The

SMALL BUSINESS DEVELOPMENT CENTER

at the

SUMMIT MEDINA BUSINESS ALLIANCE

Presents…

Numbers Demystified

The Numbers Tell a Story

Any idea what yours are saying?

GIGOMeaningful Analysis of Financial

Statements Only Works with Good, Honest Data

Data must be:• Timely• Accurate• Not Skewed

–Don’t manage to minimize taxes

–Manage to maximize income

One Size Does Not Fit All• Acceptable Standards for Comparison varies by

Industry

• SBDCnet Data by Industry (NAICS Code)

Accounting Basis

• CASH

• ACCRUAL

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?

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?

Financial Statements

Key Financial Statements

• Comparative Balance Sheets• Comparative Income Statements

(P&L’s)• Statements of Cash Flow

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?

Comparative Statements

• Two or more equal periods• Side by side• Most recent to oldest• Two ways to compare

Highlightedlines would

Balance Sheet not appearin Cash Basis

For the years ended December 31, [Current] and [Prior]

Current Prior

1 Cash $ 488,462.00 $ 588,220.00 2 Accounts Receivable 454,760.00 - 3 Inventories 414,770.00 577,970.00 4 Prepaid Expenses - -

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00

6 Other Assets - -

7 Fixed Assests 1,750,000.00 1,750,000.00 8 Accumulated Depreciation (78,573.00) (14,286.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00 1,735,714.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00

11 Accounts Payable $ 236,297.00 $ 469,204.00 12 Accrued Expenses 26,435.00 18,480.00 13 Line of Credit 25,000.00 25,000.00 14 Current Portion of Note 75,000.00 75,000.00 15 Income Taxes Payable 139,804.00 -

11+12+13+14+15=16 Total Current Liabilities 502,536.00 587,684.00

17 Long-Term Portion of Note 800,000.00 900,000.00 16 + 17 = 18 Total Liabilities 1,302,536.00 1,487,684.00

19 Paid-In Capital 1,550,000.00 1,550,000.00 20 Retained Earnings 251,883.00 (135,780.00) 21 Distributions (75,000.00) -

19 + 20 + 21 = 22 Total Member's Equity 1,726,883.00 1,414,220.00

18 + 22 = 23 Total Liabilitied and Equity $ 3,029,419.00 $ 2,901,904.00

Horizontal Comparison

• Line item percentage change with respect to a base period

• Are there noticeable, relevant trends?

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.

Balance Sheet

For the years ended December 31, [Current] and [Prior] % Changefrom

Current Prior Prior

1 Cash $ 488,462.00 $ 588,220.00 -17% (99,758.00) 2 Accounts Receivable 454,760.00 - 454,760.00 3 Inventories 414,770.00 577,970.00 -28% (163,200.00) 4 Prepaid Expenses - - -

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00 16% 191,802.00

6 Other Assets - -

7 Fixed Assests 1,750,000.00 1,750,000.00 0% - 8 Accumulated Depreciation (78,573.00) (14,286.00) 450% (64,287.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00 1,735,714.00 -4% (64,287.00)

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00 4% 127,515.00

11 Accounts Payable $ 236,297.00 $ 469,204.00 -50% (232,907.00) 12 Accrued Expenses 26,435.00 18,480.00 43% 7,955.00 13 Line of Credit 25,000.00 25,000.00 0% - 14 Current Portion of Note 75,000.00 75,000.00 0% - 15 Income Taxes Payable 139,804.00 -

11+12+13+14+15=16 Total Current Liabilities 502,536.00 587,684.00 -14% (85,148.00)

17 Long-Term Portion of Note 800,000.00 900,000.00 -11% (100,000.00) 16 + 17 = 18 Total Liabilities 1,302,536.00 1,487,684.00 -12% (185,148.00)

19 Paid-In Capital 1,550,000.00 1,550,000.00 0% - 20 Retained Earnings 176,883.00 (135,780.00) -230% 312,663.00

19 + 20 = 21 Total Member's Equity 1,726,883.00 1,414,220.00 22% 312,663.00

18 + 21 = 22 Total Liabilitied and Equity $ 3,029,419.00 $ 2,901,904.00 4% 127,515.00

Common Sized Statements

Vertical Comparison

• Line item percentage change with respect to total assets

• Is anything noticeably disproportionate?• Horizontal comparison of the vertical

What if …

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

assets.

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.

