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High Speed Growth

Managing Business Financials for

Growth

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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

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Using Financial Statements to Manage Your Business

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Jennifer Behar

Cash:

• Cash basis bookkeepers recognize

income and expenses when they are

received/paid

Accrual:

• Accrual basis bookkeepers recognize

income and expenses when the

product/service is delivered

Important Terms: Bookkeeping

Methods

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• Gross sales (revenues)

• Cost of goods sold

• Gross profit

• Sales, general and administrative expenses

• Operating profit

• Interest expenses and depreciation

• Net profit

Accounting Terminology

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• 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)

Cost of Goods Sold

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Expenses that support the company’s operations,

including sales, but are not directly related to COGS

Sales, General & Administrative

Expenses

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Using Financial Statements to

Manage Your Business

Sales Revenues

COGS

Gross Profits

SG&A

Operating Profits Net Profit

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

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Douglas S. Cavanaugh

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

Financial Statements

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Theresa Alfaro Daytner

Review the sample Income Statement

and Balance Sheet with the instructor

and discuss the different components of

each.

Financial Statement Discussion

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Top section shows revenues

• Gross revenues

• Adjustments to revenues

• Cost of goods sold (COGS)

• Adding/subtracting the figures above = gross profit

Bottom section shows expenses

• Logical categories of expenses

• Revenues – expenses = net profit for period

Income Statement

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Balance Sheet

Organized in sections

The Balance Sheet

Assets:-Current

-Long-term

Liabilities:-Short-term-Long-term

Shareholders’ Equity:

-Common stock-Retained earnings

-Current income

Organized in Sections

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• 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

Statement of Cash Flows

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• 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

A/R and A/P Aging

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Pros of In-House Bookkeeping

vs. Outsourcing

In-House:

Bookkeeper devoted to your business

Familiarity with your business

May have additional expertise

May handle other tasks

Outsourcing:

May cost less Off-the-shelf software

allows easy data transfer

Technology enables secure sharing of sensitive data

May gain access to multiple skill sets

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Types of Financial Statements

Using Financial Statements to

Manage Your Business

CPA Audited

CPA Reviewed

CPA CompiledInternally Prepared

Mos

t Tru

sted

Least Expensive

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Understanding and Using Financial Ratios

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• Liquidity

• Profitability

• Leverage

• Efficiency

Financial Ratios

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Surendra N. Kumar

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

Liquidity Ratios

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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.

Liquidity Ratios: Current Ratio

Current Assets

Current Liabiliti es

Current Rati o

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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

Liquidity Ratios: Quick Ratio

Cash and A/R

Current Liabiliti es

QuickRati o

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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

Liquidity Ratios: Days of Cash

Cash and Cash

EquivalentsRevenues

Days of Cash360

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Elizabeth Feichter

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

Profitability Ratios

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The percentage of money left after sales when cost of goods sold

(COGS) is subtracted

Profitability Ratios: Gross Profit

Margin

Formula:

Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit Margin

Example:

Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) = Gross Profit ($4,000)

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The profit generated by the total assets employed by a company

What it means: Higher ratio reflects a more effective employment

of company assets

Profitability Ratios: Return on

Assets

Net Earnings

TotalAssets

Return on Assets

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The profit generated by the net assets employed

ROE is the single most important financial ratio applying to

small business owners and the best measure of performance by

management

Profitability Ratios: Return on

Equity (ROE)

Net Earnings

Total Net Worth

Return on Equity

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Andrew Dunn

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

Leverage Ratios

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Indicates how well a business is leveraging its debt against the

capital invested by its owners

If liabilities exceed net worth, creditors have a greater stake than

the shareholders

Leverage Ratios: Debt to Equity

Total Liabiliti es

Total Net Worth

Debt to Equity

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Marta E. Maxwell

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)

Efficiency Ratios

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Indicates the number of days to collect a period’s worth of

accounts receivable

Though industries vary, if you can keep your A/R collection cycle

close to 30 days or less, you have an efficient collection process

Efficiency Ratios: Days A/R

Outstanding

Net A/R

Days in Period

Days A/R Outstanding

Credit Sales

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Indicates the number of days it takes to turn over your inventory

If 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

Efficiency Ratios: Days of

Inventory

Inventory Value

Cost of Sales

Days of Inventory360

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Indicates the number of days of trade and service payables your

company is owing

If your vendor offers net 30 terms with a 2% prompt payment

discount (within 10 days), taking the discount when you can is

important

Efficiency Ratios: Days of A/P

Net A/P

Days in Period

Days A/P Outstanding

Credit Sales

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Financing Growth

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• Friends and family

• Angel Investors (Equity)

• Small Business Investment Companies (SBICs)

Funding For Strategic Growth:

Equity

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• 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)

Funding For Strategic Growth:

Debt

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SCORE

www.score.org

SCORE (Local Chapter)

www.scorechapter.org

American Express Open Forum

www.openforum.com

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