FINANCIAL STATEMENTS

Why Use Financial Statements? Investors and bankers Investors and bankers Suppliers and creditors Suppliers and creditors You and management You and management

Types of Financial Statements Cash Flow Statement Cash Flow Statement Income Statement Income Statement (aka Profit-and-Loss) (aka Profit-and-Loss) Balance Sheet Balance Sheet Personal Financial Statement Personal Financial Statement

Cash Flow Statement Describes the flow of cash in and out of a business Describes the flow of cash in and out of a business Created at end of each month Created at end of each month $ $

Why is a Cash Flow Statement Important? Expenses are paid with CASH not sales Expenses are paid with CASH not sales Helps you estimate sales Helps you estimate sales Helps you estimate operating expenses Helps you estimate operating expenses

Constructing a Cash Flow Statement Cash receipts - Disbursements = Net cash flow (inflow)(outflow) (inflow)(outflow)

Example: A business took in $23,000. It spent $16,620. What is its cash flow? $23,000 - $16,620 = $6380 Positive cash flow

Example: For the month of March, a business took in $18,920. It spent $19,340. What is its monthly cash flow? $18,920 - $19,340 = -$ Negative cash flow

CASH FLOW STATEMENT March 31, 2002 Cash Receipts$23,000 Disbursements Equipment $12,000 Cost of goods 2,500 Selling Expense 200 Salaries 700 Advertising 130 Office Supplies 20 Rent 500 Utilities 90 Insurance 170 Taxes 70 Loan principal and interest 240 Total disbursements $ 16,620 NET CASH FLOW 6,380

Income Statement (Profit-and-loss Statement) Compares revenues and expenses over a specific period of time (usually monthly) Compares revenues and expenses over a specific period of time (usually monthly) Revenue – Expenses = Net Profit (Loss) Revenue – Expenses = Net Profit (Loss) In a retail or wholesale business, expenses include “cost of goods sold” In a retail or wholesale business, expenses include “cost of goods sold”

INCOME STATEMENT- Year ended December 31, 2001 Revenue Sales $450,000 Cost of goods sold 250,000 Gross Profit $200,000 Operating Expenses Salaries$70,000 Advertising 12,000 Rent 14,000 Utilities 3,600 Maintenance 1,200 Insurance 1,500 Miscellaneous 1,000 Total Expenses $103,300 NET PROFIT (before taxes) $ 96,700

Balance Sheet Tells entrepreneur what the business is worth. Tells entrepreneur what the business is worth. Includes assets and liabilities Includes assets and liabilities Asset – things of value that belong to the business Asset – things of value that belong to the business Liability – things that are owed to others Liability – things that are owed to others

BALANCE SHEET – March 31, 2002 Assets Cash$10,745 Accounts receivable 868 Inventory 5,799 Supplies 433 Total Assets$17,845 Liabilities Accounts payable$ 3,444 Notes payable (loans) 5,705 Total Liabilities$ 9,149 Owner’s Equity$ 8,696 Total Liabilities and Owner’s Equity$17,845

Personal Financial Statement Potential investors Potential investors Personal assets Personal assets Savings account Savings account Equity in house Equity in house Personal liabilities Personal liabilities Credit cards Credit cards House payment House payment Car payment Car payment Net Worth Net Worth

Managing Your Finances Forecasting sales – you must predict what your business will do. You can use industry data or actual sales data once your company is operating. Forecasting sales – you must predict what your business will do. You can use industry data or actual sales data once your company is operating. Evaluating profit potential – Evaluating profit potential – Fixed cost/selling price – variable cost = break even point Fixed cost/selling price – variable cost = break even point Variable costs: expenses that change Variable costs: expenses that change Fixed costs: expenses that don’t change Fixed costs: expenses that don’t change

Controlling Costs Lease instead of buying an office or warehouse. Lease instead of buying an office or warehouse. Lease equipment or purchase used equipment Lease equipment or purchase used equipment Hire part time help or use free lancers Hire part time help or use free lancers Monitor and control utility costs Monitor and control utility costs

Managing Cash Flow Budget (put it in writing) Budget (put it in writing) Improve cash flow Improve cash flow Tighten up credit and collections Tighten up credit and collections Set up cash reserve for bad debts Set up cash reserve for bad debts Take advantage of credit terms Take advantage of credit terms Offer cash discounts Offer cash discounts Manage inventory carefully Manage inventory carefully Put cash surpluses to work Put cash surpluses to work Keep payroll under control Keep payroll under control Cut expenses Cut expenses

Cash Budget Sample

Plan for Capital Expenditures Long-term commitments of large sums of money to buy new equipment or replace old equipment. Long-term commitments of large sums of money to buy new equipment or replace old equipment. Create savings accounts or plans to cover these to limit your borrowing needs. Create savings accounts or plans to cover these to limit your borrowing needs.

Managing Taxes Time income so you can control when it is taxes (schedule sales for beginning of new year will defer taxes) Time income so you can control when it is taxes (schedule sales for beginning of new year will defer taxes) Time deductions Time deductions Choose the depreciation method that is most beneficial to your specific situation. Choose the depreciation method that is most beneficial to your specific situation. Write off bad debt. Write off bad debt. Claim research and development costs. Claim research and development costs. Keep expense records. Keep expense records. Keep current with tax laws. Keep current with tax laws.

Managing Credit Granting credit involves 5 steps: Granting credit involves 5 steps: Obtain information from customers. Obtain information from customers. Checking credit and background before you extend credit Checking credit and background before you extend credit Evaluating credit applications Evaluating credit applications Making your decision Making your decision Closing Closing Collect on accounts Collect on accounts