Balance Sheet

For the years ended December 31, [Current] and [Prior]

Current Prior Current Prior Change

1 Cash $ 488,462.00 $ 588,220.00 16% 20% -4%2 Accounts Receivable 454,760.00 - 15% 0% 15%3 Inventories 414,770.00 577,970.00 14% 20% -6%4 Prepaid Expenses - - 0% 0% 0%

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00 45% 40% 5%

6 Other Assets - - 0% 0% 0%

7 Fixed Assests 1,750,000.00 1,750,000.00 58% 60% -3%8 Accumulated Depreciation (78,573.00) (14,286.00) -3% 0% -2%

7 + 8 = 9 Net Fixed Assets 1,671,427.00 1,735,714.00 55% 60% -5%0%

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00 100% 100% 0%

11 Accounts Payable $ 236,297.00 $ 469,204.00 8% 16% -8%12 Accrued Expenses 26,435.00 18,480.00 1% 1% 0%13 Line of Credit 25,000.00 25,000.00 1% 1% 0%14 Current Portion of Note 75,000.00 75,000.00 2% 3% 0%15 Income Taxes Payable 139,804.00 - 5% 0% 5%

11+12+13+14+15=16 Total Current Liabilities 502,536.00 587,684.00 17% 20% -4%

17 Long-Term Portion of Note 800,000.00 900,000.00 26% 31% -5%16 + 17 = 18 Total Liabilities 1,302,536.00 1,487,684.00 43% 51% -8%

19 Paid-In Capital 1,550,000.00 1,550,000.00 51% 53% -2%20 Retained Earnings 176,883.00 (135,780.00) 6% -5% 11%

19 + 20 = 21 Total Member's Equity 1,726,883.00 1,414,220.00 57% 49% 8%

18 + 21 = 22 Total Liabilitied and Equity $ 3,029,419.00 $ 2,901,904.00 100% 100% 0%

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?

Income Statement

For the years ended December 31, [Current] and [Prior]

Current Prior

1 Net Sales Product A $ 1,833,336.00 $ - 2 Net Sales Product B 1,222,224.00 -

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 Cost of Goods Product A 1,404,081.00 4,972.50 5 Cost of Goods Product B 601,749.00 1,657.50

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 6,630.00

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00)

8 Advertising & Promotion 17,825.00 3,490.00 9 Automobile Expense 19,200.00 3,704.00

10 Bank & Credit Card Fees 500.00 89.00 11 Depreciation Expense 750.00 119.00 12 Dues & Subsrciptions 750.00 132.00 13 Employee Benefits 66,965.00 9,360.00 14 Employee Mileage 875.00 162.00 15 Miscellaneous 250.00 66.00 16 Office Supplies 3,500.00 1,027.00 17 Operating Supplies 22,000.00 6,364.00 18 Payroll Tax 62,500.00 15,248.00 19 Professional Services 37,250.00 9,522.00 20 Property & Casualty Insurance 4,250.00 3,620.00 21 Rent 72,000.00 32,400.00 22 Travel, Meals & Entertainment 11,810.00 282.00 23 Utilities 14,400.00 3,285.00 24 Wages & Salaries 223,218.00 40,280.00

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00 129,150.00

8 - 25 = 26 Operating Income (EBIT) 491,687.00 (135,780.00)

27 Interest Earned 5,000.00 - 28 Interest Paid (105,000.00) -

27 + 28 = 29 Net Interest Income (100,000.00) -

30 Income Taxes 139,804.00 -

26 + 29 - 30 = 31 Net Income $ 251,883.00 $ (135,780.00)

Horizontal Comparison• Same method as balance sheets• Line item percentage change with respect to

a base year• Are there noticeable, relevant trends?• Audit exercise

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.

Income Statement

For the years ended December 31, [Current] and [Prior] % Changefrom

Current Prior Prior

1 Net Sales Product A $ 1,833,336.00 $ - 2 Net Sales Product B 1,222,224.00 -

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 Cost of Goods Product A 1,404,081.00 4,972.50 28237%5 Cost of Goods Product B 601,749.00 1,657.50 36305%

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 6,630.00 30254%

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00) 15833%

8 Advertising & Promotion 17,825.00 3,490.00 511%9 Automobile Expense 19,200.00 3,704.00 518%

10 Bank & Credit Card Fees 500.00 89.00 562%11 Depreciation Expense 750.00 119.00 630%12 Dues & Subsrciptions 750.00 132.00 568%13 Employee Benefits 66,965.00 9,360.00 715%14 Employee Mileage 875.00 162.00 540%15 Miscellaneous 250.00 66.00 379%16 Office Supplies 3,500.00 1,027.00 341%17 Operating Supplies 22,000.00 6,364.00 346%18 Payroll Tax 62,500.00 15,248.00 410%19 Professional Services 37,250.00 9,522.00 391%20 Property & Casualty Insurance 4,250.00 3,620.00 117%21 Rent 72,000.00 32,400.00 222%22 Travel, Meals & Entertainment 11,810.00 282.00 4188%23 Utilities 14,400.00 3,285.00 438%24 Wages & Salaries 223,218.00 40,280.00 554%

