LIQUIDITY A measure of the company's ability to meet obligations as they come due. Financial Score for Restaurant

Transcription

1 Dear Client: In an effort to bring you more value as a financial management advisor, we have initiated a program to present your financial statements in an easier-to-read and more useful format. We are very excited about this program because it will provide you with a plain-language translation of your financial statements. The report highlights the areas of your business which are the strongest, and those which may need improvement, as well as outline some of the ways in which we can help you to define and reach your financial goals. The experts at Tax Force / Pizza Force have one primary objective: to make your business more profitable by simplifying your workload. Look for this new report with the next set of financial statements we send you we look forward to the discussion it will initiate.

2 This report is designed to assist you in your business' development. Below you will find your overall ranking, business snapshot and narrative write-up. Snapshot of: Industry: Pizza Restaurant Revenue: $1M - $10M Periods: Full-Service Restaurants 12 months against the same 12 months from the previous year Financial Score for Restaurant LIQUIDITY - A measure of the company's ability to meet obligations as they come due. PROFITS & PROFIT MARGIN - A measure of whether the trends in profit are favorable for the company. SALES - A measure of how sales are growing and whether the sales are satisfactory for the company. BORROWING - A measure of how responsibly the company is borrowing and how effectively it is managing debt. ASSETS - A measure of how effectively the company is utilizing its gross fixed assets. EMPLOYEES - A measure of how effectively the company is hiring and managing its employees. Financial Analysis for Restaurant LIQUIDITY A measure of the company's ability to meet obligations as they come due. Operating Cash Flow Results

3 Conditions in this area are strong, currently. The company is generating solid, positive cash flow from operations. It is particularly nice to see this in combination with the overall liquidity results, which are also very good (this will be discussed in more depth below). Ultimately, cash flow drives long-run liquidity for almost every business, so it is good to see a strong relationship between cash flow and profits. General Liquidity Conditions The company has performed well in this area. The firm's liquidity is strong in several areas, and moreover, this strength has been maintained since last period. Best of all, high growth in sales and profits were combined with positive liquidity. Often, it's difficult for companies to grow because growth puts constraints on cash or liquidity. In this case, the company has expanded the business and maintained its solid liquidity position. Also, it should be noted that the company's liquidity position is "strong" relative to the industry. This can turn into a competitive advantage if superior liquidity is consistently maintained relative to the competition. Still, it's noteworthy to mention that it is management's charge to make sure that the integrity of current asset accounting is solid. For example, there should be checks in place to make certain that the amounts listed in the current assets portion of the Balance Sheet actually reflect real economic value. This may be obvious, but it is sometimes the case that balances on the Balance Sheet are not quite correct. Currently, the company's inventory days and accounts payable days ratios are about average as compared to other companies in the industry. This generally means that the company is converting inventory to sales and paying its bills in a typical manner. Generally, it is positive that these turnover ratios look to be in line. Tips For Improvement Liquidity is a challenge that is never solved. Managers might possibly consider the following actions to maintain or improve conditions over time: Use reliable suppliers that can deliver goods when they are needed. For example, suppliers that can deliver within one day can make it easier for the restaurant to keep inventory low and fresh. Accept multiple forms of payment, such as credit and debit cards, to help cut down on the number of denied payments (bad checks). Watch the payment terms of credit cards since longer terms will delay collection until much later. If cash is a constraint, try to establish a sufficient line of credit from the bank. The restaurant should obtain, but not necessarily use, as much financing as possible. If you decide to obtain external financing, structure it as long-term rather than short-term in order to decrease monthly payments. Monitor the impact tax payments may have on cash. Keep enough money aside to be able to meet future tax obligations based on earnings. LIMITS TO LIQUIDITY ANALYSIS: Keep in mind that liquidity conditions are volatile, and this is a general analysis looking at a snapshot in time. Review this section, but do not overly rely on it. Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible. The This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator

