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Understanding Financial StatementsEntrepreneurial Workshop II

How Your Personal and Business Financial “Pictures” Are Linked

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AGENDA

What Financial Statements Can and

Can’t DoDetermining Your Personal Cash Flow

NeedsThe Personal Financial Statement Pricing

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AGENDA (con’t)

Variable and Fixed Costs Break-even Analysis Business Cash Flow The Balance Sheet The Income Statement

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Financial Statements CAN:

• Provide an indication of the value of your business

• Help you keep track of your income and expenses

• Reflect profits and losses• Help you know when you can afford to borrow

money• Provide you with a sales history for purposes of

anticipating inventory and staffing needs.

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• Increase or create sales• Keep your financial records• Pay your bills• Pay your taxes• Collect accounts receivable• Improve your bottom line

Financial Statements CAN NOT:

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Personal Cash Flow

• Estimate Disposable Income based on past 12 months

Gross Income less taxes paid

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Personal Cash Flow (con’t)

• Estimate Living Expenses for the past

12 months- Housing - Utilities- Food - Insurance- Recreation - Child Care- Transportation - Medical Care- Clothing/Personal Care - Miscellaneous- Financial/Legal Services

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Personal Financial Statement

• Reflects your personal assets and liabilities• Can be verified by a personal credit check• Is required for any loan application• Must be included in your business plan

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ASSETS

What You Own

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Assets

Cash on hand & in banks Savings Accounts IRA or other Retirement Accounts Accounts and Notes Receivable Life Insurance – cash surrender value only Stocks and Bonds

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Assets (cont.)

Real Estate Automobile- present value Other personal property Other assets

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LIABILITIES

What You Owe

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Liabilities

Accounts Payable Notes Payable to Bank and Others Installment Account (auto) Installment Account (other) Loan on Life Insurance Mortgages on Real Estate Unpaid Taxes Other Liabilities

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PROPER PRICING:

Can mean the difference between success and failure

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UNDER-PRICING

Under-pricing can cause a business to fail:

If products/services are drastically under-priced, the business loses money every time a sale is made.

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OVER-PRICING

Over-pricing can cause sales to disappear altogether, as customers buy from lower-priced competitors.

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Determining the Right Price

Customer Surveys Ask your potential customers.

“Shop” your Competition Find out how your competitors are pricing

their goods/services and treating their customers.

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Determining the Right Price (con’t)

Market Research Sales Try selling your goods/services on a temporary basis at a fair or marketplace and ask for customer feedback.

Break Even Analysis Determine how many products/services you

must sell to cover ALL expenses of your business.

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EXPENSES

Cost of Goods Sold Also known as direct or variable

expenses These are the costs incurred in creating

your product/service. They are directly related to your sales volume and should be controlled thus.

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EXPENSES (con’t)

Fixed Expenses Also known as operating expenses You must pay them every month (or

regularly) regardless of sales levels Some “controllable” fixed expenses are:

advertising, payroll and taxes

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A Few More Terms

GROSS INCOME = the amount of income a business earns before expenses are considered.

GROSS PROFIT = Gross Income - Cost of Goods Sold

It is from Gross Profit that fixed expenses are paid.

PRE TAX PROFIT = Gross Profit - Fixed Expenses

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The Break Even Analysis

The Formula for Break Even is: Gross Income – Cost of Goods Sold =

Gross Profit

Fixed Expenses ÷ Gross Profit = Break

Even

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CASH FLOW

Positive Cash Flow is achieved when money comes into your business faster then it goes out.

Positive Cash Flow is a matter of timing. Managing your cash flow is a matter of

planning.

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REMEMBER:

Having cash is NOT the same thing as being profitable.

(and vice versa)

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Projecting Cash Flow

Don’t Let Your Business Manage YOU. Cash Flow Projections can help you anticipate how much money you will

need to cover “short” months. See Cathy’s Cleaning Service Example

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BALANCE SHEET

The Balance Sheet is a financial “snapshot”

of your business at a given point in time. It tells you, as of a specific date:® What your business owns® The Debt for which your business is

liable® The Net Worth of your business

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Balance Sheet (cont.)

The information is categorized as follows:® Assets (What you own)® Liabilities (What you owe)® Equity (Your Net Worth)

Note: Assets – Liabilities = Equity

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Income Statement

The Income Statement is a financial “movie” that covers a specific period of time. It tells you if your business operated at a profit or a loss during a specific period of time. ® Income (Revenue generated)® Expenses (Cost of Operations)® Profit or Loss (Difference between income and expenses)

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Mary’s Financial Picture

1. Mary’s take-home pay is $4,000/mo.2. Her living expenses total $3,600/mo.3. The difference between her income

and expenses is $400.4. Mary puts her monthly “profit” into a

savings account.5. She just bought a used car for $6,000.

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Mary (cont.)

6. She put $1,000 down to buy the car.7. She has an auto loan with a balance of

$5,000.8. Mary is buying a house. The purchase

price is $300,000.9. She put $30,000 down on the house.10. She has a mortgage balance of

$270,000.

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Mary’s Balance Sheet

ASSETSBank Balance $

400Car

6,000House

300,000

TOTAL Assets $ 306,400

LIABILITIESMortgage loan $ 270,000 Car Loan 5,000

Liabilities 275,000

EQUITY (net worth)Home Equity $ 30,000

Car Equity 1,000

Profit 400EQUITY $ 31,400

Total Liabilities & Equity $ 306,400

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Mary’s Income Statement

INCOME Salary $4,000EXPENSES Mortgage Payment $2,000 Food 500 Utilities 400 Insurance 100 Auto Payment 300 Miscellaneous 300TOTAL EXPENSES $3,600Profit (Loss) $ 400

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In Conclusion . . .

Predicting the future is never easy. But by following these dos and don’ts for financial projections, you can avoid some common

mistakes.

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Dos and Don’ts

Don’t provide only an income statement, include a balance sheet and cash flow statement too;

Do provide monthly data for the upcoming year and annual data for succeeding year;

Don’t provide more than three years worth of projections unless your lender or investor has asked for them;

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Dos and Don’ts (Cont.)

Don’t provide more than two scenarios in your projections;

Do ensure that the numbers reconcile;Don’t be too optimistic about sales growth or

gross and operating profit margins;Do account for reasonable interest expense

on your income statement if you have debt on your balance sheet;

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Dos and Don’ts (Cont.)

Don’t include every individual line item for each expense, asset and liability figure;

And finally, be as prepared and honest as you can be ~ you may be meeting a long-time advisor and friend. Commercial lending is a relationship business!

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Thank you for your attention!

Questions?

SEED Corporation80 Dean Street

Taunton, MA 02780(508) 822-1020

(508) 880-7869 (fax)

www.seedcorp.com