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00 129,150.00 432%

8 - 25 = 26 Operating Income (EBIT) 491,687.00 (135,780.00) 362%

27 Interest Earned 5,000.00 - 28 Interest Paid (105,000.00) -

27 + 28 = 29 Net Interest Income (100,000.00) -

30 Income Taxes 139,804.00 -

26 + 29 - 30 = 31 Net Income $ 251,883.00 $ (135,780.00) 186%

Vertical Comparison

• Line item percentage change with respect to total sales

• Is anything noticeably disproportionate?• Horizontal comparison of the vertical

PRIOR YEAR NUMBERS DIFFER FROM OTHER SHEETS - NEED TOTAL REVENUE FOR THIS TO WORK

Income Statement

For the years ended December 31, [Current] and [Prior]

Current Prior Current Prior Change

1 Net Sales Product A $ 1,833,336.00 $ 1,430,002.00 60% 49% 11%2 Net Sales Product B 1,222,224.00 1,466,668.00 40% 51% -11%

1 + 2 = 3 Total Revenue 3,055,560.00 2,896,670.00 100% 100% 0%

4 Cost of Goods Product A 1,404,081.00 1,053,060.00 46% 36% 10%5 Cost of Goods Product B 601,749.00 696,667.00 20% 24% -4%

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 1,749,727.00 66% 60% 5%

3 - 6 = 7 Gross Margin 1,049,730.00 1,146,943.00 34% 40% -5%

8 Advertising & Promotion 17,825.00 17,666.00 1% 1% 0%9 Automobile Expense 19,200.00 18,750.00 1% 1% 0%

10 Bank & Credit Card Fees 500.00 450.00 0% 0% 0%11 Depreciation Expense 750.00 600.00 0% 0% 0%12 Dues & Subsrciptions 750.00 666.00 0% 0% 0%13 Employee Benefits 66,965.00 71,782.00 2% 2% 0%14 Employee Mileage 875.00 820.00 0% 0% 0%15 Miscellaneous 250.00 333.00 0% 0% 0%16 Office Supplies 3,500.00 5,200.00 0% 0% 0%17 Operating Supplies 22,000.00 32,216.00 1% 1% 0%18 Payroll Tax 62,500.00 77,187.00 2% 3% -1%19 Professional Services 37,250.00 48,200.00 1% 2% 0%20 Property & Casualty Insurance 4,250.00 4,150.00 0% 0% 0%21 Rent 72,000.00 67,680.00 2% 2% 0%22 Travel, Meals & Entertainment 11,810.00 15,600.00 0% 1% 0%23 Utilities 14,400.00 13,430.00 0% 0% 0%24 Wages & Salaries 223,218.00 279,022.00 7% 10% -2%

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00 653,752.00 18% 23% -4%

8 - 25 = 26 Operating Income (EBIT) 491,687.00 493,191.00 16% 17% -1%

27 Interest Earned 5,000.00 3,250.00 0% 0% 0%28 Interest Paid (105,000.00) (125,000.00) -3% -4% 1%

27 + 28 = 29 Net Interest Income (100,000.00) (121,750.00) -3% -4% 1%

30 Income Taxes 139,804.00 137,092.00 5% 5% 0%

26 + 29 - 30 = 31 Net Income $ 251,883.00 $ 234,349.00 8% 8% 0%

• Profit Margin is a Vertical Comparison– Net Income / Sales

• Individual Revenue Items as a percentage of sales

Income Statement RETURN ON SALES

For the years ended December 31, [Current] and [Prior] Profit Margin

Current NET INCOMENET SALES

1 Net Sales Product A $ 1,833,336.00 2 Net Sales Product B 1,222,224.00 Line 31

1 + 2 = 3 Total Revenue 3,055,560.00 Line 3

4 Cost of Goods Product A 1,404,081.00 251,883.00 5 Cost of Goods Product B 601,749.00 3,055,560.00

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00

0.08 3 - 6 = 7 Gross Margin 1,049,730.00

8 Advertising & Promotion 17,825.00 9 Automobile Expense 19,200.00

…LINES 10 - 22 OMITTED …

…23 Utilities 14,400.00 24 Wages & Salaries 223,218.00

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00

8 - 25 = 26 Operating Income (EBIT) 491,687.00

27 Interest Earned 5,000.00 28 Interest Paid (105,000.00)

27 + 28 = 29 Net Interest Income (100,000.00)

30 Income Taxes 139,804.00

26 + 29 - 30 = 31 Net Income $ 251,883.00

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

A 2nd 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?

