1 high speed growth managing business financials for growth
TRANSCRIPT
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High Speed Growth
Managing Business Financials for
Growth
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The SCORE Foundation would like to thank
for showing their support of America’s small businesses by sponsoring this series.
The content provided in the Simple Steps for Growing Your Business materials is intended as a business resource only
and does not guarantee a successful outcome when applied to individual business use.
To find additional resources on growing your business, visit www.score.org and www.openforum.com
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Using Financial Statements to Manage Your Business
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Jennifer Behar
Cash:
• Cash basis bookkeepers recognize
income and expenses when they are
received/paid
Accrual:
• Accrual basis bookkeepers recognize
income and expenses when the
product/service is delivered
Important Terms: Bookkeeping
Methods
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• Gross sales (revenues)
• Cost of goods sold
• Gross profit
• Sales, general and administrative expenses
• Operating profit
• Interest expenses and depreciation
• Net profit
Accounting Terminology
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• Components of COGS varies from industry to
industry
• Generally includes all direct and indirect costs of
producing a product
• Does not include sales, general and administrative
expenses (SG&A)
Cost of Goods Sold
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Expenses that support the company’s operations,
including sales, but are not directly related to COGS
Sales, General & Administrative
Expenses
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Using Financial Statements to
Manage Your Business
Sales Revenues
COGS
Gross Profits
SG&A
Operating Profits Net Profit
Gross Profits
• Profits after you subtract
COGS from sales revenue
Operating Profits
• Profits after you subtract
SG&A from Gross Profits
Net Profits
• Profits after you subtract
taxes, interest paid and
depreciation from Gross Profits
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Douglas S. Cavanaugh
A typical set of financial statements is made
up of:
• Income Statement (P&L)
• Balance Sheet
• Statement of Cash Flows (optional)
Optional:
• Accounts Receivable Aging Summary
• Accounts Payable Aging Summary
Financial Statements
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Theresa Alfaro Daytner
Review the sample Income Statement
and Balance Sheet with the instructor
and discuss the different components of
each.
Financial Statement Discussion
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Top section shows revenues
• Gross revenues
• Adjustments to revenues
• Cost of goods sold (COGS)
• Adding/subtracting the figures above = gross profit
Bottom section shows expenses
• Logical categories of expenses
• Revenues – expenses = net profit for period
Income Statement
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Balance Sheet
Organized in sections
The Balance Sheet
Assets:-Current
-Long-term
Liabilities:-Short-term-Long-term
Shareholders’ Equity:
-Common stock-Retained earnings
-Current income
Organized in Sections
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• Shows all inflows and outflows of cash for a period of
time
• Lets management see how much cash has been
added to or subtracted from operations
Statement of Cash Flows
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• Though these two summary aging reports are not
technically part of the financial statement, most
financing sources want to see them with the other
three components
A/R and A/P Aging
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Pros of In-House Bookkeeping
vs. Outsourcing
In-House:
Bookkeeper devoted to your business
Familiarity with your business
May have additional expertise
May handle other tasks
Outsourcing:
May cost less Off-the-shelf software
allows easy data transfer
Technology enables secure sharing of sensitive data
May gain access to multiple skill sets
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Types of Financial Statements
Using Financial Statements to
Manage Your Business
CPA Audited
CPA Reviewed
CPA CompiledInternally Prepared
Mos
t Tru
sted
Least Expensive
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Understanding and Using Financial Ratios
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• Liquidity
• Profitability
• Leverage
• Efficiency
Financial Ratios
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Surendra N. Kumar
Used to measure the quality and
adequacy of current assets to meet
current obligations as they come due
• Current ratio
• Quick ratio
• Days of cash
Liquidity Ratios
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Indicates the extent to which current assets are available to satisfy
current liabilities
• Stated as values such as 2.5 to 1.0 or simply 2.5
• A ratio of 1.5:1 or higher is considered adequate. A 2:1 ratio is
strong.
Liquidity Ratios: Current Ratio
Current Assets
Current Liabiliti es
Current Rati o
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Indicates the extent to which more liquid assets are available to
satisfy current liabilities
• Stated as values such as 1.5 to 1.0 or simply 1.5
• A quick ratio of 1:1 or higher is generally considered liquid
Liquidity Ratios: Quick Ratio
Cash and A/R
Current Liabiliti es
QuickRati o
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Indicates the number of days revenue held in cash
• Days of cash = safety cash
• Every business will require a different level of safety cash
• Cash equivalents include money market holdings, short-term liquid
investments, marketable securities and government bonds and bills
Liquidity Ratios: Days of Cash
Cash and Cash
EquivalentsRevenues
Days of Cash360
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Elizabeth Feichter
Used to measure performance of a
company and how well its assets are
being used to generate revenues
• Gross profit margin
• Return on assets
• Return on equity
Profitability Ratios
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The percentage of money left after sales when cost of goods sold
(COGS) is subtracted
Profitability Ratios: Gross Profit
Margin
Formula:
Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit Margin
Example:
Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) = Gross Profit ($4,000)
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The profit generated by the total assets employed by a company
What it means: Higher ratio reflects a more effective employment
of company assets
Profitability Ratios: Return on
Assets
Net Earnings
TotalAssets
Return on Assets
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The profit generated by the net assets employed
ROE is the single most important financial ratio applying to
small business owners and the best measure of performance by
management
Profitability Ratios: Return on
Equity (ROE)
Net Earnings
Total Net Worth
Return on Equity
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Andrew Dunn
Key measurements in determining a
company’s vulnerability to business
downturns as well as its capacity for
credit and internal capital needs
• Debt to Equity
Leverage Ratios
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Indicates how well a business is leveraging its debt against the
capital invested by its owners
If liabilities exceed net worth, creditors have a greater stake than
the shareholders
Leverage Ratios: Debt to Equity
Total Liabiliti es
Total Net Worth
Debt to Equity
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Marta E. Maxwell
Measurements of the effectiveness of
using current assets and managing
current liabilities
• Days of accounts receivable (A/R)
• Days of inventory
• Days of accounts payable (A/P)
Efficiency Ratios
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Indicates the number of days to collect a period’s worth of
accounts receivable
Though industries vary, if you can keep your A/R collection cycle
close to 30 days or less, you have an efficient collection process
Efficiency Ratios: Days A/R
Outstanding
Net A/R
Days in Period
Days A/R Outstanding
Credit Sales
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Indicates the number of days it takes to turn over your inventory
If your business is seasonal, you may want to start your season
with a higher number of days of inventory and end it with fewer
days
Efficiency Ratios: Days of
Inventory
Inventory Value
Cost of Sales
Days of Inventory360
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Indicates the number of days of trade and service payables your
company is owing
If your vendor offers net 30 terms with a 2% prompt payment
discount (within 10 days), taking the discount when you can is
important
Efficiency Ratios: Days of A/P
Net A/P
Days in Period
Days A/P Outstanding
Credit Sales
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Financing Growth
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• Friends and family
• Angel Investors (Equity)
• Small Business Investment Companies (SBICs)
Funding For Strategic Growth:
Equity
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• SBA Microloan – up to $50,000
• SBA Express Loan Program – up to $350,000
• SBA 7 (a) Loan Program – up to $5 million
• USDA B&I loans
• Community Development Financial Institutions (CDFI)
• Banks and Credit Unions (Conventional)
Funding For Strategic Growth:
Debt
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SCORE
www.score.org
SCORE (Local Chapter)
www.scorechapter.org
American Express Open Forum
www.openforum.com
For More Information