balance Sheet Example Converts to Cash in 1 Year XYZ Company Balance Sheet Assets Current Assets Cash $ 10,000 Accounts Receivable $ 75,000 Inventory $ 85,000 Total Current Assets $ 170,000 Long Term Assets Fixed Assets $ 140,000 Less Accumulated Depreciation $ (25,000) Net Fixed Assets $ 115,000 Total Assets $ 285,000 Liabilities Current Liabilities Accounts Payable $ 41,000 Current Portion of LT Debt $ 6,000 Note Payable $ 100,000 Total Current Liabilities $ 147,000 Long Term Liabilites Long Term Loan $ 54,000 Total Long Term Liabilities $ 54,000 Total Liabilities $ 201,000 Capital or Net Worth Owner Investment $ 20,000 Retained Earnings $ 64,000 Total Net Worth $ 84,000 Total Liabilities and Net Worth Converts to Cash in 1 Year Converts to Cash in over 1 Year Total of everything owned Liabilities < 1 Year Liabilities > 1 Year Equity in Business

What Can We Learn from the Balance Sheet? What we own and how we financed it. How Risky is the Business Too much debt Debt not structured properly Difficulty in paying short term debt Ratio Analysis can reveal other issues Uses both balance sheet and income statement info together.

Income Statement aka: Profit and Loss Statement (P&L) Covers a period of time... Ex: Jan – Dec 2013 Shows both amount and changes in: Revenues Expenses Profit Does NOT Show Is 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)

Income Statement Format Revenues Less Cost of Goods = Gross Profit (Margin) Less Operating Expenses (Rent, Utilities…) Less Interest = Net Profit before Taxes Less Taxes = Net Profit after Taxes

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%

Income Statement (P&L) Example XYZ Company Income Statement Net Sales $ 900,000 Less Cost of Goods Sold $ 540,000 60% Gross Profit $ 360,000 40% Operating Expenses Wages $ 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 Net Profit After Taxes $ 80,000 Materials + Direct Labor Profit Margin Other Expenses Profit after all Expenses

P & L: Special Notes P & L often seen from a TAX Perspective: Shows what your Taxable Income is Thus drives what your income tax will be From a tax perspective, you like to show high expenses 2 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.

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 business Cash going out of the business Your ability to pay your bills The maximum loan payments you can afford Shows both interest and principal on loan payments Does Not Show Accounts Receivable and Payable Assets and Liabilities Depreciation on Equipment

Cash Flow Format Beginning Cash +Cash Received =Total Cash Available -Less Cash Going Out = Ending Cash

What can I learn from the Cash Flow Do 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?

Cash Flow Example Cash at start of month to pay bills XYZ Company Cash Flow Jan Feb Mar ….. 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 $ 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) Supplies $ 2,000 Rent, Utilities, Insurance, etc. Interest (on loans) $ 1,000 Subtotal Cash Out $ 33,000 $ 31,000 $ 34,000 Other Cash Out Expenses Principal Payments on Loans $ 500 Capital Purchases (eg: new equipment) Owners Withdrawal $ 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 $ 5,500 Cash at start of month to pay bills Cash Received from all sources Total Cash Available during month to pay bills All Cash going out during month Cash flow for the month Cash available at end of month Problem !!!

Summary Accurately Track Performance Frequently Review Performance Consider all 3 financial statements Look for ways to improve Seek help as needed…. Hint: the WKU SBDC is a good resource

WKU Small Business Development Center 2413 Nashville Road Bowling Green, KY 42101 270-745-1905 www.wkusbdc.com