Statement of Operating Expenses

For the years ended December 31, [Current] and [Prior]

Current Prior Current Prior Change

Advertising & Promotion $ 17,825.00 $ 3,490.00 3% 3% 0%Automobile Expense 19,200.00 3,704.00 3% 3% 1%Bank & Credit Card Fees 500.00 89.00 0% 0% 0%Depreciation Expense 750.00 119.00 0% 0% 0%Dues & Subsrciptions 750.00 132.00 0% 0% 0%Employee Benefits 66,965.00 9,360.00 12% 7% 5%Employee Mileage 875.00 162.00 0% 0% 0%Miscellaneous 250.00 66.00 0% 0% 0%Office Supplies 3,500.00 1,027.00 1% 1% 0%Operating Supplies 22,000.00 6,364.00 4% 5% -1%Payroll Tax 62,500.00 15,248.00 11% 12% -1%Professional Services 37,250.00 9,522.00 7% 7% -1%Property & Casualty Insurance 5,000.00 3,620.00 1% 3% -2%Rent 72,000.00 32,400.00 13% 25% -12%Travel, Meals & Entertainment 11,810.00 282.00 2% 0% 2%Utilities 14,400.00 3,285.00 3% 3% 0%Wages & Salaries 223,218.00 40,280.00 40% 31% 9%

Total Operating Expenses $ 558,793.00 $ 129,150.00 100% 100% 0%

What are the sources of cash?

• Revenue from sales• Proceeds from financing• Investment Income• Cash from the sale of assets

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

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?

PROJECTED CASH FLOW ANALAYSISCOM PANY NAM E

DATES

CurrentBEGINNING CASH

Cash on Hand - Cash in Bank - TOTAL CASH -

CASH FROM:Current Month Cash Sales 2,584,900.00 Collected ReceivablesLoans & Financing 2,450,000.00 Investment Earnings 5,000.00 Sale of Property & EquipmentTOTAL CASH RECEIVED 5,039,900.00

CASH USED FORInventory Purchases 305,000.00 Operating Expenses

Wages 223,218.00 Benefits 66,965.00 Payroll taxes 62,500.00 Advertising 17,825.00 Travel & Entertainment 11,810.00 Dues & Subscriptions 750.00 Legal & Accounting 37,250.00 Supplies 304,720.00 TelephoneUtilities 14,400.00 Rent 72,000.00 Property & Casualty Insurance5,000.00 Licences & PermitsOther Operating Expenses 75,000.00

Tax Payments (other than payroll)Financing

Principal payments on loans1,500,000.00 Interest payments on Loans105,000.00

InvestmentsPurchase of securities Investment / Broker fees

Purchase of Property & Equipment 1,750,000.00 TOTAL CASH USED 4,551,438.00

ENDING CASH 488,462.00

The Statement of Cash Flows is nothing more than the

SUBTRACTION ofone Balance Sheet from Another

To show how we got From A to B

The Statement of Cash Flows is a form of

Horizontal Analysison the

Balance Sheet

Balance Sheet Statement of Cash FlowsFor the years ended December 31, [Current] and [Prior] For the years ended December 31, [Current] and [Prior]

Current Prior Current Prior Cash Flow

1 Cash $ 488,462.00 $ 588,220.00 Cash flows from operating activities2 Accounts Receivable 454,760.00 - 3 Inventories 414,770.00 577,970.00 20 Net Income 251,883.00 (135,780.00) 387,663.00 4 Prepaid Expenses - -

Adjustments to reconcile net income1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00 to net cash used in operations:

6 Other Assets - - 8 Depreciation 78,573.00 14,286.00 64,287.00

7 Fixed Assests 1,750,000.00 1,750,000.00 Changes in working capital:8 Accumulated Depreciation (78,573.00) (14,286.00)

2 Accounts Receivable (454,760.00) - (454,760.00) 7 + 8 = 9Net Fixed Assets 1,671,427.00 1,735,714.00 3 Inventories 414,770.00 577,970.00 163,200.00

