1 High Speed Growth Managing Business Financials for Growth

2 The SCORE Foundation would like to thank for showing their support of America’s small businesses by sponsoring this series. The content provided in the Simple Steps for Growing Your Business materials is intended as a business resource only and does not guarantee a successful outcome when applied to individual business use. To find additional resources on growing your business, visit and

3 Using Financial Statements to Manage Your Business

4 Jennifer Behar Cash: Cash basis bookkeepers recognize income and expenses when they are received/paid Accrual: Accrual basis bookkeepers recognize income and expenses when the product/service is delivered Important Terms: Bookkeeping Methods

5 Gross sales (revenues) Cost of goods sold Gross profit Sales, general and administrative expenses Operating profit Interest expenses and depreciation Net profit Accounting Terminology

6 Components of COGS varies from industry to industry Generally includes all direct and indirect costs of producing a product Does not include sales, general and administrative expenses (SG&A) Cost of Goods Sold

7 Expenses that support the company’s operations, including sales, but are not directly related to COGS Sales, General & Administrative Expenses

8 Using Financial Statements to Manage Your Business Sales Revenues COGS Gross Profits SG&A Operating Profits Net Profit Gross Profits Profits after you subtract COGS from sales revenue Operating Profits Profits after you subtract SG&A from Gross Profits Net Profits Profits after you subtract taxes, interest paid and depreciation from Gross Profits

9 Douglas S. Cavanaugh A typical set of financial statements is made up of: Income Statement (P&L) Balance Sheet Statement of Cash Flows (optional) Optional: Accounts Receivable Aging Summary Accounts Payable Aging Summary Financial Statements

10 Theresa Alfaro Daytner Review the sample Income Statement and Balance Sheet with the instructor and discuss the different components of each. Financial Statement Discussion

11 Top section shows revenues Gross revenues Adjustments to revenues Cost of goods sold (COGS) Adding/subtracting the figures above = gross profit Bottom section shows expenses Logical categories of expenses Revenues – expenses = net profit for period Income Statement

12 Balance Sheet Organized in sections The Balance Sheet Assets: -Current -Long-term Liabilities: -Short-term -Long-term Shareholders’ Equity: -Common stock -Retained earnings -Current income Organized in Sections

13 Shows all inflows and outflows of cash for a period of time Lets management see how much cash has been added to or subtracted from operations Statement of Cash Flows

14 Though these two summary aging reports are not technically part of the financial statement, most financing sources want to see them with the other three components A/R and A/P Aging

15 Pros of In-House Bookkeeping vs. Outsourcing In-House:  Bookkeeper devoted to your business  Familiarity with your business  May have additional expertise  May handle other tasks Outsourcing:  May cost less  Off-the-shelf software allows easy data transfer  Technology enables secure sharing of sensitive data  May gain access to multiple skill sets

16 Types of Financial Statements Using Financial Statements to Manage Your Business CPA Audited CPA Reviewed CPA Compiled Internally Prepared Most Trusted Least Expensive

17 Understanding and Using Financial Ratios

18 Liquidity Profitability Leverage Efficiency Financial Ratios

19 Surendra N. Kumar Used to measure the quality and adequacy of current assets to meet current obligations as they come due Current ratio Quick ratio Days of cash Liquidity Ratios

20 Indicates the extent to which current assets are available to satisfy current liabilities Stated as values such as 2.5 to 1.0 or simply 2.5 A ratio of 1.5:1 or higher is considered adequate. A 2:1 ratio is strong. Liquidity Ratios: Current Ratio

21 Indicates the extent to which more liquid assets are available to satisfy current liabilities Stated as values such as 1.5 to 1.0 or simply 1.5 A quick ratio of 1:1 or higher is generally considered liquid Liquidity Ratios: Quick Ratio

22 Indicates the number of days revenue held in cash Days of cash = safety cash Every business will require a different level of safety cash Cash equivalents include money market holdings, short-term liquid investments, marketable securities and government bonds and bills Liquidity Ratios: Days of Cash

23 Elizabeth Feichter Used to measure performance of a company and how well its assets are being used to generate revenues Gross profit margin Return on assets Return on equity Profitability Ratios

24 The percentage of money left after sales when cost of goods sold (COGS) is subtracted Profitability Ratios: Gross Profit Margin Formula: Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit Margin Example: Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) = Gross Profit ($4,000)

25 The profit generated by the total assets employed by a company What it means: Higher ratio reflects a more effective employment of company assets Profitability Ratios: Return on Assets

26 The profit generated by the net assets employed ROE is the single most important financial ratio applying to small business owners and the best measure of performance by management Profitability Ratios: Return on Equity (ROE)

27 Andrew Dunn Key measurements in determining a company’s vulnerability to business downturns as well as its capacity for credit and internal capital needs Debt to Equity Leverage Ratios

28 Indicates how well a business is leveraging its debt against the capital invested by its owners If liabilities exceed net worth, creditors have a greater stake than the shareholders Leverage Ratios: Debt to Equity

29 Marta E. Maxwell Measurements of the effectiveness of using current assets and managing current liabilities Days of accounts receivable (A/R) Days of inventory Days of accounts payable (A/P) Efficiency Ratios

30 Indicates the number of days to collect a period’s worth of accounts receivable Though industries vary, if you can keep your A/R collection cycle close to 30 days or less, you have an efficient collection process Efficiency Ratios: Days A/R Outstanding

31 Indicates the number of days it takes to turn over your inventory If your business is seasonal, you may want to start your season with a higher number of days of inventory and end it with fewer days Efficiency Ratios: Days of Inventory

32 Indicates the number of days of trade and service payables your company is owing If your vendor offers net 30 terms with a 2% prompt payment discount (within 10 days), taking the discount when you can is important Efficiency Ratios: Days of A/P

33 Financing Growth

34 Friends and family Angel Investors (Equity) Small Business Investment Companies (SBICs) Funding For Strategic Growth: Equity

35 SBA Microloan – up to $50,000 SBA Express Loan Program – up to $350,000 SBA 7 (a) Loan Program – up to $5 million USDA B&I loans Community Development Financial Institutions (CDFI) Banks and Credit Unions (Conventional) Funding For Strategic Growth: Debt

36 SCORE SCORE (Local Chapter) American Express Open Forum For More Information