the dec education: understanding financials
DESCRIPTION
ABOUT THE CLASS This class will walk you through a series of financial constructs needed to run a successful business. Understand key revenue calculations and expense assumptions over a multi-year period. Tie in income statement numbers as a point to showcase factors that affect cash flow such as receivables, payables, and taxes. Walk through a balance sheet and understand the importance of this and other documents for growing your business. THE TAKEAWAYS To obtain an understanding of core financial constructs needed to project cash flow, revenue, expenses, income statement (pro forma) and a balance sheet. To highlight pitfalls and key issues to address in projections. To establish best practices for calculating key assumptions associated with startup financial projections. ABOUT THE INSTRUCTOR, Deborah L. von Storch Deborah von Storch is the Southwest Region Strategic Growth Markets Leader at EY, a leading multinational professional services firm. She manages a multi-disciplined practice dedicated to serving high-growth companies that are evolving into market leaders. With more than 31 years of experience, Deborah has a deep knowledge of the needs and issues faced by high-growth companies, with an extensive background in providing global account leadership, strategic tax and transaction planning, and advisory services. Deborah leads EY's Entrepreneur of the Year® program for an eight-state region in the Southwest geography. PRESENTED BY, The Dallas Entrepreneur Center The Dallas Entrepreneur Center (DEC) is an entrepreneurial support system dedicated to bringing together the resources, support and opportunities that Dallas-area entrepreneurs need to start, build and grow their businesses. Launched in 2013, the DEC believes investment in entrepreneurs is investment in the community. Learn more at thedec.co.TRANSCRIPT
The DEC
Fundamentals of Financial Statements
September 24, 2013
Debra L. von Storch
Page 2 The DEC - Fundamentals of Financials
Objectives
► Obtain an understanding of core financial constructs needed to project cash flow, revenue, expenses, income statement (pro forma) and a balance sheet.
► Discuss pitfalls and key issues to address in projections.► Establish best practices for calculating key assumptions
associated with startup financial projections.
Page 3
Financial Statements
► Income Statement (profit and loss) and Statement of Cash Flows – focus is “flows” of activities over the period
► Balance Sheet – accounts at a specific point in time
The DEC - Fundamentals of Financials
Income Statement
Revenues- ExpensesNet Income
Statement of Retained Earnings
Beginning RE+ Net Income
- DividendsEnding RE
Balance Sheet
Cash+ Other Assets
Total Assets
Total liabilities+ Stock
+ Retained Earnings
Total Liabilities and Equity
Cash Flows
Inflows- Outflows
Ending cash balance
Page 4 The DEC - Fundamentals of Financials
Compilation of financial statements
► Financial statements are interdependent► Income statement► Balance sheet► Statement of cash flows
► Income statement and balance sheet report revenues as they are earned and expenses as they are incurred – accrual basis accounting
► Cash flow statement converts the accrual basis of accounting to cash basis
Page 5 The DEC - Fundamentals of Financials
Compilation of financial statements
► Bottom line – cash is king! Follow the cash► Accounts receivable may not be collected immediately► Accounts payable are often dictated by suppliers’ terms (number
of DSO, etc.)
► Tip – review your cash flow at least monthly, using a report that presents side by side numbers for two or more periods.► Track changes in cash position
Page 6 The DEC - Fundamentals of Financials
Income Statement
► Income statement reflects the enterprise’s► Income► Expenses► Gains► Losses
► The summation of these transactions is “net income” or “net loss” which is often referred to as “bottom line”
► Date of statement is for a defined period of time and captures the impact of the transactions during such period
Page 7 The DEC - Fundamentals of Financials
Income Statement - Model
Jan '13 Feb '13 Mar '13 Apr '13 May '13 Jun '13 July '13 Aug '13 Sept '13 Oct '13 Nov '13 Dec '13 FY '13
Revenue -
15,000
20,000
25,000
30,000
40,000
45,000
50,000
55,000
60,000
70,000
80,000
490,000
Cost of goods sold -
