“Financial Essentials for Growing Your Business”

Understanding Financial Statements

• Objectives– Describe the 3 primary financial statements

and what they mean to a business

– Introduce ratios & proportions

– How to get better productivity from your expenses

Understanding Financial Statements

• 3 Basic Financial Statements

1. The Balance Sheet

2. The Income Statement

3. The Cash Flow Statement

Understanding Financial Statements

Balance Sheet

Understanding Financial Statements

Understanding Financial Statements

Understanding Financial Statements

Understanding Financial Statements

• Ratios– Liquidity Ratios – measure the amount of cash available to

cover expenses current and long term

Current Ratio – should be 2 x or 200% of current liabilities

Quick Ratio = cash + A/R

Current Liab. (B/S & IS)

– Turnover of Cash Ratio – or working capital, if maintained at adequate levels this is what can finance sales

Sales should be 5 or 6 times working capital

Turnover of Cash Ratio =Net Sales

Working Capital (B/S & IS)

– Debt to Equity Ratio – the relationship between capital contributed by creditors (banks) that loan cash and owners equity remaining in the business

• CL to net worth should not exceed 80% & LT debt should not exceed 50% or creditors may want to have a say in how the business is operated or an ownership interest

Debt to Equity Ratio = Total Debt

Equity

Understanding Financial Statements

• Summary

Liquidity ratios – ability to pay debts

Current ratios – ability to pay immediate bills

Working capitol – difference between CA and CL

Total LT debt should not exceed 45% of NW

Understanding Financial Statements

• Rate of Return on Sales Ratio– Operating income/Net profit – indicates if sales can cover cost

and leave an acceptable profit Rate of Return on Sales Ratio = Operating Income

Net Sales

• Rate of Return on Assets Ratio (ROA)– Income/Profit - generated by the assets

ROA = Income Before TaxesTotal Assets

• Rate of Return on Investments (ROI)– Used to determine whether or not to invest in a company

ROI = Income Before TaxesNet Worth

Understanding Financial Statements

• Summary of Profitability Ratios

Profitability ratios - measure return on sales, return on assets and return on investments

Profitability – your price structure, sales, and controlling expenses.

Ratios- used to compare with industry average

ROI- may be compared as RONW to total assets

Understanding Financial Statements

• How to get better productivity from your expenses– Understand Sales – why made or not made– Understand COGS – increase or decrease %

of net sales– Credit & Collections – reduce time (commitment of

cash & collection of cash)

– Fixed Expenses – occurs if sales made or not– Variable Expenses – Tied to sales volume

Understanding Financial Statements