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Understanding P & L’s For Non-Financial Personnel

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Pre-Test Accounting & Finance

Name the 3 Key Financial Statements?

What is GAAP? What is IFRS?

What is EBITDA? How do we use it?

What Financial Statement deals with Operations of a Business?

What Financial Statement deals with Management of the Business?

Name the three parts of a Balance sheet?

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Language of Business

What is Finance?Art of raising, managing, and making money

in business.1. Assessing financial performance and health of firm

2. Using information to plan for future

3. Executing the plan

What is Accounting? Language of Business

Standardized System for Providing

Financial Information About Business

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Financial Terms

Accrual Method / Cash Method

Assets

Balance Sheet

Capital Expenditures

Capital Gain

Current Assets

Statement of Cash Flow

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Financial Terms

Liabilities – Current or Long Term Liabilities

Depreciation

Equity

Income Statement

Leverage

Retained Earnings

Sales Forecast

Statement of Retained Earnings

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Cash Basis

AccountingAccrual Basis Accounting

Record

Sales / Revenues

When Cash

Received

When Revenues

Earned

Record

Expenses

When Cash

Paid

When Expenses

are Incurred

Matched to

Cash vs. Accrual Basis Accounting

Accounting Concepts

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Important Ways to Understand

& Apply GAAP

Understand what financial data is telling you

Communicate more effectively

Understand how the bottom line is impacted

Develop budgets

Control Cost

Make better informed decisions

Spotting Financial Trends to Capitalize on Opportunities

Make Decisions Based on Solid Financial Data

. International Financial Reporting

Standards (IFRS)

Are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external.

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Assets - What a company Owns

Liabilities - What a company Owes

Owners’ Equity – What’s Left Over

Money invested by Owners in business

The Accounting Equation - A L E

Assets = Liabilities + Owners’ Equity

•

Accounting Concepts

Jargon To Translate

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1 Balance Sheet

2 Income Statement

3 Cash Flow Statement

Financial Statements

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How are these

Financial Statements

Link together?

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Balance SheetAssets

Current Assets $$

Fixed Assets $$

Other Assets $$

Total Assets $$

Liabilities

Current Liabilities $$

LT Liabilities $$

Total Liabilities $$

Owners’ Equity

Contributed Capital $$

Retained Earnings $$

Total Liabilities & Equity $$

Income Statement

Sales / Revenue $$

- Costs $$

- Expenses $$

Profit or Loss $$

Cash Flow StatementOperating Activities $$

Investing Activities $$

Financing Activities $$

Change in Cash $$

Beginning Cash $$

Ending Cash $$

Key Concept

Everything either impacts profits or impacts cash.

You can not do anything in business that does “NOT” hit the financials

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Why Are Financial Statements

Necessary?

Owners / Management

To make informed, intelligent decisions

Investors

To analyze investment potentials

Bankers

To decide whether or not to loan money

Company

To determine the risk of doing business

Six Key Drivers in Business

1. Cash

2. Profits

3. Assets

4. Efficiency/ Utilization

5. Growth

6. People

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Poll Question 1

Name three ways your company uses financials?

1)

2)

3)

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The Income Statement

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Two Types of Income Statement

Single Step Income Statement Multi-Step Income Statement

Basic Profit Relationship

Revenue .Revenue (Sales)

Minus Cost of Good Sales

Minus Expenses and Losses Equals Gross Profits

Minus Selling Expenses

Equals Net Income Minus G & A Expenses

Equals Net Income

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What the Income Statement Tells You

Is the organization profitable and how much so?

Are Profits increasing or decreasing? “WHY”

Ratios GP, OP, NP

How effective are marketing and sales efforts?

Have outside factors (e.g., economy, competition, etc.) impacted revenue and how much so?

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What the Income Statement Tells You

Have costs increased (which ones?) and

How have they impacted profitability?

Bottom Line Impact: Greater Accuracy = Greater Profits

Do you see any trends over the course of several years? What are the trends?

What costs are increasing or decreasing? (WHY?)

How effective is Inventory & Cost of Goods?

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Poll Question 2

What are the most important items to focus on in an Income statement?

a) Profitability

b) Efficiency

c) Growth

d) None of the above

e) All of the above

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The Balance Sheet

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What the Balance Sheet Tells You

Measures Liquidity:

1) Current Ratio Current Assets/ Current Liability

Ability to meet near-term obligations 2:1 ratio is good

2) Quick Ratio Current Assets – Inventory / Current LiabilityAbility to meet near-term regardless of sales levels

Measures Cash

Liquidity (short term)

Liquidity

The company’s available cash and its ability to turn its assets into cash quickly and inexpensively:

How quickly and inexpensively could it generate more cash:

Liquidity is the company’s cash position plus its cash flow.