(12,000)
(16,000)
(18,750)
(22,500)
(30,000)
(31,500)
(35,000)
(38,500)
(39,000)
(45,500)
(52,000)
(340,750)
Gross profit -
3,000
4,000
6,250
7,500
10,000
13,500
15,000
16,500
21,000
24,500
28,000
149,250
Operating expenses, excl depr
-
(8,000)
(8,000)
(8,000)
(8,000)
(8,000)
(12,000)
(12,000)
(12,000)
(12,000)
(12,000)
(12,000)
(112,000)
Depreciation expense -
-
(1,818)
(1,818)
(1,818)
(1,818)
(1,818)
(1,818)
(1,818)
(1,818)
(1,818)
(1,818)
(18,180)
Net Income -
(5,000)
(5,818)
(3,568)
(2,318)
182
(318)
1,182
2,682
7,182
10,682
14,182
19,070
Page 8 The DEC - Fundamentals of Financials
Income Statement - Ratios
► Income statement ratios for managing your enterprise► Gross margin – gross profit in relation to revenue► Operating expenses as a % of revenue► EBITDA – earnings before interest, taxes, depreciation,
amortization► EBITDA margin – EBITDA in relation to revenue
Jan '13 Feb '13 Mar '13 Apr '13 May '13 Jun '13 July '13 Aug '13 Sept '13 Oct '13 Nov '13 Dec '13 FY '13Gross margin n/a 20.0% 20.0% 25.0% 25.0% 25.0% 30.0% 30.0% 30.0% 35.0% 35.0% 35.0% 30.5%Opex as a % of revenue n/a 53.3% 40.0% 32.0% 26.7% 20.0% 26.7% 24.0% 21.8% 20.0% 17.1% 15.0% 22.9%
EBITDA n/a
(5,000)
(4,000)
(1,750) (500)
2,000
1,500
3,000
4,500
9,000
12,500
16,000
37,250
EBITDA margin n/a -33.3% -20.0% -7.0% -1.7% 5.0% 3.3% 6.0% 8.2% 15.0% 17.9% 20.0% 7.6%
Page 9 The DEC - Fundamentals of Financials
Balance Sheet
► Overview of the enterprise’s total assets and liabilities at a particular date
► Indicative of the health of your financial affairs► ASSETS = LIABILITIES + OWNER’S EQUITY
Page 10 The DEC - Fundamentals of Financials
Balance Sheet
► Components of the balance sheet► Cash – money on deposit in bank accounts► Accounts receivable► Inventory► Prepaid assets► Fixed assets – property, plant and equipment; long-life tangible,
productive operating assets► Accrued liabilities – amounts for the costs of unpaid expenses► Loans – amounts borrowed on interest-bearing liabilities► Stock – amounts of capital invested in the enterprise by the owner
or other shareholders► Retained earnings – amounts remaining in the owners’ equity
account
Page 11 The DEC - Fundamentals of Financials
Balance sheet - model Jan '13 Feb '13 Mar '13 April '13 May '13 June '13 July '13 Aug '13 Sept '13 Oct '13 Nov '13 Dec '13 FY '13
Cash
500,000
277,000
268,000
247,250
254,000
247,250
181,250
181,750
177,750
178,250
185,250
134,750
134,750
Accounts receivable
15,000
20,000
35,000
25,000
30,000
40,000
45,000
50,000
55,000
60,000
70,000
70,000
Inventory
12,000
12,000
16,000
18,750
22,500
30,000
31,500
35,000
38,500
39,000
45,500
45,500
Prepaids
-
2,000
2,000
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
Current assets
500,000
306,000
302,000
300,750
300,250
302,250
253,750
260,750
265,250
274,250
286,750
252,750
252,750
Fixed assets
-
200,000
198,182
196,364
194,546
192,728
190,910
189,092
187,274
185,456
183,638
181,820
181,820
Total Assets
500,000
506,000
500,182
497,114
494,796
494,978
444,660
449,842
452,524
459,706
470,388
434,570
434,570
Accounts payable
8,000
8,000
8,000
8,000
8,000
8,000
12,000
12,000
12,000
12,000
12,000
12,000
Accrued expenses
-
3,000
3,000
3,500
3,500
3,500
3,500
3,500
3,500
3,500
3,500
3,500
3,500
Current liabilities
-
11,000
11,000
11,500
11,500
11,500
11,500
15,500
15,500
15,500
15,500
15,500
15,500
Debt
-
-
-
-
-
-
-
-
-
-
-
-
-
Total liabilities
-
11,000
11,000
11,500
11,500
11,500
11,500
15,500
15,500
15,500
15,500
15,500
15,500
Equity
500,000
495,000
489,182
485,614
483,296
483,478
433,160
434,342
437,024
444,206
454,888
419,070
419,070
Total liabilities and equity
500,000
506,000
500,182
497,114
494,796
494,978
444,660
449,842
452,524
459,706
470,388
434,570
434,570
Beginning equity
-
500,000
495,000
489,182
485,614
483,296
483,478
433,160
434,342
437,024
444,206
454,888
-
Net income
(5,000)
(5,818)
(3,568)
(2,318)
182 (318)
1,182
2,682
7,182
10,682
14,182
19,070
Capital infusion
500,000
-
-
-
-
-
-
-
-
-
-
-
500,000
Distributions
-
-
-
-
-
-
(50,000)
-
-
-
-
(50,000)
(100,000)
Ending equity
500,000
495,000
489,182
485,614
483,296
483,478
433,160
434,342
437,024
444,206
454,888
419,070
419,070
Page 12 The DEC - Fundamentals of Financials
Statement of Cash Flows
► Shows the total change in cash, and the reason for change
► Three categories of cash flows:► Operating► Investing► Financing