4 Prepaid Expense - - - 5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00 11 Accounts Payable 236,297.00 469,205.00 (232,908.00)

12 Accrued Expenses 26,435.00 18,480.00 7,955.00 15 Income Taxes Payable 139,804.00 - 139,804.00

11 Accounts Payable $ 236,297.00 $ 469,204.00 Net cash used in operating activities 75,241.00 12 Accrued Expenses 26,435.00 18,480.00 13 Line of Credit 25,000.00 25,000.00 Cash flows from investing activities14 Current Portion of Note 75,000.00 75,000.00 15 Income Taxes Payable 139,804.00 - 7 Fixed Assests (PP&E purchase) 1,750,000.00 1,750,000.00 -

11+12+13+14+15=16 Total Current Liabilities 502,536.00 587,684.00 Net cash used in investing -

17 Long-Term Portion of Note 800,000.00 900,000.00 Cash flow from financing16 + 17 = 18 Total Liabilities 1,302,536.00 1,487,684.00

19 Paid in capiotal 1,550,000.00 1,550,000.00 - 19 Paid-In Capital 1,550,000.00 1,550,000.00 21 Distributions (75,000.00) - (75,000.00) 20 Retained Earnings 251,883.00 (135,780.00) 13 Line of Credit 25,000.00 25,000.00 - 21 Distributions (75,000.00) - 14 Current Portion of Note 75,000.00 75,000.00 -

19 + 20 + 21 = 22 Total Member's Equity 1,726,883.00 1,414,220.00 17 Long-Term Portion of Note 800,000.00 900,000.00 (100,000.00) Net cash from financing activities (175,000.00)

18 + 22 = 23 Total Liabilitied and Equity $ 3,029,419.00 $ 2,901,904.00 Net increase (decrease) in cash (99,759.00)

1 Beginning cash 588,220.00 1 Ending cash 488,462.00

Demystifying

Financial Ratios

Financial Ratios

• Where do we get the numbers?

• What does each ratio tell us?

Categories of Ratios

• LIQUIDITY• PROFITABILITY• FINANCING• ACTIVITY

Liquidity Ratios

Current Ratio

Current Assets _____________________________________________

Current Liabilities

Balance Sheet CURRENT RATIO

For the years ended December 31, [Current] CURRENT ASSETSCURRENT LIABILITIES

CurrentLINE 5

1 Cash $ 488,462.00 LINE 162 Accounts Receivable 454,760.00 3 Inventories 414,770.00 1,357,992.00 4 Prepaid Expenses - 502,536.00

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 2.70

6 Other Assets -

7 Fixed Assests 1,750,000.00 8 Accumulated Depreciation (78,573.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00

11 Accounts Payable $ 236,297.00 12 Accrued Expenses 26,435.00 13 Line of Credit 25,000.00 14 Current Portion of Note 75,000.00 15 Income Taxes Payable 139,804.00

11+12+13+14+15=16 Total Current Liabilities 502,536.00

17 Long-Term Portion of Note 800,000.00 16 + 17 = 18 Total Liabilities 1,302,536.00

19 Paid-In Capital 1,550,000.00 20 Retained Earnings 251,883.00 21 Distributions (75,000.00)

19 + 20 + 21 = 22 Total Member's Equity 1,726,883.00

18 + 22 = 23 Total Liabilitied and Equity $ 3,029,419.00

Quick Ratio or Acid-Test Ratio

(Cash + Marketable Securities + Net Receivables)

______________________________

Current Liabilities

Balance Sheet QUICK RATIO

For the years ended December 31, [Current] CASH + RECEIVABLESCURRENT LIABILITIES

CurrentLINES 1 + 2

1 Cash $ 488,462.00 LINE 162 Accounts Receivable 454,760.00 3 Inventories 414,770.00 943,222.00 4 Prepaid Expenses - 502,536.00

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1.88

6 Other Assets -

7 Fixed Assests 1,750,000.00 8 Accumulated Depreciation (78,573.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00

11 Accounts Payable $ 236,297.00 12 Accrued Expenses 26,435.00 13 Line of Credit 25,000.00 14 Current Portion of Note 75,000.00 15 Income Taxes Payable 139,804.00

11+12+13+14+15=16 Total Current Liabilities 502,536.00

17 Long-Term Portion of Note 800,000.00 16 + 17 = 18 Total Liabilities 1,302,536.00

19 Paid-In Capital 1,550,000.00 20 Retained Earnings 251,883.00 21 Distributions (75,000.00)

19 + 20 + 21 = 22 Total Member's Equity 1,726,883.00

18 + 22 = 23 Total Liabilitied and Equity $ 3,029,419.00

• What do the liquidity ratios tell us?

