b n· ³³ ÕÌ¦¸ ÌÌ c½È±Ì¤½Æ...• long-term liabilities: money that becomes due over a...

© 2019 BBVA USA Bancshares, Inc. BBVA USA is a Member FDIC and an Equal Housing Lender. BBVA and BBVA Compass are trade names of BBVA USA, a member of the BBVA Group. Rev. 06/2019 / #4026_20033

BBVASmall Business WorkshopFree expert advice on growing your small business.

Business Financial Statements

artici ant Guide

BBVA Center for Financial Education

Copyright 2018 EVERFI, Inc. 2

Table of Contents Financial Statements ............................................................................................. 3 Balance Sheets ..................................................................................................... 5 Sample Balance Sheet .......................................................................................... 7 A Scenario: Joe’s T-Shirt Print Shop ..................................................................... 8 Joe’s T-Shirt Print Shop: Balance Sheet ............................................................... 9 Profit and Loss Statements ................................................................................... 9 Sample Profit and Loss Statement ...................................................................... 11 Joe’s T-Shirt Print Shop: Profit and Loss Statement ........................................... 13 Cash Flow Statements ........................................................................................ 14 Sample Cash Flow Statement ............................................................................. 15 Sample Cash Position Report ............................................................................. 16 Joe’s T-Shirt Print Shop: Cash Flow Statement .................................................. 17


Financial Statements Best Practices • Create financial statements at least quarterly, and preferably monthly. • Learn how to read and use basic financial statements for decision-making. • Review your financial statements monthly and monitor them for trends in your

business. Considering Financial Statements Consider these questions as you review your financial statements. They will help you understand the story that your company’s finances are telling.

Past Present Future

My Considerations

• Is my business competitive?

• Is my business on a growth trajectory?

• Am I building equity that will provide long-term stability?

• Where should I be spending my time, personnel, and funds?

• Am I on track to achieve my goals?

• Am I in a positive equity position?

• Are there patterns or trends in my business that could hinder or help me?

• Is my business profitable enough to take on more loans?

• Is my balance sheet strong enough to take on more debt?

• Can I repay future loans, based on my historical track record?

• Do I need a loan for my future projects or do I have enough cash to cover new investments?


Financial Statements, Continued Past Present Future

Lender’s Considerations

• What kinds of financial decisions did the business make in the past?

• Has the company paid back previous loans?

• Is the company profitable?

• Has the company built equity?

• How much cash flow is available to support a new loan?

• How is the company currently using its capital?

• What are its current income and cash flows?

• What are the company’s current goals?

• Can the business take on more loans or debt?

• How will the business use a loan?

• Are there trends in the industry that hurt or help the business and, if so, are the business owners aware of and planning for them?

• What assets are available to secure a loan in case of default?


Balance Sheets What Is a Balance Sheet? A balance sheet is a statement of what your business owns and what it owes. The difference between the two is called the business’s “equity.” A positive equity position is a primary indicator of how stable your business is. A business with a positive equity position will be able to survive through tough times. Definitions of Terms in Balance Sheets Assets are what you own.

• Current Assets: Either cash or other assets, such as accounts receivable, that will convert to cash within 12 months

• Inventory: Materials that you have already purchased and have stored

• Accounts Receivable: Money that you have invoiced customers for, but not yet received

• Prepaid Expenses: Anything that you have paid for before the expense is

accrued; for example, if you paid rent at the beginning of each quarter, then you could consider three months of rent costs as a prepaid expense; many small businesses do not track these unless they are significant

• Long-Term Assets: Include fixed assets such as real estate or

equipment, or long-term investments

• Accumulated Depreciation: For accounting purposes, buildings and equipment lose value over time. Your accountant will keep a depreciation schedule to know how much depreciation you must deduct from the value of the building or equipment that you own.

Liabilities are what you owe.

• Current Liabilities: Money that will become due within 12 months

• Accounts Payable: Money that you owe to your suppliers; many businesses have credit terms with their suppliers in order to better match the payment of their accounts receivable

• Sales Tax Payable: Money that you owe, but have not yet paid, for sales

tax

• Line of Credit: A revolving loan from a bank to cover cash flow fluctuations due to high accounts receivable


Balance Sheets, Continued

• Current Portion of Note Payable: The portion of a term loan that will become due over the next 12 months

• Long-Term Liabilities: Money that becomes due over a period longer

than 12 months Equity is assets minus liabilities.

• A positive equity position is one where the value of your assets is greater than the value of your total liabilities

• A negative equity position means that you are overleveraged and your business owes more than it is worth. Overleveraged businesses are at risk of closing their doors or filing for bankruptcy.


Sample Balance Sheet Use this sample to create a balance sheet for your business.

