FINANCIALBASICS • Business 2.010 at the Library Brown Bag Seminar Series • 1
course objectivesFINANCIAL BASICS: • Identify names of financial reports • Describe their purpose • Use information to make important decisions about running your business • Learn financial vocabulary to communicate with professional advisors • Referral to SBDC ADVISOR • Access SBDC Resources
Numbers Tell A Story: • Sports and Recreation • 28 • 1 • 300 • School • GPA • Report Card • Financial Reports = Report Card for your Business
FINANCIAL BASICS Why are Financial Statements necessary? • Making a profit or losing money? • Healthy business? • Bookeeping & taxes • Enough cash?
Source of Financial Statements: • Accounts (Record Results of Financial Activities) • Sale of goods • Pay telephone bill • Purchase assets • 5 Types • Assets • Liabilities • Capital (equity) • Revenue (income; sales) • Expenses
FINANCIAL BASICS Common Financial Statements: • Balance Sheet • Profit & Loss (Income) Statement • Breakeven Analysis • Cash Flow
balance sheet Definition: Shows state of financial health of your company on a particular day • A ‘financial snapshot’ • “Assets = Liabilities + Equity”
balance sheet terms: Assets - What a company owns • Cash • Accounts Receivable • Equipment • Software
balance sheet terms: Liabilities - What a company owes • Bills to vendors • Loans • Mortgages • Accrued taxes • etc.
balance sheet terms: Equity - What a company owns minus what a company owes • OR • What your business is worth • at book value (not market value)
balance sheet terms: The sum of: Owner’s Equity – Money invested by owners Retained earnings Profit and losses to date
balance sheetExample: 10/31/10
profit & loss statement • Definition: The income and expenses from your business operations that occurred during a specified period of time.
profit & loss statement Example: Gross Revenues $3,200 Less Cost of Goods Sold = -1,200 Gross Profit/Loss $2,000 Less Operating Expenses = -2,200 Net Profit/(Loss) $ (200)
profit & loss statement Terms: Gross Revenues= Total amount of money that comes into a business through sales of product or providing a service (Monthly Racoon Rib sales = $3,200)
profit & loss statement Terms: Cost of Goods Sold = Total amount of labor and material to produce the products (Monthly cost to produce Ribs = $1,200)
profit & loss statement Terms: Gross Profit = What’s left after subtracting CoGS from Gross Revenue ($2,000) Also called “Gross Margin” or “Contribution Margin”
profit & loss statement Terms: Operating Expenses (Overhead) = Other business operating costs, not associated with production. ($2,200)
profit & loss statement Terms: Net Profit/(Net Loss) = Gross Profit minus Operating Expenses ($200 [loss])
profit & loss statement Terms: Net Profit is the money the owner(s) can: • take out of the business • reinvest in the business (after loans and taxes are paid). • This amount is what you pay income tax on.
profit & loss statement Example: Month of October 2010
breakeven analysis Calculates: What I have to sell at a given price to pay all my expenses with no profit.
breakeven analysis Terms: Contribution Margin Percent: • Is thepercentage of sales remaining after subtracting CoGS • Is the percentage of Sales that contributes to Fixed Expenses and Profit. = Gross Profit/Sales
breakeven analysis Terms: Break Even Point (BEP) in sales/revenue = Fixed Expenses = $2200 Contribution Margin % .625 • BEP in units = Fixed Expenses = $2200= 440 Contribution Margin/unit 5
Cash Flow IN • Sources of Cash Flow in: • Sales Revenue • Sale of Assets • Loan proceeds • Investment in the business
Cash Flow Out • Sources of Cash Flow out: • Operating expenses • Asset purchases • Loan reduction (pay back of principal) • Equity reduction (withdrawal of investment equity)
Positive Cash Flow • Positive Cash Flow is not the same as operating profit • Negative Cash Flow is not the same as operating loss • Cash in the bank is <not => positive cash flow • Cash Flow management = analyzing cash flow trends
Cash Flow Management Three rules for effective Cash Flow Management • PLAN • PLAN • PLAN
Cash Flow Projection • Make a Cash Flow projection (Plan) • Cash MUST come in faster than it goes out • Hold on to cash as long as you can • Compare cash flow projection to actual cash flow
Wrap Up: • Resources: • WEB SITES • www.centralcoastsbdc.org • www.edd.ca.gov • www.irs.gov • www.nolo.com • www.sba.gov • www.calgold.ca.gov • www.co. santa-cruz.ca.us
evaluations & wrap-upFINANCIAL BASICS • Turn in seminar evaluations • Sign up for advising or other seminars • Thank you to our sponsors: