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Financial Statements

Financial Statements

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Financial Statements

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  1. Financial Statements

  2. Balance Sheet • Financial snapshot of what company owns and owes at any point in time • Start-ups usually project for opening day and at the end of the first year • Assets = Liabilities + Equity

  3. Process • Fill in company name at top and date of opening • Transfer current assets from asset listing to that area Include money borrowed for expenses as cash on hand • Transfer fixed assets from listing • Total all assets • Transfer amounts from sources of funds to liabilities and equities sections

  4. Anything that has to be paid back (loans) are liabilities • Anything that you contributed falls to owner’s equity • Equity section will change due to ownership structure • Corporation will list stock outstanding and retained earnings • Proprietorships will list partner names individually • Sole proprietorship will list owner’s name

  5. Assets must equal liabilities and equities

  6. Income Statement • Purpose: Show profit or loss over time • Typically projected for 3-5 years • Process • Label company name and end of year 1 at top • Obtain industry averages or expense information • Calculate best, worst, most likely sales forecast • COGS = Cost of Goods Sold is the cost to produce or purchase the product or service (Services may have COGS = 0)

  7. Gross Profit = amount of profit or loss you have after paying for the product/service Sales – COGS = Gross Profit 6.List Operating Expenses = costs of running business such as marketing, selling, administrative and general expenses Fill in expenses from page 2 of the packet. Make sure everything is per year. 7.Total the operating expenses – You can check these against industry averages

  8. 8.Net Profit (Loss) Before Taxes: This is the first idea of whether or not you are making money Net Profit Before Taxes = Gross Profit – Total Operating Expenses 9. For corporations only: Add in taxes (WI: 7.9%; Federal of 15% for income 0-50,000; 25% for income of 50,000-75,000; 34% for income to 100,000) 10. Net Profit (loss) = Net Profit before taxes - Taxes

  9. Reminders: • It’s OK to have a loss for the first year • If you have an unreasonable high profit, check the sales forecast or expenses • There should be a difference between the best and worst case scenarios in terms of variable expenses

  10. Cash Flow Statement • Purpose: Shows changes in cash over time and helps you plan cash needs so you don’t run out • Typically plan will have 3 years of cash flow projections with at least one year broken down by month

  11. Process: 1. Find the cash balance on the opening day balance sheet. This is beginning cash balance. (This is similar to a checkbook. How much $ is in your checkbook to start?) 2. Cash receipts refers to the amount of $ coming into your business. Usually this is sales. Break the sales up by the month in which the cash is collected.

  12. (As you break it into months, consider the sales pattern. Is it seasonal? Is there a delay when you first start the business before your first sale? If you sell on credit, when does the money actually come in? ) 3. Total Cash Available = Beginning Cash + Receipts 4. Cash Disbursements are the amounts of money you pay out each month.

  13. (Consider the timing of payments. For example, insurance is usually paid every 3-6 months. Use only cash items. Remember to include money owners take out of the business (owner’s draw) and payments on items bought on credit. Total all cash disbursements for the statement, but list separate items on the bottom.) 5. Ending Cash = Cash Available – Cash Disbursements

  14. 6. Month’s Ending Cash is next month’s beginning cash 7. If there is a shortage (negative number) for any month, you will need a loan or extra cash when you start the business. Excess money left over should be invested, taken out by the owner, or used to decrease the beginning amount of funding.

  15. Sales Forecast • Two general processes • Breakdown • Take whole population and narrow down to your customers • Of total population, 10% will buy my product • Build up • Add together different segments to get total number of customers • Ex: customers from Marshfield, WR, SP • Ex: newlyweds, anniversaries

  16. May be easier to use different time frame (day, week, or month instead of year) • Accuracy • Reality check

  17. Example • You would like to start a dog walking service. • You are targeting dog owners who are between the ages of 30-80 with an income over $50,000. • Census data indicates that there are 500 households like that in this area • You have no local competition. A similar service in Milwaukee charges $75 per week per dog for a 20-minute walk once a day

  18. Setting a Price • Set objectives for price • Choose a strategy • skimming, penetration, psychological, promotional, competitive, premium • Consider factors • cost of product, customer expectations, product value, supply & demand, competitors, lemonade game items • Set price • Price needs to cover cost and profit • Affects volume and image