Understanding Financial Statements

What are financial statements? The summarized results of your business financial transactions over a designated period of time. They will show total income, expenses, cash balances, level of debt, and much more. But where does this information come from?

Accounts Accounts are the categories into which the effects of transactions are recorded, and from which financial reports are created. 5 major account categories: The Income and Expense accounts measure business operations – what’s going in and out of the business. The Assets, Liabilities, and Equity accounts measure financial position. Income Proceeds from sales Expenses Costs of operation Assets What you own Liabilities What you owe Equity Net worth / level of investment Operations Financial Position

Chart of Accounts Sample Income accounts Sales revenue Other income Sample Expense accounts Rent Cost of Goods Sold (COGS) Marketing Office supplies Payroll Professional fees Sample Asset accounts Current assets Cash Inventory Accounts receivable Fixed assets Equipment Property Sample Liability accounts Accounts payable Credit card payable Loan payable Sample Equity accounts Owner’s equity Retained earnings Within each major account category, you’ll have sub-accounts to further classify your transactions by type of account. Here are some examples of common sub-accounts. Every business will use different account categories, though businesses in the same industry will likely have the same. Your master list of what accounts (categories) you use is called your chart of accounts. Keep it simple, though – you don’t want a million accounts – just the main ones. Like bank accounts, each of these accounts will have transactions posted to it and will maintain a running balance that is the sum of all the transactions that have been posted to them. Explain what kind of other income a company might have besides revenue. Define COGS and why it may be indicated separately from other type of expenses (but that we are not getting into inventory accounting today) Explain the difference between current and fixed assets Define accounts receivable and accounts payable. Define retained earnings as the cumulative net profit of the business.

* today’s class will focus on the income statement and balance sheet Financial Statements Income Statement* Balance Sheet* Statement of Cash Flow * today’s class will focus on the income statement and balance sheet Each has different information and tells a different story.

Income Statement / Profit & Loss Statement (P&L) My company Income Statement For the month of August 2008 Income Sales revenue $2,000 Expenses rent $ 850 utilities 75 payroll 400 insurance 25 marketing 250 Total expenses 1,600 Profit/Loss $400 Shows the performance of your business over a period of time Resets at the beginning of each new accounting period Summarizes all revenue generated by the business Summarizes all expenses incurred by the business (by category) Calculates the net profit or loss, or “bottom line” = Income – Expenses Tells you how well your business is operated

Reviewing your income statement How is your revenue trending? Month-to-month Against same period last year (considers seasonality) How are your expenses trending? What are your highest categories of expenses? Which expenses are fixed vs. variable? What is your cost of goods sold? How do your expenses (as a % of sales) compare to others in your industry? Review a sample income statement – talk about the different sections. So, what should you look for when reviewing? Have them spend some time analyzing the numbers and coming to conclusions of their own.

Reviewing your income statement will tell you… Are you profitable? What’s your profit margin? Profit / Sales What’s your gross profit margin? (Sales – COGS) / Sales

My company Balance Sheet Shows a snapshot of your business at a point in time Accumulates over the lifetime of your business Shows the net worth of your business The balance sheet always balances ASSETS – LIABILITIES = EQUITY My company Balance Sheet As of August 31, 2008 Assets: Cash 5,000 Accounts Receivable 600 Inventory 900 Equipment 1,000 Total Assets 7,500 Liabilities: Accounts Payable 900 Loan Payable 3,500 Total Liabilities 4,400 Equity: Owner’s equity 2,700 Retained earnings 400 Total Equity 3,100 Explain current vs long-term assets and liabilities.

Link between balance sheet and income statement Profit or loss is taken from the bottom line of the income statement and recorded on the balance sheet in the Retained Earnings equity account. Retained earnings accumulate over the life of the business. When a business operates at a profit, it increases in equity (is worth more) When a business operates at a loss, it decreases in equity (is worth less)

Reviewing your balance sheet Liquidity: Can your company meet its payment obligations? Cash balance Working capital: Current assets – Current liabilities Current ratio: Current assets / Current liabilities Cash flow management How much inventory do you have? How fast are you selling it? Is your inventory on the shelf collecting dust and interest? Are you doing physical inventories monthly, annually, never? Inventory turns: (COGS / Inventory balance) How high is your accounts receivable balance? How quickly are you collecting it? Days sales outstanding: (AR / Sales) * # of days in period This is related to cash flow as well. Inventory is Black and White. Not gray like marketing or sales…

Reviewing your balance sheet Debt management What are your total debt obligations? What is your total equity in the business? How leveraged is your company? Debt-to-equity ratio: Total liabilities / Total equity

Food Truck Financing Assignment Here’s the Story: The year is 2025 and you just inherited 30,000 dollars from a long lost relative. You decide to take the money and follow your passion, and open up a food truck. You head to the #1 Food Truck City in the World, Orlando, Florida. Before you start serving some grub, you have to figure out a few things though using the internet. What is the name of your Food Truck and what do you serve? Give some examples of start-up costs related to a food truck business? What are some examples of operating costs related to a food truck? What does the average food truck cost? Knowing you only have 30,000 dollars, how will you plan to finance the truck and why? What other items would you need to finance to start up the food truck? How much would you typically pay someone to work a food truck an hour? What is the average cost to operate a food truck in the United States (in 2018)? If you decided to open up another food truck, what are 3 groups you could borrow money from? Which would you prefer and why?