Accounting & Understanding Financial Statements Disadvantaged Business Enterprise (DBE) Supportive Services Program

Transcription

1 Accounting & Understanding Financial Statements Disadvantaged Business Enterprise (DBE) Supportive Services Program The contents of this training course reflect the views of the author who is responsible for the facts and accuracy of the data presented herein. The contents do not necessarily reflect the official views or policies of the State of California or the Federal Highway Administration. This course outline does not constitute a standard, specification, or regulation.

2 Agenda Types of Financial Statements Format of Each Financial Statement Setting Up Your Financial Statements Understanding Financial Statements Financial Calculators Discussion 2

3 Types of Financial Statements Three Main Financial Statements Balance Sheet Income Statement or Profit and Loss (P & L) Cash Flow Report 3

4 Format of Financial Statements GAAP Generally Accepted Accounting Principles Guidelines for formatting financial statements Uses double-entry accounting system Allows for better comparison between companies 4

5 Format of Financial Statements Balance Sheet Assets = Liabilities + Equity (Assets Liabilities = Equity) Is a snapshot in time it tells about your business on a specific day 5

6 Format of Financial Statements Balance Sheet Divided into three sections: Assets, Liabilities and Equity in that order Total of Assets = Total of Liabilities + Equity 6

7 Format of Financial Statements What is an Asset? Everything you own that will provide a future benefit Current assets Fixed assets Notes receivable 7

8 Format of Financial Statements Assets List accounts in order of liquidity (nearness to cash) Current Assets Cash Accounts Receivable Notes Receivable Inventory Prepaid Expenses Total Current Assets 8

9 Format of Financial Statements Fixed Assets Land Buildings Furniture or Leasehold Improvements Equipment or Machinery Less Accumulated Depreciation Total Property and Equipment 9

10 Format of Financial Statements Notes Receivable Other Assets Total Assets 10

11 Format of Financial Statements Liabilities List accounts in order of soonest to mature Current Liabilities Accounts Payable Accrued Expenses Notes Payable (short-term) Current Portion of Long-Term Debt Total Current Liabilities 11

12 Format of Financial Statements Long-Term Liabilities Notes Payable (long-term) Notes Payable - shareholder Total Liabilities Total Long-Term Liabilities 12

13 Format of Financial Statements Equity Stock (common or preferred) Paid in Capital Retained Earnings Net income (current year) Total Equity Total Liabilities and Equity 13

14 Format of Financial Statements Income Statement (Profit & Loss) Income (Sales, Fees) - Cost of Sales (COGS) = Gross Profit (Income minus COGS) - Operating Expenses (G & A) = Net Operating Income + Other Income (Expense) = Net Income (Loss) 14

15 Format of Financial Statements Income Revenue from sales of goods Fees for services COGS Raw materials Direct labor Direct expenses 15

16 Format of Financial Statements Sales COGS = Gross Profit Shows how much the company has made from its core operations Important to watch gross profit and analyze fluctuations 16

17 Format of Financial Statements Operating Expenses (G & A) Indirect Labor, Payroll Taxes Rent, Utilities Postage, Printing Insurance Employee Benefits Depreciation Advertising 17

18 Format of Financial Statements Gross Profit - Operating Expenses = Operating Income (Profit) Other Income (Expense) Revenues not from core operations Extraordinary income (expense) Interest income (expense) 18

19 Format of Financial Statements Operating Income + Other Income (Expense) = Net Profit Before Taxes Taxes and Dividends Not deductible items Will vary from year to year based on profits Net Income (Loss) 19

20 Setting Up Your Financial Statements Chart of Accounts Assets (Current, Fixed or Long-Term) Liabilities (Current or Long-Term) Capital (Equity) Income (Revenue) Cost of Goods Sold (COGS) Expenses (Operating) Other Income (Expenses) 20

21 Setting Up Your Financial Statements Input Documents Sales invoices Deposit slips Paid bills Bank statements Cancelled checks Payroll records Tax reports payroll, sales tax A/R and A/P reports 21

22 Setting Up Your Financial Statements Financial Statements Balance Sheet Income Statement Cash Flow Report 22

23 Understanding Financial Statements When do you look at Balance Sheet? When do you look at the Income Statement? What do you do with them once you have them? 23

24 Understanding Financial Statements Financial Ratios Meaningless unless it is compared to a standard Your own prior period ratios Industry averages Your own projections and goals 24

25 Understanding Financial Statements 4 types of financial ratios: Liquidity ratios Safety ratios Profitability ratios Efficiency ratios 25

26 Understanding Financial Statements Liquidity Ratios Highlight working capital Track your progress toward financial stability Measure your capacity to pay your debts as they come due 26

27 Understanding Financial Statements Liquidity Ratios Working Capital Ratio = Current Assets - Current Liabilities Should be positive number Represents short-term unencumbered cash Larger the number the better Look for consistency and growth over time 27

28 Understanding Financial Statements Liquidity Ratios Current Ratio = Current Assets Current Liabilities Working capital Above 1:1 and close to 2:1 Quick Ratio = Cash + A/R Current Liabilities Generally 1:1 is good 28

29 Understanding Financial Statements Liquidity Ratios Inventory to Working Capital Ratio = Inventory Total Current Assets Total Current Liabilities % of working capital made up of inventory Number will be less than 1 29

30 Understanding Financial Statements Safety Ratios Debt to Equity Ratio = Debt Equity 1:1 to 4:1 (2:1 usually for small business loans) 30

31 Understanding Financial Statements Profitability Ratios Sales Growth = Current Year s Sales Last Year s Sales Last Year s Sales 31

32 Understanding Financial Statements Profitability Ratios Gross Profit Margin = Gross Profit Total Sales Net Profit Margin = Net Profit Total Sales 32

33 Understanding Financial Statements Profitability Ratios Operating Expense Percentage = Operating Expenses Total Sales Calculate for total or for each operating expense individually Used to control operating expenses Work to decrease percentages 33

34 Understanding Financial Statements Efficiency Ratios Sales to Total Assets = Sales Total Assets Indicates how efficiently your business generates sales on each dollar of assets Volume indicator that measures efficiency of your business 34

35 Understanding Financial Statements Efficiency Ratios Days in Receivables = Average A/R Sales X 360 days Accounts Receivable Turnover = Sales Average A/R 35

36 Understanding Financial Statements Efficiency Ratios Days in Inventory Inventory Turnover Days in Accounts Payable Accounts Payable Turnover 36

37 Understanding Financial Statements Financial calculators

38 Thank you! Questions & Answers Evaluation Survey Link will be ed to you after this class Upcoming Classes Register today! Check s will be sent to you soon 38

39 Business Development Program Business Plan Development One-on-One Mentoring Free Technical Assistance Certificate upon Completion of Program Teaming/Partnering Access to Recorded Webinars Access to Valuable Business Resources Custom Level Bid Matching For more information: Visit: