Financial Statements for Lawyers

Transcription

1 Financial Statements for Lawyers The 6 Keys to Understanding the Numbers! Brett Goodyer - Principal

2 What will we cover? The basics of what you are looking at What it means in the context of the business Some key methods, tips and insights into where to look and what to look for to answer your questions

3 Your client. My husband s business is worth a fortune! But it s my business and my money. My wife has this business on the side, she says it s not worth anything My business partner says we aren t profitable, but we turn over millions, he must be hiding something!

4 Where to from here? All businesses should have financial statements Most (SME) financial statements are directed at tax obligations and can be verified using tax returns; Basic financial statements include at a minimum: Profit and loss Balance sheet Depending on their nature - may be audited. Today we will give you 6 key pointers to the truth

5 Firstly the context.. Entity Purpose General Purpose v Special Purpose Accounting/tax rules What is NOT shown Current goodwill Business environment Business non-accounting attributes Relative market performance

6 Profit and Loss Money in and money out of a business during a period of time Usually 1 July to 30 June Should include income from all (taxable) sources Should include all expenses that have been incurred Should include non cash entries such as depreciation and amortisation P&L = what has the business done?

7 Profit and Loss Sales Cost of goods sold Revenues (gross profit) Other Revenue Expenses Profit/Loss

8 An example

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10 P&L v BAS BAS Business Activity Statement Periodic tax reporting Monthly, quarterly Makes no distinction between Capital and Income Mainly for GST purposes May be more current information After the last financial year end Has anything changed since financial year end?

11 Balance Sheet Statement of financial position Snapshot of the business as at a point of time All the assets owned Current Long term All the liabilities owed Current Long term The difference between these two is the shareholder s equity What shareholders actually own

12 Balance Sheet Current Assets Non Current Assets Total Assets Current Liabilities Non Current Liabilities Total Liabilities Equity Retained Earnings

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14 Analysis Vertical Horizontal Ratio

15 Vertical Analysis (example)

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18 Horizontal Analysis (example)

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20 Ratio Analysis Gross Profit Margin Liquidity Ratio (Current Ratio)

21 Gross Profit Margin Formula: Gross profit margin = Sales Cost of goods sold Sales x 100 Example: Gross profit margin = $500,000 - $300,000 $500,000 x 100 Gross profit margin = 40%

22 Liquidity Ratio This is a primary method of determining immediate solvency: Current Ratio It is: Current Assets Current Liabilities A result of >1 means the business has the means to pay its current liabilities. If it is less than 1, trouble is not far away

23 Key Expenses Analysis Always look at superannuation If it >9% of wages Why? High entertainment costs = lifestyle funding Motor Vehicle expenses Why does an accountancy practice have a $300k pa expense? Ferrari. Loans to and from related parties.

24 Directors/Shareholders Loans If there is apparent high equity, is it still in the business? Has it been loaned out to shareholders? Has it been taken as personal wealth without really being reflected in the business? Is the equity liquid? or is it locked up in fixed assets such as a building?

25 Shareholders Loans Asset That is a loan by the company to the shareholder Alternative way of getting money out of the company Shareholders have to pay the loan back Division 7A loans (tax act) Commercial basis Repayment schedule

26 Shareholders Loans Liability That is a loan to the company by the shareholders Company needs to pay these back to the shareholders Usually unsecured and on favourable terms Sourced from funds outside the business Maybe from dividends re-invested These loans probably form part of the marital asset pools. (for you family lawyers)

27 In Closing The 6 Keys Vertical Analysis Horizontal Analysis Gross Profit Margin Liquidity Ratio Key Expense Analysis Directors/Shareholders Loans

28 Thanks for coming! Thanks for coming I hope you have come away with something practical. Don t forget to visit us at:

29 If you have any queries If I haven t answered your question please send it to me here: brett@vantageforensicaccounting.com.au And I will get back to you as soon as I can.