• Whether we have enough cash and near-cash assets to pay our bills

Profitability Ratios

Profit Margin

Net Income _____________________________________________

Net Sales

Income Statement RETURN ON SALES

For the years ended December 31, [Current] and [Prior] Profit Margin

Current NET INCOMENET SALES

1 Net Sales Product A $ 1,833,336.00 2 Net Sales Product B 1,222,224.00 Line 31

1 + 2 = 3 Total Revenue 3,055,560.00 Line 3

4 Cost of Goods Product A 1,404,081.00 251,883.00 5 Cost of Goods Product B 601,749.00 3,055,560.00

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00

0.08 3 - 6 = 7 Gross Margin 1,049,730.00

8 Advertising & Promotion 17,825.00 9 Automobile Expense 19,200.00

……

23 Utilities 14,400.00 24 Wages & Salaries 223,218.00

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00

8 - 25 = 26 Operating Income (EBIT) 491,687.00

27 Interest Earned 5,000.00 28 Interest Paid (105,000.00)

27 + 28 = 29 Net Interest Income (100,000.00)

30 Income Taxes 139,804.00

26 + 29 - 30 = 31 Net Income $ 251,883.00

Rate of Return on Assets

Net Income _____________________________________________

Total Assets

Balance Sheet

For the years ended December 31, [Current] and [Prior]

Current Prior RETURN ON ASSETS

1 Cash $ 488,462.00 $ 588,220.00 Current Prior2 Accounts Receivable 454,760.00 - 3 Inventories 414,770.00 577,970.00 NET INCOME 251,883.00 (135,780.00) 4 Prepaid Expenses - - TOTAL ASSETS 3,029,419.00 2,901,904.00

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00

6 Other Assets - - 0.08 (0.05)

7 Fixed Assests 1,750,000.00 1,750,000.00 8 Accumulated Depreciation (78,573.00) (14,286.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00 1,735,714.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00

Income Statement

For the years ended December 31, [Current] and [Prior]

Current Prior

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 6,630.00

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00)

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00 129,150.00

8 - 25 = 26 Operating Income (EBIT) 491,687.00 (135,780.00)

27 + 28 = 29 Net Interest Income (100,000.00) -

30 Income Taxes 139,804.00 -

26 + 29 - 30 = 31 Net Income $ 251,883.00 $ (135,780.00)

Rate of Return on Equity

Net Income _____________________________________________

Total Equity

Balance Sheet

For the years ended December 31, [Current] and [Prior]

Current Prior RETURN ON EQUITY

11 Accounts Payable $ 236,297.00 $ 469,204.00 Current Prior12 Accrued Expenses 26,435.00 18,480.00 13 Line of Credit 25,000.00 25,000.00 NET INCOME 251,883.00 (135,780.00) 14 Current Portion of Note 75,000.00 75,000.00 SHAREHOLDERS EQUITY 1,726,883.00 1,414,220.00 15 Income Taxes Payable 139,804.00 -

11+12+13+14+15=16 Total Current Liabilities 502,536.00 587,684.00

17 Long-Term Portion of Note 800,000.00 900,000.00 0.15 (0.10) 16 + 17 = 18 Total Liabilities 1,302,536.00 1,487,684.00

19 Paid-In Capital 1,550,000.00 1,550,000.00 20 Retained Earnings 251,883.00 (135,780.00) 21 Distributions (75,000.00) -

19 + 20 + 21 = 22 Total Member's Equity 1,726,883.00 1,414,220.00

18 + 22 = 23 Total Liabilitied and Equity $ 3,029,419.00 $ 2,901,904.00

Income Statement

For the years ended December 31, [Current] and [Prior]

Current Prior

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 6,630.00

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00)

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00 129,150.00

8 - 25 = 26 Operating Income (EBIT) 491,687.00 (135,780.00)

27 + 28 = 29 Net Interest Income (100,000.00) -

30 Income Taxes 139,804.00 -

26 + 29 - 30 = 31 Net Income $ 251,883.00 $ (135,780.00)

• What do the profitability ratios tell us?

• These ratios show us how our investment is doing.

