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Document Sample
Financial Analysis
for the Small
Business Owner
What are the numbers
and what do they mean?
Presented by
Introduction
• Nevada Small Business Development Center
– Statewide program for business assistance
– Part of a national network
– Free and confidential advising
– Low cost or free management training
Today's Objectives
• Understanding Financial Statements
– Income Statement
– Balance Sheet
– Cash Flow Statement
• NAICS/SIC Code
– What are they?
– How do I find mine?
• Financial Benchmarks/Ratios
– Definitions
– What they mean to your business
– Operational Processes to correct deficiencies
• Lab Work
What is an Income Statement?
• An Income Statement, also called a Profit
and Loss Statement (P&L)
– a financial statement for companies that
indicates how revenue is transformed into net
income (the result after all revenues and
expenses have been accounted for, also known
as the "bottom line").
Income Statement
• AKA Profit & Loss (P&L)
• Contains a list of all revenues and expenses
• Reflects operating profit or a loss
• Does not reflect cash flow
The important thing to remember about an
income statement is that it represents a period of
time. This is in contrast to the balance sheet,
which represents a single moment in time.
P/L Components
Category % of Revenue
Revenue Sources
• Apples $100
• Grapes $300
Gross Revenue $400 • 100%
Cost of Goods
• Apples $75
• Grapes $150
Total COGs $225 • 56%
Gross Profit $175 • 44%
SG&A
• Rent $50
• Other $50
Total SG&A $100 • 25%
Net Revenue $75 • 19%
Breakeven Analysis Definition
• A company has broken even when its total
sales or revenues equal its total expenses.
– At the breakeven point, no profit has been
made, nor have any losses been incurred.
– This calculation is critical for any business
owner, because the breakeven point is the
lower limit of profit.
• Different viewpoints:
– Company A will break even after selling 500
widgets
– Company B will break even after 2 years.
The Break-Even Formula
(Price x Volume) = (Variable Costs x Volume) + Fixed Costs
or
To calculate Break-even quantity of sales:
Fixed Costs
(Price – Variable Cost)
Fixed Costs = fixed costs for one year
Price = price you will charge for a product
Variable Cost = direct or variable costs related to each product
What is a Balance Sheet?
• In financial accounting, a balance sheet or
statement of financial position is a
summary of a person's or organization's
balances.
– Assets
– Liabilities
– Owners equity
Balance Sheet
• “Snapshot”
– Financial picture of business at a particular
moment in time
– Compare to previous “Snapshots” for analysis
of changes in financial position
• Useful for
– Evaluating capital structure of your business
– Assess risk and future cash flows
– Analyze your company’s
• Liquidity, Solvency, and Financial flexibility
Balancing the Balance Sheet
Total Assets = Liabilities + Owners Equity
Left Side = Right Side
Total Assets Total Liabilities & Capital
• $77,000 • $77,000
Balance Sheet Components
Asset Side
• Current Assets
– Cash $400
– Accounts Receivables $50
– Inventory $400
– Prepaid Expenses $150
Total Current Assets $1000
Balance Sheet Components
Asset Side (cont.)
• Fixed Assets
– Building $50,000
– Furniture & Fixtures $25,000
– Other Fixed Assets $ 5,000
Fixed Assets $80,000
– Less Accumulated Depreciation $10,000
Total Fixed Assets $70,000
Balance Sheet Components
Asset Side (cont)
• Other Assets
– Deposits $ 4,000
Total Other Assets $ 6,000
Totals of All Assets
Total Current Assets $ 1,000
Total Fixed Assets $70,000
Total Other Assets $ 6,000
Total Assets $77,000
Balance Sheet Components
Liabilities & Owners Equity Side
• Current Liabilities
– Accounts Payable $ 2,000
– Sales Tax Payable $ 1,000
– Payroll Taxes Payable $ 500
– Accrued Wages Payable $ 500
Total Current Liabilities $ 4,000
Liabilities & Owners Equity Side –
Balance Sheet Components
• Long Term Liabilities
– Start-Up Loan $45,000
– Other Bank Loan $ 6,000
Total Long Term Liabilities $51,000
Liabilities
– Current $ 4,000
– Long Term $51,000
Total Liabilities $55,000
Balance Sheet Components
Liabilities & Owners Equity Side
• Owners Equity
– Retained Earnings $10,000
– Paid in Capital $ 9,000
– Drawing Account $ 1,000
– Net Profit/Net Loss $ 2,000
Total Owners Equity $22,000
Balance Sheet Components
Liabilities & Owners Equity Side
Total Liabilities and Owners Equity
– Liabilities $55,000
– Owners Equity $22,000
Total $77,000
Limitations of Balance Sheets
Assets and liabilities are not reported at current
value
Use of judgments and estimates
Industry Codes
• NAICS Code
– North American Industry Classification System
– Collection, analysis, and publication of
economic statistics
– http://www.naics.com/search.htm
• SIC Code
– Standard Industrial Classification
– http://www.osha.gov/pls/imis/sicsearch.html
Why are Industry Codes
important?
• Facilitates the collection, presentation and
analysis of economic activities of organizations
• Promotes uniformity and comparability in the
presentation of statistical data
• The classifications cover all economic activities
• Data is accessible by private enterprise to
analyze and evaluate their business activities
through BENCHMARKING
What are Benchmarks?
• Baselines against which the performance of
programs may be measured.
Benchmark Examples
– Blood Pressure 120/80
– Temperature 98.6
– Weight 125 lbs
Where To Find Financial
Benchmarks
– www.bizstats.com
– www.Strategy4U.com
– www.estatementstudies.com (RMA)
– www.dblearn.com (Dun & Bradstreet Key Industry Ratios)
Subscription basis
What Are Ratios?
• A ratio is an expression which compares
quantities relative to each other.
The norm versus measured
Examples of measured ratios?
• Your Blood Pressure Measurement
• Your Temperature
• Your Weight 200 lbs
Business Ratio Analysis
• Businesses calculate ratios on factors that affect
productivity and that are controllable
• Some examples are:
– Profitability ratios
• How much profit does an average company make
– Sales ratios
• What is the average sales a company generates
– Breakeven
• Amount of gross revenue that needs to be generated to
cover your fixed costs
LAB WORK
• Find your Benchmark
• Compute Your Ratios
• Compare Your Ratios to Benchmarks
• How to fix Disparate Ratios
Compute Your Ratios Exercise
•Populate Input Sheet
•Input Industry Averages
•Compute Ratios
How to fix your
Benchmark/Ratio Anomalies
Exercise
How to Use the Spreadsheet
Summary
• Know the terms
• Two components of a financial statement
– Profit and Loss –> Revenue & Expenses
– Balance Sheet –> Assets = Liab + Equity
• Income statements are historical documents
• Balance Sheets are a “snapshot” in time
• Shorter reporting periods allow for detection of
trends sooner
• Determine what the key factors are in delivering
results for your business
• Measure the ones you can control
– Ratios and benchmarks
– Operational processes to correct deficiencies
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