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High Speed Growth Managing Busines s Financials for Growth

High Speed Growth Managing Busines s Financials for Growth. The SCORE Foundation would like to thank for showing their support of America’s small businesses by sponsoring this series.

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High Speed Growth Managing Busines s Financials for Growth

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  1. High Speed GrowthManaging Business Financials for Growth

  2. The SCORE Foundation would like to thank for showing their support of America’s small businesses by sponsoring this series. The content provided in the Simple Steps for Growing Your Business materials is intended as a business resource only and does not guarantee a successful outcome when applied to individual business use. To find additional resources on growing your business, visit www.score.org and www.openforum.com

  3. Using Financial Statements to ManageYour Business

  4. Important Terms: Bookkeeping Methods Cash:• Cash basis bookkeepers recognize income and expenses when they are received/paidAccrual:• Accrual basis bookkeepers recognize income and expenses when the product/service is delivered Jennifer Behar

  5. Accounting Terminology • Gross sales (revenues)• Cost of goods sold• Gross profit• Sales, general and administrative expenses• Operating profit• Interest expenses and depreciation• Net profit

  6. Cost of Goods Sold • Components of COGS varies from industry to industry• Generally includes all direct and indirect costs of producing a product• Does not include sales, general and administrative expenses (SG&A)

  7. Sales, General & Administrative Expenses Expenses that support the company’s operations, including sales, but are not directly related to COGS

  8. Using Financial Statements to Manage Your Business Gross Profits• Profits after you subtract COGS from sales revenue Operating Profits • Profits after you subtract SG&A from Gross Profits Net Profits • Profits after you subtract taxes, interest paid and depreciation from Gross Profits

  9. Financial Statements A typical set of financial statements is made up of:• Income Statement (P&L)• Balance Sheet• Statement of Cash Flows (optional)Optional:• Accounts Receivable Aging Summary• Accounts Payable Aging Summary Douglas S. Cavanaugh

  10. Financial Statement Discussion Review the sample Income Statement and Balance Sheet with the instructor and discuss the different components of each. Theresa Alfaro Daytner

  11. Income Statement Top section shows revenues• Gross revenues• Adjustments to revenues• Cost of goods sold (COGS)• Adding/subtracting the figures above = gross profitBottom section shows expenses• Logical categories of expenses• Revenues – expenses = net profit for period

  12. The Balance Sheet Organized in Sections Balance SheetOrganized in sections

  13. Statement of Cash Flows • Shows all inflows and outflows of cash for a period of time• Lets management see how much cash has been added to or subtracted from operations

  14. A/R and A/P Aging • Though these two summary aging reports are not technically part of the financial statement, most financing sources want to see them with the other three components

  15. Pros of In-House Bookkeeping vs. Outsourcing

  16. Using Financial Statements to Manage Your Business Types of Financial Statements Least Expensive Most Trusted

  17. Understanding and Using Financial Ratios

  18. Financial Ratios • Liquidity• Profitability• Leverage• Efficiency

  19. Liquidity Ratios Used to measure the quality and adequacy of current assets to meet current obligations as they come due• Current ratio• Quick ratio• Days of cash Surendra N. Kumar

  20. Liquidity Ratios: Current Ratio Indicates the extent to which current assets are available to satisfy current liabilities• Stated as values such as 2.5 to 1.0 or simply 2.5• A ratio of 1.5:1 or higher is considered adequate. A 2:1 ratio is strong. Current Ratio Current Assets Current Liabilities

  21. Liquidity Ratios: Quick Ratio Indicates the extent to which more liquid assets are available to satisfy current liabilities• Stated as values such as 1.5 to 1.0 or simply 1.5• A quick ratio of 1:1 or higher is generally considered liquid Quick Ratio Cash and A/R Current Liabilities

  22. Liquidity Ratios: Days of Cash Indicates the number of days revenue held in cash• Days of cash = safety cash• Every business will require a different level of safety cash• Cash equivalents include money market holdings, short-term liquid investments, marketable securities and government bonds and bills Cash and Cash Equivalents Days of Cash Revenues 360

  23. Profitability Ratios Used to measure performance of a company and how well its assets are being used to generate revenues• Gross profit margin• Return on assets• Return on equity Elizabeth Feichter

  24. Profitability Ratios: Gross Profit Margin The percentage of money left after sales when cost of goods sold (COGS) is subtracted

  25. Profitability Ratios: Return on Assets The profit generated by the total assets employed by a companyWhat it means: Higher ratio reflects a more effective employment of company assets Return on Assets Net Earnings Total Assets

  26. Profitability Ratios: Return on Equity (ROE) The profit generated by the net assets employedROE is the single most important financial ratio applying to small business owners and the best measure of performance by management Return on Equity Net Earnings Total Net Worth

  27. Leverage Ratios Key measurements in determining a company’s vulnerability to business downturns as well as its capacity for credit and internal capital needs• Debt to Equity Andrew Dunn

  28. Leverage Ratios: Debt to Equity Indicates how well a business is leveraging its debt against the capital invested by its ownersIf liabilities exceed net worth, creditors have a greater stake than the shareholders Debt to Equity Total Liabilities Total Net Worth

  29. Efficiency Ratios Measurements of the effectiveness of using current assets and managing current liabilities• Days of accounts receivable (A/R)• Days of inventory• Days of accounts payable (A/P) Marta E. Maxwell

  30. Efficiency Ratios: Days A/R Outstanding Indicates the number of days to collect a period’s worth of accounts receivableThough industries vary, if you can keep your A/R collection cycle close to 30 days or less, you have an efficient collection process Days A/R Outstanding Net A/R Days in Period Credit Sales

  31. Efficiency Ratios: Days of Inventory Indicates the number of days it takes to turn over your inventoryIf your business is seasonal, you may want to start your season with a higher number of days of inventory and end it with fewer days Days of Inventory Inventory Value Cost of Sales 360

  32. Efficiency Ratios: Days of A/P Indicates the number of days of trade and service payables your company is owingIf your vendor offers net 30 terms with a 2% prompt payment discount (within 10 days), taking the discount when you can is important Days A/P Outstanding Net A/P Days in Period Credit Sales

  33. Financing Growth

  34. Funding For Strategic Growth: Equity • Friends and family• Angel Investors (Equity)• Small Business Investment Companies (SBICs)

  35. Funding For Strategic Growth: Debt • SBA Microloan – up to $50,000• SBA Express Loan Program – up to $350,000• SBA 7 (a) Loan Program – up to $5 million• USDA B&I loans• Community Development Financial Institutions (CDFI)• Banks and Credit Unions (Conventional)

  36. For More Information SCOREwww.score.orgSCORE (Local Chapter)www.scorechapter.orgAmerican Express Open Forumwww.openforum.com

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