4 higher the ratio, the more liquid the company is. (current liabilities). The higher the number, the stronger the company. This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric. The lower the better. This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Lower is normally better. PROFITS & PROFIT MARGIN A measure of whether the trends in profit are favorable for the company. A stronger net profit margin and higher sales have combined to improve this company's overall net profitability position significantly this period. Specifically, net profit margins have improved by 26.49% while sales have increased by 28.00%. The company is generating significantly more revenue than last period and managing it better by improving net margins -- an excellent combination. It looks like the company is pushing itself nicely within its "relevant range" -- the company's operating range for its current cost structure. This situation could also imply that the company may be able to push sales and profits higher concurrently in the future, which is not always easy to achieve. Overall net profitability here is excellent. This means that the net profit margin is good even compared to what similar companies are earning. This puts the challenge on managers to make sure that they are moving money back into the company to improve future profitability. As long as net margins don't slide too much, it is important to invest in the company to take advantage of this excellent strategic position. Managers should also make sure to put money aside to pay taxes on the extra earnings. Tips For Improvement The following ideas to improve profitability might be useful and can be thought-through by managers: Try to hire employees with restaurant experience in serving, cooking, etc. Call previous employers to assess the employee s skills. Create cost menus so that each menu item has a cost associated with it. This will help in figuring out what the profit margins are for each dish and which items should be removed. If needed, adjust menu item marketing to improve profitability. Track the effectiveness of advertising by the additional customer visits generated from the campaign. Consider doing advertising/marketing in-house to reduce costs, as long as quality can be maintained. Monitor the amount of money that is being used for activities unrelated to the business.

5 This number indicates the percentage of sales revenue that is not paid out in direct costs (costs of sales). It is an important statistic that can be used in business planning because it indicates how many cents of gross profit can be generated by each dollar of future sales. Higher is normally better (the company is more efficient). This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts. The higher the better. This metric shows advertising expense for the company as a percentage of sales. This metric shows rent expense for the company as a percentage of sales. This metric shows G & A payroll expense for the company as a percentage of sales. This metric shows total payroll expense for the company as a percentage of sales.

6 SALES A measure of how sales are growing and whether the sales are satisfactory for the company. It is interesting that sales have significantly risen at the same time that the employee base has also significantly risen. It is good to see large increases in sales accompany the relatively large increases in the employee base, even if the new employees have not directly helped elevate sales. A side observation is that fixed asset levels have stayed approximately the same as they were last period. This means that a larger amount of sales revenue is being generated by each dollar of assets. Finance professionals refer to this as increasing the business's "asset turns," which is a key performance measure in this specific industry. The company is now driving more sales through about the same level of assets, which can help improve profitability over the long run if expenses can be managed. BORROWING A measure of how responsibly the company is borrowing and how effectively it is managing debt. The company performed very well with respect to debt use. Borrowing increased and net profitability improved at an even faster rate. This is a favorable result, and should provide improved returns for owners if the trend continues over time. In addition, not only did profitability in dollars improve from last period, but the net profit margin also improved by 26.49% -- an unusual and important combination when adding debt. Even when a company receives a good score in this area, it is still quite important to evaluate real returns. For example, the trend here is good but the company will still want to determine the rates of return on assets and borrowed money. This report only indicates trends, not acceptable rates of return on borrowed funds. The overall trend in this area seems to be positive. The company has a relatively low level of debt as compared to its equity, and has demonstrated the ability to generate adequate earnings (before interest and non-cash expenses) to cover its interest obligations. Since the company seems to be able to cover its current debt obligations and is not highly levered, it may be able to borrow effectively to help foster future growth. Of course, this must be carefully evaluated by the company s management. It could be helpful to carefully analyze the following question: Did the increase in debt directly help improve profitability? The improved profitability could have been caused by other factors unrelated to debt. The answer to this question could point the direction for optimal debt decisions in the future. This ratio measures a company's ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality. The higher the better. This Balance Sheet leverage ratio indicates the composition of a company s total capitalization -- the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a lower ratio to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial leverage.

