A Simple Guide To Your
FINANCIAL
STATEMENTS
Understanding
Where You Stand:
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Note
Below
B A L A N C E
S H E E T
I N C O M E
S TAT E M E N T
C A S H F L O W
S TAT E M E N T
R AT I O S
10
8
6
4
I N T R O D U C T I O N
One statement cannot diagnose your company’s financial health. Put several
statements together and you can make smart financial, investment and
management decisions.
Many business owners don’t know how to read their statements and rely on
advisors (such as accountants) to tell them the results. Their input is valuable
b
ut you need to educate yourself. You must be able to understand your
statements so you can:
realize the vital role money plays in every business decision
determine if you are making a profit or losing money
calculate your current and future financial needs:
make sure you have positive cash flow for short-term needs
make sure your business is growing and will continue to grow
For lending purposes, statements will help you determine:
if you can afford to pay a loan
the loan amount
the loan term (number of years)
which assets you should buy vs. which assets should be financed
what collateral is available to secure a loan
W H AT A R E T H E S E S TAT E M E N T S ?
Financial statements are meaningful, written records which allow you to diagnose
your financial strengths and weaknesses and increase the life and profitability of
your company. Statements are usually prepared annually although the income
statement should be developed on a monthly or, at least, a quarterly basis.
W H AT D O T H E S E STAT E M E N T S SHO W ?
Balance Sheet
What a company owns, what it owes, and what is left over.
Income Statement
A firm’s sales and expenses plus its profit (or loss).
Ratios
Analyze a company’s financial condition. Ratio answers can be compared
to others in the same industry.
Cash Flow Statement
The sources, uses, and balance of cash, shown on a monthly basis.
3
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U N D E R S T A N D I N G W H E R E Y O U S T A N D
NewGround Publications. (Phone: 800 207-3550) All rights reserved. Photocopying any part of this book is against the law.
This book may not be reproduced in any form, including xerography, or by any electronic or mechanical means, including information
storage and retrieval systems, without prior permission in writing from the publisher. 0211
BALANCE SHEETS:
BEFORE AND AFTER
FINANCING
Established
companies should
develop two Balance
Sheets - one before,
and one the day after
the loan closes.
New companies
should include an
opening Balance Sheet
in the projections to
reflect what the
balance sheet
will look like the day
after the loan closes.
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U N D E R S T A N D I N G W H E R E Y O U S T A N D
Liabilities + Net Worth = Assets
Think of the Balance Sheet like a scale. Assets and liabilities alone are
out of balance until you add capital, the last weight put on the scale, to
makes it balance.
Assets
Assets are divided into two categories: current and
non-current. They are listed according to how liquid
they are (how quickly they can be turned into cash).
Examples of current assets are cash and inventory.
Examples of non-current assets are
furniture, fixtures,
property and equipment
. Money owed to your
company (accounts receivable) is considered an asset.
Liabilities
Liabilities (debts you owe) are divided into two categories: current and
non-current (or long-term). They are listed in the order they need to be repaid.
Capital or Net Worth
The business’ equity includes money the owners have invested and income
kept in the business from the company’s profits.
W H AT I T S H O W S Y O U
The net value of the business
How much of your loan debt is current, and how much is long-term
Percentages and ratios (which are extracted from the numbers)
necessary to analyze your business (see Ratios section)
Compare two of the same time periods to see changes in:
cash accounts payable accounts receivable
equity inventory retained earnings
W H AT I T W O N ’ T S H O W Y O U :
Income or expenses over a period of time.
Remember, the Balance Sheet reflects one moment in time.
Market value of assets, although it will reflect purchase costs and
depreciation according to industry standards
Quality of assets
Contingent Liabilities (money you agreed to repay by signing notes,
or by being a co-maker or guarantor of loans).
Operating Lease obligations (which allow you to buy the item at the end
of the lease, for a set price, do not appear on the Balance Sheet). However,
Capital Leases (with buyout price of $1) are shown on the Balance Sheet.
ASSE
T
S
LIABILITIES
+
CAPITAL
ASSETS
W H AT D O E S A B A L A N C E S H E E T T E L L Y O U ?
This statement shows what you own (assets), what you owe (liabilities), and
what’s left over (net value or equity in the business). The numbers change every
time you receive money or give credit to a client as well as when you pay for or
charge an expense.
The Balance Sheet is
a picture of your
business, frozen for a
second in time.