► Statement helps to predict an entity’s ability to ► Generate future cash flows► Predict ability to pay debts and dividends► Explains difference between accrual basis net income and cash
flows► Shows significant non-cash transactions which will impact future
cash flow
Page 13 The DEC - Fundamentals of Financials
Statement of Cash Flows - Operating
► Transactions that involve producing and selling goods and services
► Inflows: selling goods and services► Outflows: inventory, salaries, taxes, interest, other
expenses
Page 14 The DEC - Fundamentals of Financials
Statement of Cash Flows - Investing
► Transactions that involve acquiring and disposing of long-term assets
► Inflows: sale of plant assets, sale of investments, collection of loans
► Outflows: purchase of plant assets, purchasing investments, lending funds
Page 15 The DEC - Fundamentals of Financials
Statement of Cash Flows - Financing
► Transactions that involve raising capital from debt and equity sources, returning capital to these sources, and making distributions to owners
► Inflows: selling stock, issuing bonds, notes, mortgages► Outflows: purchasing treasury stock, paying dividends,
repaying principal on borrowings, distributions
Page 16 The DEC - Fundamentals of Financials
Cash flow statement - model Jan '13 Feb '13 Mar '13 April '13 May '13 June '13 July '13 Aug '13 Sept '13 Oct '13 Nov '13 Dec '13 FY '13
Net income
-
(5,000)
(5,818)
(3,568)
(2,318)
182 (318)
1,182
2,682
7,182
10,682
14,182
19,070
Add: depreciation expense
-
-
1,818
1,818
1,818
1,818
1,818
1,818
1,818
1,818
1,818
1,818
18,180
Change in AR
-
(15,000)
(5,000)
(15,000)
10,000
(5,000)
(10,000)
(5,000)
(5,000)
(5,000)
(5,000)
(10,000)
(70,000)
Change in inventory
-
(12,000)
-
(4,000)
(2,750)
(3,750)
(7,500)
(1,500)
(3,500)
(3,500) (500)
(6,500)
(45,500)
Change in prepaids
-
(2,000)
- (500)
-
-
-
-
-
-
-
-
(2,500)
Change in AP
-
8,000
-
-
-
-
-
4,000
-
-
-
-
12,000
Change in accruals
-
3,000
-
500
-
-
-
-
-
-
-
-
3,500
Cash flow from operations
-
(23,000)
(9,000)
(20,750)
6,750
(6,750)
(16,000)
500
(4,000)
500
7,000 (500)
(65,250)
Capital expenditures
-
(200,000)
-
-
-
-
-
-
-
-
-
-
(200,000)
Cash flow from investing
-
(200,000)
-
-
-
-
-
-
-
-
-
-
(200,000)
Equity infusion
500,000
-
-
-
-
-
-
-
-
-
-
-
500,000
Distributions
-
-
-
-
-
(50,000)
-
-
-
-
-
(50,000)
(100,000)
Cash flow from financing
500,000
-
-
-
-
(50,000)
-
-
-
-
-
(50,000)
400,000
Net cash flow
500,000
(223,000)
(9,000)
(20,750)
6,750
(56,750)
(16,000)
500
(4,000)
500
7,000
(50,500)
134,750
Beginning cash
-
500,000
277,000
268,000
247,250
254,000
197,250
181,250
181,750
177,750
178,250
185,250
-
Ending cash
500,000
277,000
268,000
247,250
254,000
197,250
181,250
181,750
177,750
178,250
185,250
134,750
134,750
Change in cash
500,000
(223,000)
(9,000)
(20,750)
6,750
(56,750)
(16,000)
500
(4,000)
500
7,000
(50,500)
134,750
Page 17 The DEC - Fundamentals of Financials
Best practices
► Use separate cash accounts in your enterprise► General operating account
► Used to process the majority of your normal, day-to-day transactions such as paying vendors and receiving customer payments
► Payroll account► Processes payroll activity
► Investment account► Park excess cash balances to generate return on investment
► Restricted cash account► Cash that is “set aside” for a particular use or purpose
Page 18 The DEC - Fundamentals of Financials
Keep in mind . . .
► Cash is king!► Practice cash management
► Balance amount of cash on hand, on a regular basis► Ensure you have sufficient cash to meet obligations► Invest excess cash to earn a return
► Establish cash controls► Cash receipts – deposit regularly and record promptly► Cash payments – paper trail for all disbursements (receipts,
purchase orders, etc.)► Separation of duties – no single person responsible for all
functions (writing checks, making deposits, preparing bank reconciliations)
Page 19 The DEC - Fundamentals of Financials
Keep in mind . . .
► Impact of growth on cash flow► Actions that raise cash flow
► Decreasing accounts receivable and inventory► Increasing accounts payable and accrued expenses payable
► Actions that lower cash flow► Increasing accounts receivable and inventory► Decreasing accounts payable and accrued expenses payable
► Depreciation expense is not a cash outlay
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