My Company Name Balance Sheet - Income Tax Basis

For the year ending __/__/____

ASSETS Current Assets

Cash Inventory Accounts receivable Prepaid expenses Total Current Assets Long-Term Assets

Real estate or buildings Equipment - Less accumulated depreciation Investments Total Long-Term Assets Total Assets

LIABILITIES AND OWNER'S EQUITY Current Liabilities

Accounts payable Sales tax payable Line of credit Current portion of note payable Total Current Liabilities Long-Term Liabilities Notes payable Total Liabilities Equity (Total Assets – Total Liabilities) Best Practices

● Create an updated balance sheet at the end of each quarter. ● Focus on building a strong and positive equity position. ● Keep track of Accounts Receivable and Accounts Payable to ensure you

are collecting on and paying invoices in a timely manner.


A Scenario: Joe’s T-Shirt Print Shop Background: Joe’s T-Shirt Print Shop produces custom T-shirts for businesses and other entities for company promotions and events. Joe recently secured a new contract to provide 2,000 custom T-shirts to Solis Software, a software company, for a staff training event. To fulfill the contract, Joe will need to purchase the 2,000 shirts, which will cost $10,000, and extra ink for his T-shirt printers, which will run about $4,000. However, Joe won’t invoice Solis Software until he delivers the shirts. Solis Software usually pays the bill 30 days after it receives the invoice. Joe will need funds, termed working capital, to pay for all the upfront costs of fulfilling the order. Additionally, Joe has an ongoing stream of smaller client orders that he will have to fulfill. Joe currently has a line of credit with a credit limit of $20,000.


Joe’s T-Shirt Print Shop: Balance Sheet Review this hypothetical balance sheet for Joe’s T-Shirt Print Shop. ASSETS Current Assets

Cash $16,346 Inventory $6,250 Accounts receivable $18,000 Prepaid expenses Total Current Assets $40,596 Long-Term Assets

Real estate or buildings $0 Equipment $38,000 - Less accumulated depreciation $9,500 Investments $0 Total Long-Term Assets $28,500 Total Assets $66,096

LIABILITIES AND OWNER'S EQUITY Current Liabilities

Accounts payable $4,500 Sales tax payable $8,000 Line of credit* $10,000 Current portion of note payable $5,000 Total Current Liabilities $27,500 Long-Term Liabilities Notes payable $10,000 Total Long-Term Liabilities $10,000 Total Liabilities $37,500 Equity (Total Assets – Total Liabilities) $28,596 *Total line of credit is $20,000.


Profit and Loss Statements What Is a Profit and Loss Statement? A profit and loss statement (P&L) is a financial statement that summarizes a company’s revenues, costs, and operating expenses over a specified period of time, such as a quarter or a year. A P&L provides information about whether your company is profitable. Definitions of Terms in Profit and Loss Statements

• Sales Revenue: Revenue derived from products or services that you sell to customers

• Other Income: Includes income items that are not related to sales from your product or service; could include investment income or fees

• Cost of Goods Sold (COGS): Costs directly attributed to producing the goods or services provided by your company; includes materials used to make the product; can include labor directly tied to production and some costs that can be directly tied to producing; does not include overhead

• Gross Profit: Profit after you subtract COGS

Gross Profit = (Sales Revenue + Other Income) – COGS

• Operating Expenses: All your overhead costs (rent, insurance, utilities, marketing costs, etc.)

• Other Expenses: Includes expense items that are not related to overhead

costs.

• Net Profit: Your profit (or loss) after all the sources of revenue and expense items have been calculated Net Profit = Gross Profit – (Operating Expenses + Other Expenses)


Sample Profit and Loss Statement Use this sample to create a profit and loss statement for your business.

My Company Name Profit and Loss Statement - Income Tax Basis

For the year ending __/__/____ Sales Revenue Other Income (i.e. interest income or gain on sale of equipment) Cost of Goods Sold (COGS)

Gross Profit

(= Sales and income minus COGS) Operating Expenses

Accounting/bookkeeping Advertising Conferences and training Depreciation Employee benefits, e.g., health insurance Entertainment, e.g., business lunches, employee appreciation, etc. Insurance, e.g., general liability, workers comp Interest on loans Legal and professional Licenses and permits Merchant account fees (credit card fees) Office expense, e.g., postage, internet, phone service, technology support, etc. Payroll taxes Rent Repairs and maintenance Salaries and wages Small equipment Supplies Travel


Sample Profit and Loss Statement, Continued Utilities Website and marketing materials Total Operating Expenses Total Other Expenses (i.e. loss on sale of equipment)

Net Profit

Net Profit (=Gross profit minus total operating and other expenses) Best Practices

• Prepare P&Ls monthly, or at a minimum, every quarter. Also create an end-of-year P&L.

