Understanding Financial Statements

1. Understanding Financial Statements Presented by: Cooper Cochran

2. Financial Statements – what good are they? • Provide a historical picture of your Company • Highlight your Company’s strengths and weaknesses • Identify potential areas of improvement • Help you make better decisions for the future

3. Financial Statements – what are they? • Balance Sheet • Income Statement • Cash Flow Statement Financial Ratios

4. Balance Sheet • Snapshot” of what the Company owns and owes, along with what is left over • Assets – items owned that have value • Liabilities – debts owed that must be paid in the future • Equity – the portion of the Company that belongs to the Owners • Assets = Liabilities + Equity

5. Assets in Detail Items owned that have value • Cash • Accounts Receivable • Inventory • Fixed Assets • Investments • Loans to Others (including owners) • Current vs. Non-Current Assets

6. Liabilities in Detail Debts owed that must be paid in the future • Accounts Payable • Taxes Payable (Payroll, Sales, Income) • Loans • Current vs. Long-Term Liabilities

7. Equity in Detail The owner’s investment in the Company • Paid-In Capital • Retained Earnings • Owner Withdrawals/Dividends

8. What the Balance Sheet shows you Company liquidity – the ability to turn an asset into cash • Working capital • Quick or Acid Test ratio • Current ratio • Leverage (debt to worth) ratio

9. WORKING CAPITAL Current Assets -Current Liabilities Working Capital $ 170,000 - 150,000 $ 20,000

10. QUICK RATIO • Total Current Assets • Inventory • Total Current Liabilities 170,000 - 85,000 = 85,000 = .56 150,000

11. CURRENT RATIO Total Current Assets Total Current Liabilities 170,000 = 1.13 150,000

12. DEBT TO WORTH Total Liabilities Total Capital 204,000 = 2.34 87,000

13. Decisions to make based on the Balance Sheet • Do we have too little (or too much) cash on hand? • Do we need to make changes to our collection policy? • Do we need to restructure our existing debt? • Do we need to seek additional financing, either from lenders or from our owners?

14. Balance Sheet Questions?

15. Income Statement • Summary of the Company’s revenue and expenses over a period of time • Revenue – what the Company has earned during the period • Expenses – costs incurred to run the Company during the period • Net Income or Loss – the difference between the two

16. Income in Detail • Sales or Service Revenue • Interest/Dividend Income • Gain/Loss on Sale of Assets

17. Expenses in Detail • Cost of Goods Sold • Operating Expenses • Interest Expense • Income Tax Expense

18. What the Income Statement shows • Gross Profit/Profit Margin • Net Income/Profit • Horizontal Analysis • Vertical Analysis

19. PROFIT MARGIN ON SALES Net Profit Net Sales 53,000 = 5.9% 900,000

20. Decisions to make based on the Income Statement • Should we increase or decrease our prices? • Should we look for ways to reduce product costs? • Are there ways we can reduce overhead or administrative costs? • Do we need to consider refinancing our debt? • What should we do with the profit earned by the Company? • How can we continue operating if the Company suffers a loss?

21. Income Statement Questions?

22. Cash Flow Statement • Summary of cash inflows and outflows during the period • Operating Activities – cash generated from or used in operating the business • Investing Activities – cash generated from or used in business investments (assets) • Financing Activities – cash generated from or used in financing the business (liabilities or equity) • Reconciliation of net income and cash

23. Cash Flow Items in Detail • Net Income • Non-cash expenses (depreciation) • Change in operating assets/liabilities • Purchase of plant assets, investments • Sale of plant assets, investments • Proceeds from new debt • Principal payment on debts • Investments made by owner(s) • Dividends paid to owner(s)

24. What the Cash Flow Statement shows you • Where your cash is coming from • Where your cash is going • How the cash generated from the Company’s profit is being used • How the balance of the Company’s cash has changed during the year

25. Decisions to make based on the Cash Flow Statement • If our operations are not generating enough cash, what can we do to change this? (credit and collection policies for example) • How can we generate sufficient cash to repay our debts? • If we take out a loan, what amount can we afford in monthly payments? • If we have excess cash, how should we be using it? (investing in Company assets, paying down debt, returning profit to the owners)

26. Other Ratio Information • Accounts receivable turnover • Inventory turnover • Accounts payable turnover • Debt service ratio

27. ACCOUNTS REC TURNOVER AR x 365 = Days to Collect Net Sales 75,000 x 365 = 27,375,000 = 30.4 900,000

28. INVENTORY TURNOVER Inv x 365 = Days to Turn Cost of Goods 85,000 x 365 = 31,025,000 = 57.4 504,000

29. ACCOUNTS PAY TURNOVER Accounts Pay x 365 Purchases 41,000 x 365 = 14,965,000 = 42.7 350,000

30. DEBT SERVICE RATIO Net Profit + Depreciation Current Portion of LT Debt 53,000 + 13,0000 = 66,000 = $11 6,000

31. Cash Flow Questions?

32. Decision-Makers outside of the Company Who else is relying on our financial statements in order to make decisions about our Company? • Owners/Investors • Lenders/Creditors • Customers • Employees or potential employees • Government Entities (regulators, IRS, etc.)

33. Decision-Makers outside of the Company, continued What information are they looking for? • Profitability • Liquidity • Sustainability • Leverage • Return on investment to the owners • Comparability with others in the industry • Trends from year to year

34. Next Steps • Analyze your own Company • Compare with others in the industry • Look for areas of improvement • Make decisions and implement changes • Start all over!

35. Questions?

36. H E L P . . . LaTech-TBDC 509 W. Alabama Ave. Ruston, LA 318-257-2835 www.latech.edu cooper@latech.edu

37. Thank you! PLEASE COMPLETE AND RETURN THE EVALUATION