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Microloan Readiness SeriesProfit and LossToday’s Agenda:
Financials’ Role in Lending
ABCs of P&L
Tools for P&L Analysis
What a lender looks for
Understanding Financials
Increase your ability to see what a lender wants
Quality of your referrals affects your agency’s relationship with lenders
Prep clients so that they have a good chance of succeeding – don’t want to discourage
What Can Financials Tell Us?
Profitable
Pricing to cover all costs
Managing inventory well
Sufficient equity in business
Which products contribute most to the bottom line
Can business finance its own growth or need financing
If yes: how much, what type, does biz qualify
And much more!
Which “financials”?Example levels of financial information required
1. Loans under $15,000: 2 months bank statements, one pay stub, one year tax returns
2. Loans between $15,000 - $50,000: 3 bank statements, 2 years tax return, one year P&L
3. Over $50,000: 4 bank statements, 3 years tax returns, 3 years P&L, 3 years Balance Sheets
Each level requires increasing skills to create quality financials and to interpret for credit analysis.
Two Caveats
QuickBooks P&L – high bar for start-up micro
Microlenders often just use bank statements, pay stubs, tax return
Smart phone apps for basic income and expense: Freshbooks, Wave, SageOne
Takes more than one hour webinar The how and what for creating a quality P&L
How to interpret for lending capacity
as well as business decisions
What are lenders looking for? Accurate: Clean P&L with proper set up and
consistent data input
Business success: Growing sales, margins good for industry, smart expenditures…
Net Profit and Cash Flow
Getting to Quality P&L
Know proper QuickBooks set up* Know Profit & Loss and Balance Sheet
rules/structure Data entry accurate and consistent Might need to create new QB company
*Includes knowing what other reports owner needs for management
Common QB Mistakes
Overlapping income/expense accounts Too many income/expense accounts Relationship between COGS and inventory Debt: entered as income; principle/interest not split Balance Sheet accounts on P&L Equity accounts don’t match legal
structure
Profit and Loss
The Profit and Loss Statement measures revenues and expenses over a period of time
Measures profitability: whether the business is making a profit on what it sells
Profit and Loss
Shows the ability to successfully manage the buying and selling process.
Measures the ability to grow,
support owner and repay debt service.
Important report from accounting software program
Profit and Loss Structure
Basic formula
+ Sales
- Cost of Goods Sold
= Gross Profit
- Overhead
= Net Profit
Sales
Income = Sales = Revenue
The revenue earned from the sale of goods and services.
Cost of Goods Sold
Expenses incurred that are directly associated with the production or service delivery for sales in that period.
Also called variable expense.
Cost of Goods Sold
Manufacturing: Direct materials, direct labor, shipping
Retail: Wholesale cost of inventory, shipping
Service: Usually don't have COGS, but in some cases labor and other costs are directly associated with service delivery.
Gross Profit
Gross Profit = Sales - COGS
Demonstrates the ability to control direct production costs:Labor and materials
Also indicates viability of pricing
Overhead
Those expenses which do not vary directly with production. Also called fixed expenses.
Everything except direct expenses.
All expenses needed to run the business, keep the doors open, etc.
Tailored to each business
Don’t use QB suggested accounts without editing – keep total P&L to one page
Net Profit
Net profit = Gross Profit - Overhead
Pays for (sole proprietor)
Owners Draw
Future expansion
Principal Loan Repayment
Income Taxes
Bad Company
Let’s look at a poorly structured P&L, typical of many microenterprises
How many errors can you find? Could a lender proceed with this? How would you help this borrower get to clean
P&L?
Key P&L Indicators
Sales: Growing
COGS: Stable / Falling
Gross Profit: Rising
Net Profit: Rising
Cash available to pay new debt service beyond owner’s draw, taxes and existing debt
Covering Debt Service
Global Cash assessment (Oct. 16th)
Looking for 1.25 coverage for monthly loan payment
Trend Analysis
Trend Analysis: Create spreadsheet to compare last 3 years to see trends
Dollar Analysis: Measure progress by looking at total sales, expenses and net profit side by side in a spreadsheet
Margin Analysis
Convert the P&L numbers into percentages of total sales for more complete analysis.
COGS/Sales = COGS margin
Overhead/Sales = Overhead margin
Net Profit/Sales = Net Profit margin
Again, each year, side by side in a spreadsheet
Trend & Margin Analysis
Track productivity
Analyze business management
Set goals
Bring more $ to bottom line
Best way to test for debt service capacity for larger deals
Ideally have three years of financials for trend and margin analysis
Good Sample P&L
Let’s look at a accurate, well-structured P&L Let’s analyze at dollars, trends and margins to
gauge business performance and “lendability”
Borrowing ‘Red Flags’
Use short-term financing or operating cash for long-term assets
Don’t invest in such a way as to increase productivity, efficiency and profitability
Use loan funds to compensate for low profitability - credit card
Discussion
Questions? Other perspectives to offer?
If you would like more in-depth training on financial statements and credit analysis, please contact me.
Susan Brown,
530-925-2530