Mgt 455 – Summer, 09Craig S. GalbraithPresentation derived in part from original material developed by Craig Galbraith and various presentations from Alan Barefield, University of Tennessee

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Number one reason for business failure (particularly small business) is not understanding financial statements

Need to know financial statements in order to track and predict success

Need to develop pro-formas for business plans

Need to analyze financial performance for valuation

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Projection of future financial condition

3 to 5 year projection Why only 3 to 5 year?

Key issues in pro-forma are Consistency with underlying

business plan Consistency with accounting

formats Sources for line items Assumptions for line items

Underlying analysis is critical

Be reasonable

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Income or Profit & Loss Statement

Balance Sheet

Cash Flow Statement

Budget Forecast

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Provides a summary of the revenues and expenses associated with the period’s operating activities

Provide information to complete the business and personal income tax returns

Shows the profitability of the business for lenders and other interested parties

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The income or profit and loss statement summarizes the level of revenue and expenses for the business

Major components include: Revenues Expenses Taxes Extraordinary Items

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Summarizes the levels of cash that the business has available to meet current obligations

Generally divided into monthly or quarterly periods to show when excess cash is available or when borrowing needs to occur

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Highlights the financing arrangements necessary to cover cash requirements

Serves as a benchmark for budgeting activities

Analyzes the timing of financial borrowing activities

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Details the financial position of a business at a particular point in time

Assets = Liabilities + Equity Tells the reader what the business

owns of monetary value and what the business owes to others.

Personal and business assets and liabilities are frequently reflected on the same statement

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The balance sheet indicates the degree to which the business is liquid and solvent

Liquidity – Can the business’ current liabilities be retired if the current assets are converted to cash?

Solvency – Can the total liabilities of the business be retired if all assets are converted to cash?

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Assets Current Assets Intermediate Assets Long-term Assets

Liabilities Current Liabilities Intermediate

Liabilities Long-term Liabilities

Net Worth

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Many persons assert that the budget is simply a projection of the cash flow statement

However this is not correctThe budget must incorporate all key

financial statementsForecasting statements are also

called pro forma statements

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Expected selling pricesExpected input pricesExpected input productivityPro forma operating budget

Production costs and sales objectivesPro forma financial budget

Cash receipts and disbursementsFamily living budgets

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Ratio analysis Alleviates the unit of measure problems

incurred when comparing raw numbers Four different types of ratios can be

examined▪ Liquidity ratios – can current debts be met▪ Solvency ratios – can all debts be met▪ Efficiency ratios – how efficient is the

operation▪ Profitability ratios – how profitable is the

operation

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Ratios don’t mean anything by themselves

They must be compared over time and with similar companies

Look at industry standards through trade magazines, Standard & Poore’s, RMA analysis, etc.