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What the Balance Sheet Tells You

Measures Solvency:

1) Net Worth (Total Assets – Total Liabilities)

2) Debt/Equity Ratio—More risk the higher it is; can’t obtain loans

3) Net Working Capital (Current Assets – Current Liabilities)

4) Total Debt/ Total Assets (More risk the higher it is)

Solvency

The ability of a company to meet its long-term financial obligations.

Solvency is essential to staying in business, but a company also needs liquidity to thrive.

Liquidity is a company's ability to meet its short-term obligations.

What the Balance Sheet Tells You

Measures Efficiency

1) Return on Sales

(Net Income/ Net sales)

2) Inventory Turnover

(COGS/ Average Inventory)

3) Days Sales In Inventory

(365 Days/ Inventory Turnover)

Efficiency

A level of performance that describes a process that uses the lowest amount of inputs to create the greatest amount of outputs.

Efficiency relates to the use of all inputs in producing any given output, including personal time and energy.

Efficiency is a measurable concept that can be determined by determining the ratio of useful output to total input. It minimizes the waste of resources such as physical materials, energy and time, while successfully achieving the desired output

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Interpreting a Balance Sheet

Is Management Really Effective?

How much are you worth?

Note the cash balance

Calculate weight of components of equation (% of each line item)

How did the business grow?

How much did debt increase?

How much did equity increase?

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How to Quickly Decipher

Analysis Methods

The simplest ways to analyze your financial statements are vertically and horizontally.

A vertical analysis shows you the relationships among components of one financial statement, measured as percentages.

On your statement of profit and loss, each line item is shown as a percentage of sales

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XYZ Manufacturing, Inc.

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How to Quickly Decipher

Analysis Methods

A vertical analysis shows you the relationships among components of one financial statement, measured as percentages.

On your Balance Sheet: Assets are reflected as a percentage of Total Assets: Liability & Equity are reflected as a percentage of Total Liability & Equity.

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How to Quickly Decipher

Analysis Method

A horizontal analysis provides you with a way to compare your numbers from one period to the next, using financial statements from at least two distinct periods.

Each line item has an entry in a current period column and a prior period column.

Those two entries are compared to show both the dollar difference and percentage change between the two periods

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Horizontal Analysis

Year 2 Year 1 Difference %

Cash 2,130 2,000 130 6.5%

A/R 2,480 2,500 (20) (.8)

Inventory 2,840 2,100 740 35.2

Total 7,450 6,600 850 12.88

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A Safe / Strong Organization

Assets Liabilities & Equity

Current Assets 70% Current Liabilities 25%

Fixed Assets 30% Long term debt 15%

Stockholders Equity 60%

Total Assets 100% Total Liability & Equity 100%

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A Risk / Weak Organization

Assets Liabilities & Equity

Current Assets 30% Current Liabilities 20%

Fixed Assets 70% Long term debt 45%

Stockholders Equity 35%

Total Assets 100% Total Liability & Equity 100%

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Poll Question 3

What are the most important items to focus on in an Balance Sheet?

a) Assets

b) Liabilities

c) Equity (Owners, Shareholders)

d) Profitability

e) All of the above

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Poll Question 4

What are the common mistakes made by companies when managing working capital.

a) Managing Receivables & Inventory

b) Managing to the Income Statement

c) Rewarding the Sales Force for Growth Alone

d) Quality in Production

e) None of the above

f) All of the above

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The Cash Flow Statement

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What the Cash Flow Tells Us

Is the cash flow adequate?

Is cash coming from operations, investing or financing sections?

Does the company show positive net income?

Does the company show planning in anticipating future cash needs?

Is the company maintaining relatively stable cash on hand?

Does the company have one-time items in investing and financing?

Questions used to Measure Cash &

Liquidity

Cash Position: How much cash does the company have available

Cash Flow: How much cash will the company generate and spend/ flow in operations

Liquidity: How quickly and inexpensively could it generate more cash

Cash Flow Ratios:

Find the Following Ratios?

Cash Flow to Sales:

Process: Cash from Operations / Sales

Operations Index: Process: Cash from

Operations / Income Continuing Operations

Cash Flow Return on Assets:

Process: Cash from Operations / Total Assets

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XYZ Manufacturing, Inc.

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Planning for Capital Investments

Some Decision Methods use for Capital Investments?

