Welcome

Introduction to seminar

What do you hope to learn in the next two hours:

Burning issues?

Topics of interest?

Opportunity to network

Have fun!

Section References

Understanding Financial Statements Section Three

Assessing Financial Health Section Four

Why Understand Financial Statements?

Understand your business better

Use financial statements to improve business performance

Make informed decisions on fact not fiction

Assess the financial health of your business

To make it easier when applying for finance or refinancing your loans

Common Terms used in Financial Statements

Asset: items of value owned by the business

Liabilities: those amounts owing to external stakeholders

Equity: the amount owing from the business to the owners

Revenue: the income the business earns from its operations

Expenses: the costs associated with earning the business income

Financial Statements

Profit and LossStatement of profitability of the business

Balance SheetStatement of financial health of the business

Statement of CashflowsStatement of movement of cashflows in the business

Page 4

Profit and Loss Statement

A summary of a business’ income and expenses over a specific period of time

Prepared at regular intervals to show the results of operations for a given period

Used to compare against previous periods

Can compare against industry averages

Page 5

Profit and Loss Statement

Total all types of revenues

Deduct the costs of the goods that have been sold (purchases + beginning stocks – ending stocks)

Deduct all the costs and expenses of operating the business

What remains is profit (or perhaps a loss)

Gross Profit

LessLess

Sales DiscountsSales

Commissions

Sales DiscountsSales

Commissions

EqualsEquals

Gross ProfitGross Profit

Cost of Goods SoldCost of Goods Sold

LessLess

EqualsEquals

SalesSales

Net SalesNet Sales

Page 5

Cost of Goods Sold

Opening

Stock

Opening

Stock

PlusPlus

Stock PurchasesStock Purchases

EqualsEquals

Stock available

for sale

Stock available

for sale

LessLess

Closing StockClosing StockPage 6

Profit and Loss Statement

EqualsEquals

Gross ProfitGross Profit

LessLess

Expenses(Fixed & Variable)

Expenses(Fixed & Variable)

Cost of Goods Sold

Cost of Goods Sold

LessLess

Net SalesNet Sales

Net ProfitNet Profit

EqualsEquals

Page 6

Profit and Loss Statement Hint

Only those businesses that have goods (products) to sell will use the calculation of Cost of Goods Sold

Case Study

Joe’s Motorbike Tyres

Joe has decided to start up his own business selling tyres to motorbike manufacturers

Page 6 & 7 of workbook

Profit and Loss Statement Tip

Regularly produce profit and loss information and compare against previous month’s activities to ensure that your profit expectations are being met

Balance Sheet

Shows the financial position of the business at a point in time

Items listed in terms of immediacy – short term and longer term

Prepared at least once a year at your balance date and usually monthly

Used to analyse the financial health of the business

Shows the net worth of the business to the owners

Balance Sheet Hint

Assets

$ 54,820

Liabilities

$ 9,620

FundedThrough

Shareholders’ Funds

$ 45,200

This diagram shows how the Balance Sheet works

Page 8

Balance Sheet Classifications

Current AssetsAll assets that will be turned into cash within 12 months

Current LiabilitiesAll liabilities that have to be repaid within 12 months

Non Current AssetsAll assets other than current assets

Non Current LiabilitiesAll liabilities other than current liabilities

Case Study

Joe’s Motorbike Tyres

Let’s look at Joe’s Balance Sheet after one year of trading

Page 10 of workbook

Balance Sheet Tip

A prosperous business will have assets of the business funded by profits rather than being heavily reliant on funding from either external parties (Liabilities) or continual cash injections from the owner (Equity)

Statement of Cashflows

Shows the movement of cash in your business

Lists the sources of funds and where they have been spent

Can indicate if you are drawing too much cash from your business

Page 11

Statement of Cashflows

Joe’s Motorbike Tyres

Let’s look at Joe’s Statement of Cashflows after one year of trading, showing the relationship between the balance sheet and profit and loss statement

Page 12 of workbook

Assessing Financial Health

Why analyse financial statements?

The main financial ratios

Industry comparisons

Page 13

Financial Statement Ratios

Analyse the health of the business against key indicators

See how you rate against your industry averages

Look for favourable or unfavourable trends

Financial Statement Ratios

Liquidity: The ability of the business to pay the bills as they fall due

Solvency: The ability of the business to meet all debt obligations

Profitability: Measure business performance and ultimate success of operations

Management: How effectively working capital is being managed

Balance Sheet: How efficient the business is using assets and equity

Liquidity Ratios

Current Ratio: measures of financial strength

Total current assetsTotal current liabilities

Quick Ratio: best measure of liquidity

Current assets – inventoryCurrent liabilities – overdraft

Page 13

Solvency Ratios

Leverage: How assets are being fundedTotal liabilities

Equity

Debt to asset: Percentage of assets being financed by liabilities

Total liabilitiesTotal assets

Page 14

Profitability Ratios

Gross Margin: % of sales dollars remaining (after obtaining or

manufacturing the goods sold) available to pay the overhead expenses of the business

Gross profitNet Sales

Net Margin: % of sales dollars left after all expenses

Net profitNet Sales

Page 15

Management Ratios

Days inventory: how well your stock is being managed

Stock x 365 Cost of goods sold

Days debtors: how quickly cash from customers is being collected Debtors x 365 Net Sales

Days creditors: how well accounts payable are being managed

Creditors x 365 Cost of goods sold

Page 16

Balance Sheet Ratios

Return on assets: how efficiently profits are being generated from the

assets of the business

Net profit before tax x 100

Total assets

Return on investment: measures the return on equity in the

business

Net profit before tax x 100

Total Equity

Page 17

Financial Analysis Tip

Financial ratio analysis will provide the all important warning signs that could allow you to solve your business problems before they destroy your business

Understanding Financial Statement

Assess the strengths and weakness of your business

Be proactive in decision making

Analyse to improve business performance

Assess your business against industry averages

List 3 actions you will follow through with as a result of this

workshop

Then

List 3 things that you’ve learned in this seminar

List 3 actions you will follow through with as a result of this

seminar

List 3 things that you’ve learned in this seminar

Business mentors help you to identify a clear direction for you and your business.Business mentors can also advise you on how to:

conduct market researchwork out your break-even pointprice and/or cost your products or servicesdevelop an effective marketing strategyuse other business management tools

To arrange a session with a business mentor go to:

www.sbms.org.au/OurPrograms/SpecialistVouchers.aspx

and type in AFS as your code

Using your SBMS voucher

Questions?

Thank you for attending

Check outbusiness.vic.gov.au/workshops

for more workshop information