L
I
A
B
I
L
I
TI
E
S
Max Computer Company, Balance Sheet
ASSETS
(WHAT YOU OWN)
Current Assets (converts to cash in one year)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
I
nventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000
Total Current Assets (10K+75K+85K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000
Non-Current Assets (more than one year to convert to cash)
Fixed Assets (furniture, fixtures, property, equipment) . . . . . . . . . 140,000
Less Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25,000
Fixed Assets (net, 140K - 25K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,000
Advances to Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Total Non-Current Assets (115K + 6K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,000
Total Assets (170K + 121K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,000
LIABILITIES
(WHAT YOU OWE)
Current Liabilities (due within one year)
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,000
Accrued Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Current Portion of Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Note Payable (due within one year) . . . . . . . . . . . . . . . . . . . . . . . . .100,000
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150,000
Long-Term Liabilities (due for more than one year)
Loan Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Total Long Term Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Total Liabilities (150K + 54K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,000
CAPITAL OR NET WORTH
(THE COMPANY’S EQUITY)
Owners Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained Earnings (income kept in the business) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,000
Total Capital or Net Worth (67K + 20K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,000
Total Liabilities & Capital (204K + 87K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,000
Depreciation
Assets lose their
value. Deductions
are made according
to tax rules
Current Portion
of Long-Term Debt
One year’s worth of
loan payments
Accounts
Receivable
Sales made but
money still owed to
the company
Advances to
Owners
Money owners
take, in the form
of a loan, to be
repaid
Loan Payable
Loan balance after
one year’s worth
of payments
Non-Current
Assets
Takes more than
one year to turn
into cash
Owners
Investment
Money owners
invest in business
THE CASH METHOD
Records a sale when
money is collected
Records an expense
when it is paid
5
U N D E R S T A N D I N G W H E R E Y O U S T A N D
W H I C H A C C O U N T I N G M E T H O D I S R I G H T F O R Y O U
THE ACCRUAL METHOD
Sales are made on credit, and not immediately paid for.
The amount customers owe is called Accounts Receivable
Buy items or incur expenses for the business, but pay later.
The amount owed is called Accounts Payable.
Net worth does not always translate to cash, since money can be tied up in
Accounts Receivable, expenses and inventory. To get a better idea of how much
cash there is at the end of the month, learn about the Cash Flow Statement.
Lenders prefer the accrual method.
Retained Earnings
Money left in the
business from the
company’s profits,
accumulated over
the life of the
business.
Accounts Payable
Purchases not
paid for
Fixed Assets
Original Cost
Think of the
Income Statement
as a report card
for your business.
It is issued from
time to time
and gives an
overview of how
you are doing.
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6
U N D E R S T A N D I N G W H E R E Y O U S T A N D
W H AT D O E S A N I N C O M E S TAT E M E N T T E L L Y O U ?
In the day-to-day running of your business, numbers fly around at a dizzying
pace. Bills are paid, money is taken in, and sometimes, in this whirlwind of
activity, it’s hard to know how much you’re actually making. The Income
Statement answers that question.
Think of the Income Statement as a kind of report card for your business.
Like a report card, it is issued from time to time and gives an overview
of how you are doing (for that period of time).
Since this statement reflects your business activity over time (not like the Balance
Sheet which is a snapshot of your business for one moment in time), it is usually
developed monthly, quarterly and annually. Creating a projected statement for
the next 12 months, based on your predictions, is also a good idea.
W H AT I T S H O W S Y O U
If sales are going up or down
Your gross profit — how much money is left for the rest of the business
after deducting what it costs to produce or purchase the product
All expenses for the time period it covers
Increases and decreases in net income
How much money is left to grow the business
How much money is left for the owner(s)
How much money is left to pay debt (principal only)
W H AT I T W O N ’ T S H O W Y O U
If your overall financial condition is weak or strong (see the Balance Sheet).
What’s tied up in Accounts Receivable (money owed to you) and
Accounts Payable (money you owe).
What you own (assets) and what you owe (liabilities)
O T H E R NAM E S F O R T H I S S TAT E M E N T
• Operating Statement • Earnings Statement • Profit & Loss Statement (P&L)
To get a more accurate picture of your financial performance,
compare percentages instead of numbers.
First, convert numbers from the Income Statement into percentages
Next, compare these percentages from this period to those from the
previous period
Are the percentages increasing or decreasing?