Financing Ratios

Debt to Equity

Total Liabilities_____________________________________________

Total Equity

Balance Sheet

For the years ended December 31, [Current]

Current

1 Cash $ 488,462.00 DEBT TO EQUITY2 Accounts Receivable 454,760.00 3 Inventories 414,770.00 Debt (long and short) LINES 13 + 14 900,000.00 4 Prepaid Expenses - Total Member Equity LINE 22 1,726,883.00

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00

6 Other Assets - 0.52

7 Fixed Assests 1,750,000.00 8 Accumulated Depreciation (78,573.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00

11 Accounts Payable $ 236,297.00 12 Accrued Expenses 26,435.00 13 Line of Credit 25,000.00 14 Current Portion of Note 75,000.00 15 Income Taxes Payable 139,804.00

11+12+13+14+15=16 Total Current Liabilities 502,536.00

17 Long-Term Portion of Note 800,000.00 16 + 17 = 18 Total Liabilities 1,302,536.00

19 Paid-In Capital 1,550,000.00 20 Retained Earnings 251,883.00 21 Distributions (75,000.00)

19 + 20 + 21 = 22 Total Member's Equity 1,726,883.00

18 + 22 = 23 Total Liabilitied and Equity $ 3,029,419.00

Debt to Total Assets

Total Liabilities_____________________________________________

Total Assets

Balance Sheet DEBT RATIO

For the years ended December 31, [Current] Debt (long and short)Total Assets

CurrentLINES 18

1 Cash $ 488,462.00 LINE 102 Accounts Receivable 454,760.00 3 Inventories 414,770.00 1,302,536.00 4 Prepaid Expenses - 3,029,419.00

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 0.43

6 Other Assets -

7 Fixed Assests 1,750,000.00 8 Accumulated Depreciation (78,573.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00

11 Accounts Payable $ 236,297.00 12 Accrued Expenses 26,435.00 13 Line of Credit 25,000.00 14 Current Portion of Note 75,000.00 15 Income Taxes Payable 139,804.00

11+12+13+14+15=16 Total Current Liabilities 502,536.00

17 Long-Term Portion of Note 800,000.00 16 + 17 = 18 Total Liabilities 1,302,536.00

19 Paid-In Capital 1,550,000.00 20 Retained Earnings 251,883.00 21 Distributions (75,000.00)

19 + 20 + 21 = 22 Total Member's Equity 1,726,883.00

18 + 22 = 23 Total Liabilitied and Equity $ 3,029,419.00

Times Interest Earned

EBIT (Earnings Before Interest and Taxes)

_____________________________________________

Interest Expense

Income Statement TIMES INTEREST EARNED

For the years ended December 31, [Current] and [Prior] OPERATING INCOME (EBIT)INTEREST PAID

CurrentLINE 26

1 Net Sales Product A $ 1,833,336.00 LINE 292 Net Sales Product B 1,222,224.00

1 + 2 = 3 Total Revenue 3,055,560.00 491,687.00 105,000.00

4 Cost of Goods Product A 1,404,081.00

5 Cost of Goods Product B 601,749.00 4.68 4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00

3 - 6 = 7 Gross Margin 1,049,730.00

8 Advertising & Promotion 17,825.00 9 Automobile Expense 19,200.00

10 Bank & Credit Card Fees 500.00 11 Depreciation Expense 750.00 12 Dues & Subsrciptions 750.00 13 Employee Benefits 66,965.00 14 Employee Mileage 875.00 15 Miscellaneous 250.00 16 Office Supplies 3,500.00 17 Operating Supplies 22,000.00 18 Payroll Tax 62,500.00 19 Professional Services 37,250.00 20 Property & Casualty Insurance 4,250.00 21 Rent 72,000.00 22 Travel, Meals & Entertainment 11,810.00 23 Utilities 14,400.00 24 Wages & Salaries 223,218.00

Sum of 8 to 24 = 25 Total Operating Expenses 558,043.00

8 - 25 = 26 Operating Income (EBIT) 491,687.00

27 Interest Earned 5,000.00 28 Interest Paid (105,000.00)

27 + 28 = 29 Net Interest Income (100,000.00)

30 Income Taxes 139,804.00

26 + 29 - 30 = 31 Net Income $ 251,883.00

• What do the financing ratios tell us?

