1. The SMALL BUSINESS DEVELOPMENT CENTER at the SUMMIT MEDINA BUSINESS ALLIANCE Presents…

2. Numbers Demystified

3. The Numbers Tell a Story Any idea what yours are saying?

4. GIGO Meaningful Analysis of Financial Statements Only Works with Good, Honest Data

5. Data must be: Timely Accurate Not Skewed –Don’t manage to minimize taxes –Manage to maximize income

6. One Size Does Not Fit All Acceptable Standards for Comparison varies by Industry SBDCnet Data by Industry (NAICS Code)

7. Accounting Basis CASH ACCRUAL

8. CASH BASIS Recognize revenue when payment is received No accounts receivable on books Recognize expense when payment is made No accounts payable on books Most businesses pay their taxes on this basis. Why?

9. Accrual Basis Recognize revenue when customer is invoiced Accounts receivable are on the books Recognize expense when obligation is incurred Accounts payable are on the books Banks & regulatory agencies prefer this basis. Why?

10. Financial Statements

11. Key Financial Statements Comparative Balance Sheets Comparative Income Statements (P&L’s) Statements of Cash Flow

12. Assets – Liabilities = Equity Have (Assets) – Owe (liabilities) = Worth (Equity) This is the Accounting Equation BALANCE SHEET The balance sheet is a snapshot in time What does it tell us?

13. Comparative Statements Two or more equal periods Side by side Most recent to oldest Two ways to compare

15. Horizontal Comparison Line item percentage change with respect to a base period Are there noticeable, relevant trends?

16. What if… Cash is down and accounts receivable are up? –Perhaps you are not collecting your money. Cash is down and accounts payable are up? –Perhaps you are spending too much.

18. Common Sized Statements

19. Vertical Comparison Line item percentage change with respect to total assets Is anything noticeably disproportionate? Horizontal comparison of the vertical

20. What if … Total Equity to total assets is growing? That’s good news! There are fewer claims against your assets.

21. What if … Total Liabilities to total assets is growing? Your debt is increasing. Is that always bad news? It could be planned debt to finance growth. It could be that you are not generating enough revenue to cover expenses.

23. Revenue – Expenses = Income Sales (Revenue) – Costs (Expenses) = Profit (Income) This is the Profit Equation INCOME STATEMENT The income statement shows performance over some period of time What does it tell us?

25. Horizontal Comparison Same method as balance sheets Line item percentage change with respect to a base year Are there noticeable, relevant trends? Audit exercise

26. What if… Health insurance is trending downward? Check your math!!! What if office supplies is trending upward? Perhaps you are spending too much. Perhaps all of those presentation packets you prepared are responsible.

28. Vertical Comparison Line item percentage change with respect to total sales Is anything noticeably disproportionate? Horizontal comparison of the vertical

30. Profit Margin is a Vertical Comparison –Net Income / Sales Individual Revenue Items as a percentage of sales

32. Classified Income Statement –One class for each revenue streams revenues and expenses –A separate P&L for each type of revenue or profit center –Compare sales revenue and profit margin

33. A 2 nd Vertical Comparison The Statement of Operating Expenses is contained within the income statement. Looking at a single operating expense item or a group of related operating expenses items against total operating expenses also provides useful information. What might you look for?

35. What are the sources of cash? Revenue from sales Proceeds from financing Investment Income Cash from the sale of assets

36. What are the uses of cash? Use cash to buy assets Use cash to pay operating expenses Use cash to pay financed debt Use cash to pay taxes

37. Ending Cash = Starting Cash + Cash received from Sources – Cash spent on Uses This is called CASH FLOW Statement of Cash Flows This statement follows the money over some period What does it tell us?

39. The Statement of Cash Flows is nothing more than the SUBTRACTION of one Balance Sheet from Another To show how we got From A to B

40. The Statement of Cash Flows is a form of Horizontal Analysis on the Balance Sheet

42. Demystifying Financial Ratios

43. Financial Ratios Where do we get the numbers? What does each ratio tell us?

44. Categories of Ratios LIQUIDITY PROFITABILITY FINANCING ACTIVITY

45. Liquidity Ratios

46. Current Ratio Current Assets _____________________________________________ Current Liabilities

48. Quick Ratio or Acid-Test Ratio (Cash + Marketable Securities + Net Receivables) ______________________________ Current Liabilities

50. What do the liquidity ratios tell us? Whether we have enough cash and near-cash assets to pay our bills

51. Profitability Ratios

52. Profit Margin Net Income _____________________________________________ Net Sales

54. Rate of Return on Assets Net Income _____________________________________________ Total Assets

56. Rate of Return on Equity Net Income _____________________________________________ Total Equity

58. What do the profitability ratios tell us? These ratios show us how our investment is doing.

59. Financing Ratios

60. Debt to Equity Total Liabilities _____________________________________________ Total Equity

62. Debt to Total Assets Total Liabilities _____________________________________________ Total Assets

64. Times Interest Earned EBIT (Earnings Before Interest and Taxes) _____________________________________________ Interest Expense

66. What do the financing ratios tell us? These ratios show debt levels and ability to pay loans

67. Activity Ratios

68. Receivables Turnover Net Sales Net Receivables

70. Receivables Days Net Receivables * 365 Net Sales

72. Inventory Turnover Cost of Goods Sold _____________________________________________ Inventory

74. Asset Turnover Sales _____________________________________________ Total Assets

76. What do the activity ratios tell us? These ratios show the strength of sales activity Do the inventory levels and receivables levels make sense when compared to sales levels?

77. Financial Projections & Budgeting Based on Income Statement Based on historical numbers where possible Includes allowance for seasonal or cyclical business activity Based on Horizontal Comparisons from the Income Statements

78. Ittelson, Thomas, Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports ©1998 Career Press