7 This ratio measures a company's ability to repay debt obligations from annualized operating cash flow (EBITDA). ASSETS A measure of how effectively the company is utilizing its gross fixed assets. These are some very good results, at least for this section. The company considerably improved profitability with about the same level of resources (fixed assets). This means that the company is now using its assets more effectively. It may also indicate that the company might have some room to further grow profitability within its current operating environment (while maintaining relatively the same level of assets). Furthermore, note the improvement in the net profit margin. The company has become more efficient within its present structure. Other positive points include the above average return on assets and return on equity that the company earned this period. If profits are moving positively against fixed assets and the company is generating good returns on those assets, this area will continue to score very well, as has been the case this period. This measure shows how much profit is being returned on the shareholders' equity each year. It is a vital statistic from the perspective of equity holders in a company. The higher the better. This calculation measures the company's ability to use its assets to create profits. Basically, ROA indicates how many cents of profit each dollar of asset is producing per year. It is quite important since managers can only be evaluated by looking at how they use the assets available to them. The higher the better.

8 This asset management ratio shows the multiple of annualized sales that each dollar of gross fixed assets is producing. This indicator measures how well fixed assets are "throwing off" sales and is very important to businesses that require significant investments in such assets. Readers should not emphasize this metric when looking at companies that do not possess or require significant gross fixed assets. The higher the more effective the company's investments in Net Property, Plant, and Equipment are. EMPLOYEES A measure of how effectively the company is hiring and managing its employees. Perhaps no other resource management area is more important than the proper management of employees, including the hiring and releasing of staff. This company has managed its employee base well since the prior period. The company has increased its employee base significantly, but net profitability has improved at an even faster rate. Basically, the company has leveraged employees effectively. In the future, managers may want to consider bringing in more people, but only if this action will continue to improve net profitability. However, managers do need to note that all hiring decisions should be based upon an assessment of future conditions. Consequently, it is prudent to plan for hiring in the same way that the company plans for any other expenditure.

9 INDUSTRY-SPECIFIC PERFORMANCE RATIOS What are the Key Performance Indicators for the business? This section of the report provides Key Performance Indicators (or KPIs) for the business being analyzed. A KPI can be either a financial or a non-financial metric, but it is typically a number or ratio that is easily obtained and tracked by the business as an early indicator of how well it is performing. The ratio calculations, graphs, and benchmarks displayed below are specific to the particular industry this business operates in. Tracking these KPIs over time as a trend and also as they relate to the industry comparison benchmark can help lead to more effective management of the business, although it is important to be aware that a KPI may be more of a rough measure of effectiveness than a precise indicator. Food Costs to Sales = Food Costs / Sales Sales Per Seat = Sales / Seats Sales Per Square Foot = Sales / Square Feet Seat Turnover = Customers Served per Day / Seats

10 Direct Labor Ratio = Direct Labor / Sales Food Costs to Food Sales = Food Costs / Food Sales Beverage Costs to Beverage Sales = Beverage Costs / Beverage Sales

11 RAW DATA Income Statement Data 12/31/ /31/2010 Sales (Income) $1,250,000 $1,600,000 Food Sales $600,000 $850,000 Beverage Sales $350,000 $320,000 Cost of Sales (COGS) $590,000 $742,000 Direct Materials $10,000 $12,000 Direct Labor $200,000 $280,000 Food Costs $250,000 $300,000 Beverage Costs $130,000 $150,000 Gross Profit $660,000 $858,000 Gross Profit Margin 52.80% 53.63% Depreciation $4,000 $5,000 Amortization $0 $0 Overhead or S,G,& A Expenses $260,000 $262,000 G & A Payroll Expense $200,000 $200,000 Rent $50,000 $50,000 Advertising $10,000 $12,000 Other Operating Income $0 $0 Other Operating Expenses $0 $0 Operating Profit $396,000 $591,000 Interest Expense $1,500 $3,000 Other Income $0 $0 Other Expenses $100,500 $112,000 Net Profit Before Taxes $294,000 $476,000 Adjusted Net Profit before Taxes $294,000 $476,000 Net Profit Margin 23.52% 29.75% EBITDA $299,500 $484,000 Taxes Paid $0 $0 Extraordinary Gain $0 $0 Extraordinary Loss $0 $0 Net Income $294,000 $476,000 Balance Sheet Data 12/31/ /31/2010 Cash (Bank Funds) $265,000 $275,000 Accounts Receivable $0 $0 Inventory $12,000 $15,000 Other Current Assets $0 $0

