df how to read financial statements

ACCOUNTING FOR THE NUMBERPHOBIC

A Survival Guide for Small Business Owners

Professor Dawn FotopulosFounder, Best Small Biz Help.com

ACCOUNTING FOR THE NUMBERPHOBICA Survival Guide for Small Business Owners

H o w t o r e a d y o u r Fi n a n c i a l S t a t e m e n t s ( a n d fi n d i n n e r p e a c e )

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Who Has Benefitted?– Jewelry Designer who avoided bankruptcy

• Reduced expenses, cut products, increased gross profit – Photographer who showed her largest profit ever

• Changed target audience, prices, marketing strategy– Interior Designer who tripled earnings

• Changed prices, focused services, improved collections

Dreamers who launch small businesses


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Did You Know…• Learn how to read your financial dashboard and you’re ahead

of 99% of small business owners. • 50% of small businesses fail in the first five years; but those

who know how to read their financials have a much better chance for survival.

• You don’t have to be an accountant to learn the basics and improve your chances for profitability and long term success.


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The 3 big questions…– Are you making a profit? – Is there enough cash to run the

business? – Is the business building wealth

or destroying it?


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Your financial dashboardThree Key Gauges: Chapter 1

– Net Income Statement – Cash Flow Statement – Balance Sheet


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Are you making money? – Showing a profit

• Net Income is positive– Showing a loss

• Net Income is negative– Breaking even

• Net Income is zero

ACCOUNTING FOR THE NUMBERPHOBICNet Income Statement

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Start at the top; work our way down– Revenues=Units sold x Unit price

Example: – T-shirt Company– Sold 1,000 T-shirt– $10 each– Revenues= $10,000

Where does it get captured?


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Revenues= Sales= “Top line”

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Revenues $15,000

Cost of Goods Sold $5,000

Gross Margin or Gross Profit $10,000

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Remember – Revenues are “net revenues”- less discounts– You don’t run your business on sales or revenues– You run your business on Gross Margin– All expenses come out of Gross Margin

• Higher Gross Margin; easier to pay expenses

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Gross MarginRatio must be 30% or higher to stay in business


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How to Increase Gross Margin? • Increase unit price• Sell more units for more total Gross Margin• Reduce Cost of Goods Sold

– Direct materials (re-engineer product)– Direct labor (more efficient)– Save cycle time (service businesses)– Reduce errors in production

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• Expenses– Cost of Goods Sold (direct costs)

• Direct Labor and Direct Material– Fixed Costs (no matter how much you sell)

• Rent, insurance– Variable Costs (fluctuate with volume)

• Marketing– Taxes on earnings

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Net Income Statement

Revenues $ 15,000 Less: Cost of Goods Sold $ (5,000)

Gross Margin or Gross Profit $ 10,000

Less: Fixed Costs $ (2,000) Less: Variable Costs $ (3,000)

Earnings Before Taxes $ 5,000 Less: Taxes $ (2,500)

Net Income $ 2,500

• Compare revenues to expenses • Rat io o f Revenues vs . Expenses • For every $1 of Revenues. .Net Income?• Grocery store: One do l lar. .one pennyYour industry norm?


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ACCOUNTING FOR THE NUMBERPHOPICA Survival Guide for Small Business Owners

Do you have enough Cash to pay your bil ls?

Cash Flow Statement

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• Checkbook- starting cash, cash in, cash out, ending cash• Gas in your tank-

– how far you can travel – how long you can run the business w/o needing more cash

• Gas gauge doesn't tell you to buy gas

You must interpret where the needle is

ACCOUNTING FOR THE NUMBERPHOBICC a s h F l o w S t a t e m e n t : Chapter 5

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Cash F low Statement: Chapter 5• Beginning Cash

– Add Cash In– Subtract Cash Out

• Ending Cash



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ACCOUNTING FOR THE NUMBERPHOBICCash Flow Statement

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Cash Flow Statement

Beginning Cash $ 10,000 Cash In $ 3,000 Cash Out

Rent ($ 5,000) Insurance ($ 2,000)

Ending Cash $ 6,000

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Revenues and Cash Not the Same

– Delays in payment – Discounts to payment– Bankruptcies

• Book Net Revenues when they happen for accurate sales cycle reporting

• Book cash in when it arrives- accurate cash cycle reporting


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Easy to Improve Cash Flow• Invoicing policies • Collections policies • Relationship building with clients • Keep cash flow healthy!


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Are you bui lding wealth or destroying it? The Balance Sheet holds the answer


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How to Win Friends and Influence Bankers! Chapter 8• Balance Sheet- Net worth statement of

the business• Personal net worth- business net worth• Relationship between what you own;

what you owe• Same for the business; relationship

between assets (own) and liabilities (owe)


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Are you bui lding wealth?

Destroying wealth? How do you know?


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What’s the Value of the Business?• Just the salvage value of the

desks, computers? • Do businesses have terminal

value? • Can they be sold for more than

annual revenues?

Yes!

ACCOUNTING FOR THE NUMBERPHOBICThe Balance Sheet

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Net Worth=Owner’s Equi ty Chapter 9• Three sections:

– Asset- what you own– Liabilities- what you owe

• Owner’s Equity= the difference


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Net Worth=Owner’s Equi ty Chapter 9• Assets-Liabilities= Owner’s Equity• Own-Owe=Net Worth• Personal Lives and Business


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Owner’s Equity is $9,000


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Balance Sheet

Current Assets Current Liabilities

Cash $ 5,000 Accounts Payable $ 2,000

Receivables $ 2,000 Credit lines Payable $ 1,000

Fixed Assets Long-term Liabilities

Building $ 15,000 Mortgage $ 10,000

Total Assets $ 22,000 Total Liabilities $ 13,000

Owner's Equity $ 9,000

Net Worth=Owner’s Equi ty Improve Owner’s Equity by:

– Increase Asset Values• Gross Margin• Cash• Sell more- receivables

– Decrease Liabilities• Pay off debt• Use debt to invest in marketing• Use debt to invest in assets• Match life of asset to length of loan

ACCOUNTING FOR THE NUMBERPHOBICThe Balance Sheet Chapter 9

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Comments on NUMBERPHOBIC:– So much fun to read! – Fascinating. – I'm tired of being a starving artist..– It should be required reading before anyone goes into

business. – I wish I had this book ten years ago!


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Remember:– The financial dashboard is your GPS– Net Income- showing profit, break even, loss– Cash Flow- enough to run the business/ how long– Net Worth-building or destroying wealth

Understand your dashboard; reduce risk

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Interview withNorm Brodsky Chapter 10“A business is all about the numbers. Most businesses could make it if theowners knew even the very basics of reading their financial dashboard.”


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Available: Amazon.comBarnesandnoble.comIndiebooks.com

Email: [email protected]


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