1) NPV

2) Payback Method,

3) IRR, (Internal Rate of Return) (Hurdle Rate)

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Capital Evaluation Methods

New Project Robotics $1,000,000:

Saving Per Year $250,000 for 10 years:

Net Present Value (10% for 10 periods)

250K * factor 6.144567 = 1,536,141 – 1,000,000

Average rate of return (IRR)

$250,000 / 1,000,000 = 25%

Payback Period

$ 1,000,000 / $250,000 = 4 years

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What Is a Budget?

The budget is a plan of future activities, to plan, guide and control usually measured in financial terms.

The budget is the foundation of decision making by management

The budget process can be a tool for success

What do you need to know?

Facts and Date (Will set you free!)

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Six Types of Budgets

Revenue

Sales

Cost

Expenses

Capital

Cash

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Top-Down vs.

Bottom-Up Budgeting

Top-Down Bottom-Up

Starting Point Last Year’s Budget Zero-Based

Basis Last Year’s +/- Activity Building

Amounts Evenly Divided Seasonal

Personnel Involved Officers/Owners Functional Groups

Reviews Annual Review Detailed Monthly Review

Priorities/ Wide/Not Stated Derailed/Discussed Assumptions

Accountability Forced Department/ Individual

Measurable Costs Hidden Easily Measured

Preparation Time Minimal Extensive

Approach NOT AGGRESSIVE AGGRESSIVE

Sandbagging Easier Line Item Analysis

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Planning Phase

Set Goals & Objectives.

Develop Strategies to Accomplish Goals and Objectives.

Develop the Assumptions

Form a Budget Committee

Establish a Budget Calendar

Set Chart of Accounts, Responsibility Centers

Assign Accountability by Department

Set Deadlines

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Preparation Phase

Publicize the Budget Process

Each Department Set Goals

Set Financial Targets

Compile a Budget Manual

Purpose, Timetables, Guidelines, Forms, Organizational Charts,

Assumptions & Details

Structural the Model

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Control Phase

Develop Responsibility System, Controls

Check Continually, Analyze Variances

Evaluate Variances,

Decide on Remedy Discrepancies

Effective Correcting Action

Forecast for Year, Do updates

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Sales / Revenue Budget

Begin Revenues, Develop Run Rates 2, 3, 5 years

Be Detailed, Conservative

Divide Revenues into Headings

Estimate Sales Demands

Build Figures, Build Customer Base

Timing of Cash, Consider Changes

Adjust the Plans

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Purpose of a

Production Budget

Sets the basis for which the budget can be prepared. Forecast Sale Volumes

Every Business is Producing

Example: Manufacture Units

Example: Service Units

Availability of Material, Availability of Labor

Availability of Overhead

Availability of Plant Capacity

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Purpose of a Direct Material

Budget

Units to be Produced

Number of Units to be Serviced

Material Needed

When Material is Needed

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Purpose of the Direct Labor

Budget

Assists in planning quantity and type of workers needed.

Assists in determining cash flow requirements.

Provides a basis for unit costing by product.

Common Issues

1) Over Time

2) Burden (Fully Loaded Cost)

3) Productivity Factor

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Purpose of Income

Statement Budget

Project Financial Position

Project Sales

Project Expenses

Measures Percentages of Line Items

Measures Net Income

AKA Operations Budget

AKA Department Budget

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Purpose of Balance Sheet

Budget

Project Companies Financial Position

Working Capital Ratio, Debt Ratio

Equity Ratio, Rate of Return Investment Ratio

Gross Profit Ratio, Net Income Ratio

Inventory Turn Over Ratio

Account Receivable Turn Over Ratio

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Purpose of Cash Budget

Can we afford the budget?

Reflects the detailed estimates of cash receipts and disbursements.

Identifies cash requirements for an operation period.

Assists in planning financial requirements.

Shows availability of cash for investment opportunities.

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Forecasting

Forecasting is the process of identifying what events are likely to happen in the future and to benefit from these events. Businesses owners know risk and uncertainly are central to forecasting and predictions, it is good practice to indicate the degree of uncertainty attaching to forecasting!

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Seven Steps to Forecasting

Problems & Purposes

Data Concerns & Collect data

Economic Theory

Assumptions

Model

Preparation of Forecast

Verification & Monitor

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Concerns & Issues of Forecasting

Predications made using historical data:

Unique events, one time items:

Co-evolution is development created by business:

Natural inclination to be conservative:

Complacency:

Day to day pressures:

Impatience: Too much work:

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Income Statement

is the Sails (Sales)

Balance Sheet

is the Hull

Cash Flow

is the Water