12 Total Current Assets $277,000 $290,000 Gross Fixed Assets $500,000 $500,000 Accumulated Depreciation $0 $0 Net Fixed Assets $500,000 $500,000 Gross Intangible Assets $0 $0 Accumulated Amortization $0 $0 Net Intangible Assets $0 $0 Other Assets $12,000 $15,000 Total Assets $789,000 $805,000 Accounts Payable $40,000 $50,000 Short Term Debt $0 $0 Notes Payable / Current Portion of Long Term Debt $0 $0 Other Current Liabilities $50,000 $50,000 Total Current Liabilities $90,000 $100,000 Notes Payable / Senior Debt $0 $0 Notes Payable / Subordinated Debt $0 $0 Other Long Term Liabilities $40,000 $50,000 Total Long Term Liabilities $40,000 $50,000 Total Liabilities $130,000 $150,000 Preferred Stock $0 $0 Common Stock $0 $0 Additional Paid-in Capital $0 $0 Other Stock / Equity $432,000 $426,000 Ending Retained Earnings $0 $0 Total Equity $432,000 $426,000 Number of Employees (FTE) Other Non-Financial Accounts Square Feet 1, , Seats Customers Served per Day

13 COMMON SIZE STATEMENTS Income Statement Data 12/31/ /31/2010 Sales (Income) 100% 100% Food Sales 48% 53% Beverage Sales 28% 20% Cost of Sales (COGS) 47% 46% Direct Materials 1% 1% Direct Labor 16% 18% Food Costs 20% 19% Beverage Costs 10% 9% Gross Profit 53% 54% Depreciation 0% 0% Amortization 0% 0% Overhead or S,G,& A Expenses 21% 16% G & A Payroll Expense 16% 13% Rent 4% 3% Advertising 1% 1% Other Operating Income 0% 0% Other Operating Expenses 0% 0% Operating Profit 32% 37% Interest Expense 0% 0% Other Income 0% 0% Other Expenses 8% 7% Net Profit Before Taxes 24% 30% Adjusted Net Profit before Taxes 24% 30% EBITDA 24% 30% Taxes Paid 0% 0% Extraordinary Gain 0% 0% Extraordinary Loss 0% 0% Net Income 24% 30% Balance Sheet Data 12/31/ /31/2010 Cash (Bank Funds) 34% 34% Accounts Receivable 0% 0% Inventory 2% 2% Other Current Assets 0% 0% Total Current Assets 35% 36% Gross Fixed Assets 63% 62%

14 Accumulated Depreciation 0% 0% Net Fixed Assets 63% 62% Gross Intangible Assets 0% 0% Accumulated Amortization 0% 0% Net Intangible Assets 0% 0% Other Assets 2% 2% Total Assets 100% 100% Accounts Payable 5% 6% Short Term Debt 0% 0% Notes Payable / Current Portion of Long Term Debt 0% 0% Other Current Liabilities 6% 6% Total Current Liabilities 11% 12% Notes Payable / Senior Debt 0% 0% Notes Payable / Subordinated Debt 0% 0% Other Long Term Liabilities 5% 6% Total Long Term Liabilities 5% 6% Total Liabilities 16% 19% Preferred Stock 0% 0% Common Stock 0% 0% Additional Paid-in Capital 0% 0% Other Stock / Equity 55% 53% Ending Retained Earnings 0% 0% Total Equity 55% 53% *The industry common size figures shown above were taken from all private company data for companies with industry code for all years in all areas with yearly sales $1 million to $10 million.

