1. Presents: Demystifying Financial Statements Students to Start-Ups Entrepreneurial Skills Workshop Series By Jim Chamberlain Center for Entrepreneurship and Innovation

2. Financial Measurement Tools  The number one reason for small business failure is inadequate planning and record keeping  Understanding of basic accounting and finance principles is vital to your success Vincent McCoy, Inland Empire SBDC

3. Financial Statements  Chart of Accounts  What is right for your business?  Structure it for your own business model  Get it right the first time!  Management vs. tax account structure  Design it to capture profitability points  Design it to measure Breakeven easily  Variable and Fixed Costs separation  Internal Control  Important in any size business  Must be given some thought

4. BALANCE SHEET 12-31-01 ASSETS CASH100 ACCOUNTS RECEIVABLE200 LESS ALLOWANCE FOR BAD DEBTS (20) NET ACCOUNTS RECEIVABLE180 INVENTORY600 LESS ALLOWANCE FOR OBSOLESCENCE (75) NET INVENTORY525 PREPAID EXPENSES 10 TOTAL CURRENT ASSETS815 DEPOSITS 50 FIXED ASSETS PROPERTY, PLANT & EQUIPMENT800 CONTRUCTION IN PROCESS 50 TOTAL GROSS FIXED ASSETS850 LESS ACCUMULATED DEPRECIATION (300) NET FIXED ASSETS550 TOTAL ASSETS 1,415 LIABILITIES ACCOUNTS PAYABLE200 ACCRUED EXPENSES100 CURRENT PORTION OF LTD 75 TOTAL CURRENT LIABILITIES375 BANK DEBT350 CAPITAL LEASES 25 TOTAL LIABILITIES750 EQUITY COMMON STOCK500 RETAINED EARNINGS100 CURRENT EARNINGS 65 TOTAL EQUITY665 TOTAL LIABILITIES & EQUITY 1,415

5. INCOME STATEMENT TWELVE MONTHS ENDED 12-31-01 GROSS SALES1,600 SALES RETURNS & ALLOWANCES 200 NET SALES1,400 COST OF SALES: VARIABLE MATERIALS 200 DIRECT LABOR 300 OTHER VARIABLE COSTS 100 TOTAL VARIABLE COSTS 600 CONTRIBUTION MARGIN 800 % 57% FIXED LABOR & OVERHEAD 300 TOTAL COST OF SALES 900 GROSS MARGIN 500 % 36% SELLING EXPENSE 125 ADMINISTRATION EXPENSE 180 TOTAL EXPENSES 305 OPERATING INCOME 195 INTEREST EXPENSE 45 OTHER EXPENSE 15 INCOME BEFORE TAX 135 PROVISION FOR INCOME TAX 70 NET INCOME 65

6. STATEMENT OF CASH TWELVE MONTHS ENDED 12-31-01 NET INCOME65 ADD: NON CASH EXPENSES: DEPRECIATION 100 CHANGES IN ASSETS & LIABILITIES INCREASE IN ACCOUNTS RECEIVABLE50 INCREASE IN INVENTORY30 INCREASE IN PREPAID EXPENSES10 INCREASE IN ACCOUNTS PAYABLE20 DECREASE IN ACCRUED EXPENSES15 TOTAL CASH PROVIDED BY OPERATIONS80 CASH FLOWS USED FROM INVESTING ACTIVITIES: PROPERTY, PLANT & EQUIPMENT50 CASH FLOWS FROM FINANCING ACTIVITIES NET INCREASE IN BANK DEBT75 PAYMENT OF CAPITAL LEASES10 TOTAL CASH PROVIDED BY FINANCING ACTIVITIES65 INCREASE IN CASH FOR THE PERIOD95 BEGINNING CASH BALANCE 5 ENDING CASH BALANCE 100

7. Financial Decision Techniques Measure these monthly – actual versus budget:  Return on Investment – the real “bottom line” Operating Cash Flow / Net Tangible Assets  Break Even Points – efficiency & performance Fixed Costs / Contribution Margin %  Current Ratio – liquidity Current Assets / Current Liabilities  Quick Ratio – liquidity (Cash + Accounts Receivable) / Current Liabilities  Debt to Equity – solvency & risk Total Long Term Debt / Net Tangible Assets

8. Financial Decision Techniques Measure these monthly – actual versus budget:  A/R Turnover – funds management A/R – Current Month Credit Sales – Previous Month Credit Sales  Inventory Turnover – funds management Cost of Goods Sold / Average Inventory Value  Contribution Margin % – efficiency Contribution Margin $ / Net Sales  SG&A as a Percent of Sales – efficiency SG&A / Net Sales  Working Capital – how much is too much? risk? incremental increases based on sales increases? Current Assets – Current Liabilities

9. Questions Jim Chamberlain James.Chamberlain@SCORE114.org

10. Making the Right Financial Decisions… Critical to Success  Business Performance Terminology  How to Measure Performance Using Financial Statements  Balance Sheet  Income Statement  Statement of Cash Flow  Techniques and Tools for Making Financial Decisions  Successful Business Pointers

11. Additional Resources  Web Financial templates http://www.score114.org/business_library_1.html http://www.score114.org/business_library_1.html Creating a profit & loss statement (free online workshop) http://www.va-interactive.com/score/http://www.va-interactive.com/score/ Financial ratios and business statistics by industry http://www.bizstats.com/ http://www.bizstats.com/ Key business ratios http://www.score114.org/PDFs/sas- 67_key_ratios.pdfhttp://www.score114.org/PDFs/sas- 67_key_ratios.pdf More links at http://www.score114.org and www.sba.govhttp://www.score114.org www.sba.gov

12. Additional Resources  People UCI Center for Entrepreneurship and Innovation CEI@Merage.uci.edu CEI@Merage.uci.edu SCORE Orange County www.score114.orgwww.score114.org

13. UPCOMING WORKSHOPS February 7 th March 21 st Demystifying Financial StatementsDriving Growth Through Distribution Channels and Sales Management February 21 st April 4 th Sure-Fire Secrets to Entrepreneurial Nuts & Bolts of Business Structure Success and Licensing March 7 th April 18 th Finding Start-Up Capital Refine Your Unique Value Proposition RSVP CEI@MERAGE.UCI.EDU Students to Start-Ups Entrepreneurial Skills Workshop Series

14. Next Steps  Sign up for future “Student to Start Up” workshops  Decide what specific area of your business (raising money, distribution, marketing, etc) would benefit from counseling  Contact UCI Center for Entrepreneurship and Innovation to arrange no-cost counseling from SCORE