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SEED Corporation Understanding Financial Statements Entrepreneurial Workshop II How Your Personal and Business Financial “Pictures” Are Linked.

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Presentation on theme: "SEED Corporation Understanding Financial Statements Entrepreneurial Workshop II How Your Personal and Business Financial “Pictures” Are Linked."— Presentation transcript:

1 SEED Corporation Understanding Financial Statements Entrepreneurial Workshop II How Your Personal and Business Financial “Pictures” Are Linked

2 SEED Corporation AGENDA What Financial Statements Can and Can’t Do Determining Your Personal Cash Flow Needs The Personal Financial Statement Pricing

3 SEED Corporation AGENDA (con’t) Variable and Fixed Costs Break-even Analysis Business Cash Flow The Balance Sheet The Income Statement

4 SEED Corporation 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.

5 SEED Corporation 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 :

6 SEED Corporation Personal Cash Flow Estimate Disposable Income based on past 12 months  Gross Income less taxes paid

7 SEED Corporation 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

8 SEED Corporation 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

9 SEED Corporation ASSETS What You Own

10 SEED Corporation 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

11 SEED Corporation Assets (cont.)  Real Estate  Automobile- present value  Other personal property  Other assets

12 SEED Corporation LIABILITIES What You Owe

13 SEED Corporation 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

14 SEED Corporation PROPER PRICING: Can mean the difference between success and failure

15 SEED Corporation 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.

16 SEED Corporation OVER-PRICING Over-pricing can cause sales to disappear altogether, as customers buy from lower-priced competitors.

17 SEED Corporation Determining the Right Price  Customer Surveys Ask your potential customers.  “Shop” your Competition F ind out how your competitors are pricing their goods/services and treating their customers.

18 SEED Corporation 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.

19 SEED Corporation 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.

20 SEED Corporation 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

21 SEED Corporation 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

22 SEED Corporation The Break Even Analysis The Formula for Break Even is : Gross Income – Cost of Goods Sold = Gross Profit Fixed Expenses ÷ Gross Profit = Break Even

23 SEED Corporation 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.

24 SEED Corporation REMEMBER: Having cash is NOT the same thing as being profitable. (and vice versa)

25 SEED Corporation 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

26 SEED Corporation 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

27 SEED Corporation 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

28 SEED Corporation 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)

29 SEED Corporation 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.

30 SEED Corporation 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.

31 SEED Corporation Mary’s Balance Sheet ASSETS Bank Balance $ 400 Car 6,000 House 300,000 TOTAL Assets $ 306,400 LIABILITIES Mortgage loan $ 270,000 Car Loan 5,000 Liabilities 275,000 EQUITY (net worth) Home Equity $ 30,000 Car Equity 1,000 Profit 400 EQUITY $ 31,400 Total Liabilities & Equity $ 306,400

32 SEED Corporation Mary’s Income Statement INCOME Salary$4,000 EXPENSES Mortgage Payment$2,000 Food 500 Utilities 400 Insurance 100 Auto Payment 300 Miscellaneous 300 TOTAL EXPENSES$3,600 Profit (Loss)$ 400

33 SEED Corporation 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.

34 SEED Corporation 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;

35 SEED Corporation 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;

36 SEED Corporation 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!

37 SEED Corporation Thank you for your attention! Questions? SEED Corporation 80 Dean Street Taunton, MA 02780 (508) 822-1020 (508) 880-7869 (fax)

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