1. Financial Statements 101

2. WKU Small Business Development Center
Free and Confidential Consulting to Small Business
Partner with the SBA
Core Services
Start Up Assistance
Feasibility Assessment
Access to Capital
Market Research
Managing and Growing a Business

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

4. 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%?

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

6. 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

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

8. Balance Sheet Example Converts to Cash in 1 Year
XYZ Company
Balance Sheet
Assets
Current Assets
Cash
$ ,000
Accounts Receivable
$ ,000
Inventory
$ ,000
Total Current Assets
$ 170,000
Long Term Assets
Fixed Assets
$ ,000
Less Accumulated Depreciation
$ (25,000)
Net Fixed Assets
$ 115,000
Total Assets
$ 285,000
Liabilities
Current Liabilities
Accounts Payable
$ ,000
Current Portion of LT Debt
$ ,000
Note Payable
$ ,000
Total Current Liabilities
$ 147,000
Long Term Liabilites
Long Term Loan
$ ,000
Total Long Term Liabilities
$ 54,000
Total Liabilities
$ 201,000
Capital or Net Worth
Owner Investment
$ ,000
Retained Earnings
$ ,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

9. 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.

10. 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)

11. 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

12. 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%

13. Income Statement (P&L) Example
XYZ Company
Income Statement
Net Sales
$ ,000
Less Cost of Goods Sold
$ ,000
60%
Gross Profit
$ ,000
40%
Operating Expenses
Wages
$ ,000
Rent
$ ,000
Utilities
$ ,000
Interest Expense
$ ,000
Depreciation
$ ,000
Other
$ ,000
Total Expenses
$ ,000
30%
Net Profit before Taxes
$ ,000
10%
Less Income Taxes
Net Profit After Taxes
$ ,000
Materials + Direct Labor
Profit Margin
Other Expenses
Profit after all Expenses

14. 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.

15. 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

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

17. 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?

18. 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
$ ,000
$ ,500
$ (1,000)
Cash Receipts
Cash Sales
$ ,000
$ ,000
$ ,000
Collections from Acct. Payable
$ ,000
$ ,000
Loans or other cash injections $
Total Cash Receipts
$ ,000
$ ,000
$ ,000 $
Total Cash Available
$ ,000
$ ,500
$ ,000
Cash Paid Out
Purchases (COG, Materials)
$ ,000
$ ,000
$ ,000
Gross Wages (excludes owners withdrawal)
Supplies
$ ,000
Rent, Utilities, Insurance, etc.
Interest (on loans)
$ ,000
Subtotal Cash Out
$ ,000
$ ,000
$ ,000
Other Cash Out Expenses
Principal Payments on Loans $
Capital Purchases (eg: new equipment)
Owners Withdrawal
$ ,000
Other
Total Cash Paid Out
$ ,500
$ ,500
$ ,500
Net Change in Cash
$ (2,500)
$ (3,500)
$ ,500
Cash Position at End of Month
$ ,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 !!!

19. 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

20. WKU Small Business Development Center
2413 Nashville Road
Bowling Green, KY