• Analyze which products or services produce the most revenue. • Evaluate your costs to see if you have opportunities to reduce expenses. • Chart revenues, expenses, and net profits over time to ascertain trends. • Create both a detailed P&L that shows revenue for each product and

details your expenses, and a summary P&L that will provide stakeholders with a quick picture of your company’s profitability.

• Retain some portion of profits in the company to build your own permanent working capital and strong equity position.


Joe’s T-Shirt Print Shop: Profit and Loss Statement Review this hypothetical profit and loss statement for Joe’s T-Shirt Print Shop.

Joe’s T-Shirt Print Shop Profit and Loss Statement - Income Tax Basis

For the year ending 12/31/2017 Sales Revenue $968,100 Cost of Goods Sold (COGS)

$402,040

Gross Profit

(= Sales minus COGS)

$566,060 Operating Expenses

Total Operating Expenses $462,500

Other Income (Expense) Net Profit (Earnings Before Tax)

$103,560


Cash Flow Statements What Is a Cash Flow Statement? A cash flow statement records the amount of cash moving in and out of your company over a specified period of time. A formal cash flow statement tracks changes in cash from three activities: operating, investing, and financing. A traditional cash flow statement can be complicated. But you can create a modified cash position report that achieves the same goals. Understanding how cash moves in and out of your company is important because it

• Shows when cash is actually received and paid out. • Ensures you won’t run out of cash, even if business is profitable. • Is useful in determining cash needs especially during high-growth periods. • Is essential for businesses using accrual basis accounting, which is when

expenses and revenue are recognized, even if cash hasn’t been spent or received yet.

• Determines needs for working capital and whether a loan will be needed to cover short-term cash needs.


Sample Cash Flow Statement Below is an example of a formal cash flow statement that can be created by your accountant:

My Company Name Statement of Cash Flows - Income Tax Basis

For the year ending __/__/____ Cash Flows from Operating Activities Net Income Adjustments for Depreciation expenses Loss on sale of equipment Decrease in inventory Increase in prepaid expenses Increase in notes receivable Increase in accounts payable Decrease in sales tax payable Total Cash Flows from Operating Activities Cash Used in Investing Activities Purchase of equipment Purchase of land or building Proceeds from sale of equipment Proceeds from sale of land or building Total Cash Used in Investing Activities Cash Flows Used in Financing Activities Proceeds from borrowing on line of credit Payment on line of credit Proceeds from long-term debt Payments on long-term debt Owner's withdrawals Total Cash Used in Financing Activities Net Cash Flows Cash - Beginning of Year Cash - End of Year


Sample Cash Position Report You can also create a simplified cash position report to understand how cash moves in and out of your company.

My Company Name Cash Position Report

For the month ending __/__/____ Beginning Cash Balance: Cash In + Cash Sales: + Accounts Receivable Collected: + New Loans or Draws on Line of Credit: + Sale of Equipment or Building: + Other Revenue, e.g. interest, other revenue activities: Cash Out

- Inventory Purchased: - Expenses Paid: - Principal Payments: - Equipment Purchased: - Land or Building Purchased: - Owner Withdrawal: - Other Cash Out:

Ending Cash Balance: Best Practices

• Balance inflow and outflow of cash. • Ensure you have enough cash on hand for day-to-day operations and for

unexpected expenditures. • Prepare these statements on a quarterly basis. • Contact your local SCORE office or a CPA for help with calculating the

amounts. Visit SCORE’s website to learn more: https://www.score.org. • Create a modified, or simplified, cash flow statement to understand your

cash position. Always maintain a positive cash balance; otherwise, you may be at risk of being unable to cover the cost of business expenses.


Joe’s T-Shirt Print Shop: Cash Position Report

Joe’s T-Shirt Print Shop Cash Position Report

For the month ending 12/31/16 Beginning Cash Balance: $11,256 Cash In + Cash Sales: $36,412 + Accounts Receivable Collected: $20,635 + New Loans or Draws on Line of Credit: $5,000 + Sale of Equipment or Building: $0 + Other Revenue, e.g., interest, other revenue activities: $0 Cash Out Inventory Purchased: $12,105 Expenses Paid: $38,212 Principal Payments: $1,600 Equipment Purchased: $0 Land or Building Purchased: $0 Owner Withdrawal: $5,040 Other Cash Out: $0 Ending Cash Balance: $16,346 Questions for Consideration

• What was Joe’s T-Shirt Print Shop Cash Balance at the beginning of the month?

• What sources of cash came in throughout the month? • What were Joe’s cash “outflows,” or what did he have to pay for? • What amount did Joe decide to pay himself? • What is Joe’s T-Shirt Print Shop Ending Cash Balance? • In what other financial statement do we see the same Ending Cash

Balance dollar amount?

b n· ³³ ÕÌ¦¸ ÌÌ c½È±Ì¤½Æ...• long-term liabilities: money that becomes due over a...

Documents