15 INDUSTRY SCORECARD Financial Indicator Current Period Industry Range Distance from Industry Current Ratio to % = Total Current Assets / Total Current Liabilities Explanation: Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible. The higher the ratio, the more liquid the company is. Quick Ratio to % = (Cash + Accounts Receivable) / Total Current Liabilities Explanation: This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator (current liabilities). The higher the number, the stronger the company. Inventory Days 7.38 Days 5.00 to Days 0.00% = (Inventory / COGS) * 365 Explanation: This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric. The lower the better. Accounts Payable Days Days to Days 0.00% = (Accounts Payable / COGS) * 365 Explanation: This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Lower is normally better. Gross Profit Margin 53.63% 52.00% to 67.00% 0.00% = Gross Profit / Sales Explanation: This number indicates the percentage of sales revenue that is not paid out in direct costs (costs of sales). It is an important statistic that can be used in business planning because it indicates how many cents of gross profit can be generated by each dollar of future sales. Higher is normally better (the company is more efficient). Net Profit Margin 29.75% 0.50% to 6.00% % = Adjusted Net Profit before Taxes / Sales Explanation: This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts. The higher the better. Advertising to Sales 0.75% 1.25% to 3.50% % = Advertising / Sales Explanation: This metric shows advertising expense for the company as a percentage of sales. Rent to Sales 3.13% 4.00% to 7.50% % = Rent / Sales

16 Explanation: This metric shows rent expense for the company as a percentage of sales. G & A Payroll to Sales 12.50% 18.00% to 30.00% % = G & A Payroll Expense / Sales Explanation: This metric shows G & A payroll expense for the company as a percentage of sales. Total Payroll to Sales 30.00% N/A N/A = (Direct Labor + G & A Payroll Expense) / Sales Explanation: This metric shows total payroll expense for the company as a percentage of sales. Interest Coverage Ratio to ,244.42% = EBITDA / Interest Expense Explanation: This ratio measures a company's ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality. The higher the better. Debt-to-Equity Ratio to % = Total Liabilities / Total Equity Explanation: This Balance Sheet leverage ratio indicates the composition of a company s total capitalization -- the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a lower ratio to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial leverage. Debt Leverage Ratio 0.31 N/A N/A = Total Liabilities / EBITDA Explanation: This ratio measures a company's ability to repay debt obligations from annualized operating cash flow (EBITDA). Return on Equity % 8.00% to 20.00% % = Net Income / Total Equity Explanation: This measure shows how much profit is being returned on the shareholders' equity each year. It is a vital statistic from the perspective of equity holders in a company. The higher the better. Return on Assets 59.13% 6.00% to 10.00% % = Net Income / Total Assets Explanation: This calculation measures the company's ability to use its assets to create profits. Basically, ROA indicates how many cents of profit each dollar of asset is producing per year. It is quite important since managers can only be evaluated by looking at how they use the assets available to them. The higher the better. Fixed Asset Turnover to % = Sales / Gross Fixed Assets Explanation: This asset management ratio shows the multiple of annualized sales that each dollar of gross fixed assets is producing. This indicator measures how well fixed assets are "throwing off" sales and is very important to businesses that require significant investments in such assets. Readers should not emphasize this metric when looking at companies that do not possess or require significant gross fixed assets. The higher the more effective the company's investments in Net Property, Plant, and Equipment are.

17 NOTE: Exceptions are sometimes applied when calculating the Financial Indicators. Generally, this occurs when the inputs used to calculate the ratios are zero and/or negative. READER: Financial analysis is not a science; it is about interpretation and evaluation of financial events. Therefore, some judgment will always be part of our reports and analyses. Before making any financial decision, always consult an experienced and knowledgeable professional (accountant, banker, financial planner, attorney, etc.).