• These ratios show debt levels and ability to pay loans

Activity Ratios

Receivables Turnover

Net SalesNet Receivables

Balance Sheet RECEIVABLES TURNOVER

For the years ended December 31, [Current] and [Prior] TOTAL REVENUEACOUNTS RECEIVABLE

Current Prior3,055,560.00

1 Cash $ 488,462.00 $ 588,220.00 454,760.00 2 Accounts Receivable 454,760.00 -

3 Inventories 414,770.00 577,970.00 6.72 4 Prepaid Expenses - -

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00

6 Other Assets - -

7 Fixed Assests 1,750,000.00 1,750,000.00 8 Accumulated Depreciation (78,573.00) (14,286.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00 1,735,714.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00

Income Statement

For the years ended December 31, [Current] and [Prior]

Current Prior

1 Net Sales Product A $ 1,833,336.00 $ - 2 Net Sales Product B 1,222,224.00 -

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 Cost of Goods Product A 1,404,081.00 4,972.50 5 Cost of Goods Product B 601,749.00 1,657.50

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 6,630.00

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00)

Receivables Days

Net Receivables * 365Net Sales

Balance Sheet RECEIVABLE DAYS

For the years ended December 31, [Current] and [Prior] ACCOUNTS REC * 365TOTAL REVENUE

Current Prior454760 * 365

1 Cash $ 488,462.00 $ 588,220.00 3,055,560.00 2 Accounts Receivable454,760.00 - 3 Inventories 414,770.00 577,970.00 165,987,400.00 4 Prepaid Expenses - - 3,055,560.00

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00 54.32

6 Other Assets - -

7 Fixed Assests 1,750,000.00 1,750,000.00 8 Accumulated Depreciation(78,573.00) (14,286.00)

7 + 8 = 9 Net Fixed Assets1,671,427.00 1,735,714.00

5 + 6 + 9 = 10 Total Assets$ 3,029,419.00 $ 2,901,904.00

Income Statement

For the years ended December 31, [Current] and [Prior]

Current Prior

1 Net Sales Product A$ 1,833,336.00 $ - 2 Net Sales Product B1,222,224.00 -

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 Cost of Goods Product A1,404,081.00 4,972.50 5 Cost of Goods Product B601,749.00 1,657.50

4 + 5 = 6 Total Cost of Goods Sold2,005,830.00 6,630.00

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00)

Inventory Turnover

Cost of Goods Sold_____________________________________________

Inventory

Balance Sheet

For the years ended December 31, [Current] and [Prior]

Current Prior INVENTORY TURNOVER RATIO

1 Cash $ 488,462.00 $ 588,220.00 Current Prior2 Accounts Receivable 454,760.00 - 3 Inventories 414,770.00 577,970.00 COGS 2,005,830.00 6,630.00 4 Prepaid Expenses - - INVENTORIES 414,770.00 577,970.00

1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00

6 Other Assets - - 4.84 0.01

7 Fixed Assests 1,750,000.00 1,750,000.00 8 Accumulated Depreciation (78,573.00) (14,286.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00 1,735,714.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00

For the years ended December 31, [Current] and [Prior]

Current Prior

1 Net Sales Product A $ 1,833,336.00 $ - 2 Net Sales Product B 1,222,224.00 -

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 Cost of Goods Product A 1,404,081.00 4,972.50 5 Cost of Goods Product B 601,749.00 1,657.50

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 6,630.00

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00)

Asset Turnover

Sales_____________________________________________

Total Assets

Balance Sheet ASSET TURNOVER RATIO

For the years ended December 31, [Current] and [Prior] TOTAL REVENUEASSETS

Current PriorCurrent Prior

1 Cash $ 488,462.00 $ 588,220.00 2 Accounts Receivable 454,760.00 - 3,055,560.00 - 3 Inventories 414,770.00 577,970.00 3,029,419.00 2,901,904.00 4 Prepaid Expenses - -

1.01 - 1 + 2 + 3 + 4 = 5 Current Assets 1,357,992.00 1,166,190.00

6 Other Assets - -

7 Fixed Assests 1,750,000.00 1,750,000.00 8 Accumulated Depreciation (78,573.00) (14,286.00)

7 + 8 = 9 Net Fixed Assets 1,671,427.00 1,735,714.00

5 + 6 + 9 = 10 Total Assets $ 3,029,419.00 $ 2,901,904.00

Income Statement

For the years ended December 31, [Current] and [Prior]

Current Prior

1 Net Sales Product A $ 1,833,336.00 $ - 2 Net Sales Product B 1,222,224.00 -

1 + 2 = 3 Total Revenue 3,055,560.00 -

4 Cost of Goods Product A 1,404,081.00 4,972.50 5 Cost of Goods Product B 601,749.00 1,657.50

4 + 5 = 6 Total Cost of Goods Sold 2,005,830.00 6,630.00

3 - 6 = 7 Gross Margin 1,049,730.00 (6,630.00)

• 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?

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

Ittelson, Thomas,

Financial Statements: A Step-by-Step Guide to

Understanding and Creating Financial Reports

©1998 Career Press