Presented by SCOTT TRANSUE

Transcription

1 Presented by SCOTT TRANSUE

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3 Cash vs. accrual Key definitions Balance sheets Income statements Cash flow statements Break-even analysis Today s Agenda Ratios

4 Recognizes transactions when they occur Recognizes income when goods are shipped or when services are rendered Recognizes an expense when the business is obligated to pay it

5 Accounts receivable Accounts payable

6 Record activity: When you receive money When you pay money out

7 The accrual method shows the flow of business income and debts more accurately, but doesn t show cash reserves.

8 The cash method provides a more accurate picture of how much actual cash your business has, but may be misleading in terms of long-term profitability.

9 Cash accounting can distort a company s accounting picture by incorrectly reflecting actual activity.

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11 Guidelines and procedures for accountants when they are setting up and preparing financial statements for a company. Generally Accepted Accounting Principles

12 Financial Accounting Standards Board Emphasis on the term general (GAAP) Generally Accepted Accounting Principles

13 An attachment to any key financial document explaining the rationale behind numbers Assumption sheet

14 The relationship between assets and the debt on those assets Leverage

15 The relationship between assets owned and how quickly those assets can be Liquidity converted to cash

16 Balance Sheet The balance sheet shows: 1.Assets 2.Outstanding liabilities 3.Owners or shareholders equity Assets Liabilities Owners Equity

17 Equity Equity Assets Liabilities

18 The balance sheet can be thought of as a photograph of a company s financial health at a given moment in time According to GAAP, assets must equal liabilities and owner equity Shows liquidity and leverage Time of year is critical, especially with seasonal businesses

19 Balance Sheet Assets Current Assets Long-lived Assets Liabilities Current Liabilities Long-lived Assets Equity

20 Income Sheet It is sometimes called: 1. Statement of operations 2. Profit and loss (P&L) statement 3. Statement of activities If a balance sheet is like a photograph, an income statement is like a video Usually done monthly

21 Income Grants Sales Income Statements Taxes Donation

22 An income statement compares a relationship between income and outflow over a given period of time Always shown on an accrual accounting basis

23 Income Statement Sales Cost of Goods Sold Gross Income Operating Expenses Net Income Before Tax Tax Provision Net Income After Tax

24 Income Statement Shows earned income only Separates payroll and non-payroll expenses Done monthly, quarterly and at year-end Indicates how the business is being run on a consistent basis

25 Cash Flow Statement Operating Activities Investing Financing

26 Cash Flow Statements Show actual money coming in and going out Designed to maximize the use of money when we have it before we need it and minimize the cost of money when we need it before we have it

27 Cash Flow Statements 1Operating 2Investing 3Financing The summation line for operations, investing and financing Adding them all up for net cash from all activities combined

28 Cash Flow Statements Combine that number with the beginning cash balance and you will have a net cash number for the cash flow statement You can use that number to verify the cash balance on the balance sheet

29 Payback Method Annual Depreciation $15,000 = = $3,000 5 Years Payback Period = Total Cost of Investment Annual Net Cash Flow ASSET FACTS Purchase Price = $15,000 Useful Life = 5 Years Cash Value = $8,000/Yr (Generated saving) 3 Years = $15,000 $8,000 $3,000 Use the payback method to determine if something is a good investment or not.

30 Financial Ratios Liquidity Ratio Do we have enough in current assets to cover what we owe in the short-term?

31 Financial Ratios Current Ratio Current Assets Current Liabilities Current Ratio

32 Financial Ratios Quick Ratio Current Assets minus Inventory Current Liabilities Quick Ratio

33 Financial Ratios Ideal Ratio is better than 1:1 Healthy Current Ratio 1.5 Healthy Quick Ratio 1.2

34 Financial Ratios Debt Ratio Total Debt Total Assets Debt Ratio

35 Financial Ratios Debt to Equity Ratio Total Debt Total Equity Debt to Equity Ratio

36 Financial Ratios Debt Ratio How much out of each dollar of assets we need to devote to paying off debt Manufacturing company ratio can be has high as 60% A ratio around 30-35% is considered safe

37 Financial Ratios Debt to Equity Ratio How much out of each dollar of your investors money or the owner s money needs to be dedicated to paying off debt If all of the assets had to be liquidated to pay off debt, how much would be left

38 Financial Ratios Days Sales Outstanding (DSO) How good your collections department is Average Accounts Receivable Net Sales X 365 DSO Ratio If your standard terms are 30 days, but you calculate DSO of 45 or 50 days, then your average collection is 45 to 50 days, not 30 days.

39 Financial Ratios Inventory Turnover Ratio How often you are turning over your inventory Cost of Goods Sold Average Inventory Inventory Turnover Ratio Return on Assets (ROA) Return on Equity (ROE)

40 Return on Assets What percentage of each dollar of asset can be considered return for return on assets? ROA = Net Income Total Assets

41 Return on Equity What are we getting back for each dollar of equity we put into the company? ROE = Net Income Total Equity

42 Gross Profit Margin What are your product costs? What are your overhead costs? Net Sales Cost of Goods Sold (COGS) Gross Profit Margin

43 Operating Profit Margin Gross Profit Margin Overhead Cost Operating Profit Margin

44 Net Sales = $1,000,000 Cost of Goods Sold = $500,000 Gross Margin = $500,000 Overhead Cost = $300,000 Operating Margin = $200,000

45 Important terms and definitions: GAAP Accrual vs. cash accounting Leverage, liquidity and assumption sheets Understand the 3 key financial statements balance sheet, income statement and cash flow statement. Look at the relationships with the ratios