F O R E X A M P L E
7
U N D E R S T A N D I N G W H E R E Y O U S T A N D
Max Computer Company, Income Statement
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .900,000 100%
Less Cost of Goods Sold (cost to make products):
Beginning Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 8%
P
urchases (to make product) . . . . . . . . . . . . . . . . . . . . . . . . 350,000 39%
Labor (to make product only) . . . . . . . . . . . . . . . . . . . . . . . 200,000 22%
Total (75K+350K+200K) . . . . . . . . . . . . . . . . . . . . . . . . . . . 625,000 69%
Less: Ending Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 85,000 9%
Cost of Goods Sold (625K less 85K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540,000 60%
Gross Profit (900K less 540K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 40%
Operating Expenses:
Selling Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 10%
General and Administrative . . . . . . . . . . . . . . . . . . . + 170,000 19%
Total Expenses (90K + 170K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,000 29%
Operating Income (360K less 260K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 11%
Less: Interest Expense (on loans) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 20,000 2%
Net Profit before taxes (100K less 20K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 9%
Less: All Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 27,000 3%
Net Profit (80K less 27K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,000 6%
Net Profit
Profit left after all
expenses have
been paid
Gross Profit
This is your
profit margin
Selling Expenses
Salaries and
expenses related
to sales only
General & Admin-
istrative
All other expenses
used to run the
company
Operating Income
(or Loss)
Shows how the
business performed
Gross Profit of $360,000
Total Sales of $900,000
=
40%
If gross profit was 35% last year, it has increased by 5%
Net Sales
Revenue or income.
Gross sales is
before returns
and allowances.
Net sales is after
returns and
allowances.
W H AT D O E S A C A S H F L O W S TAT E M E N T T E L L Y O U ?
Cash is the fuel that runs your business. Running out of it would be disastrous, so
you must have a “cash flow” or money on hand to pay bills and meet day-to-day
expenses. Keep in mind that companies can produce a profit, but still not have a
positive cash flow.
The Cash Flow Statement shows money that comes into the business, money that
goes out and money that is kept on hand to meet daily expenses and emergencies.
W H AT I T S H O W S Y O U
If the business has enough money to:
- cover day-to-day activities
- pay debts on time
- maintain and grow the business without a negative cash flow
The need for additional working capital (cash) when sales increase since
increased sales mean increased purchases of material or labor. You should
know how much you need. Show where the additional working capital will
come from.
The maximum loan payment the business can afford
The breakdown of principal and interest on your loan payments.
Note that the Income Statement only shows interest - not principal.
Your weaknesses (an inability to keep and generate cash). For lending
purposes, explain how you’ll handle these weaknesses (via increased
sales, cost reductions, or owner’s investments).
W H AT I T W O N ’ T S H O W Y O U
How much you have in Accounts Receivable and Accounts Payable
(shown in the Balance Sheet)
Your balances in assets, liabilities and net worth
Depreciation of equipment, which is a non-cash expense.
This is dealt with in the Balance Sheet.
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U N D E R S T A N D I N G W H E R E Y O U S T A N D
Of Special Interest to New Companies
Losses - also called “pull down balances” - are common
in the first year of a start-up. Lenders want to see the
business break-even during the year. To produce positive
balances, you’ll have to cover months (that show negative
balances) with loans, increased revenue, additional
owner’s investments, or by reducing expenses.
What money comes
in, what goes out,
and what stays
9
U N D E R S T A N D I N G W H E R E Y O U S T A N D
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B. Cash Receipts
1. Cash Sales
2. Collections from Credit Accounts 32,813 75,000 76,250 81,250 85,000 85,750 88,500 90,000 88,750 84,250 81,500 78,750
3. Loan or Other Cash injection (specify)
C. Total Cash Receipts (B1+B2+B3) 32,813 75,000 76,250 81,250 85,000 85,750 88,500 90,000 88,750 84,250 81,500 78,750
D. Total Cash Available (A+C, before cash paid) 42,813 80,627 89,991 91,720 98,830 100,9 40 99,998 105,202 110,907 115,247 120,872 127,351
E. Cash Paid Out:
1. Purchases (Merchandise) 0 30,000 42,500 42,500 44,000 45,000 45,000 42,500 41,000 40,000 37,500 37,500 447,500
2. Gross Wages (excludes withdrawals) 10,758 10,758 11,364 11,970 11,970 12,334 12,576 12,576 11,970 11,606 11,364 10,758 140,004
3. Payroll Expenses (Taxes, etc.) 1,076 1,076 1,136 1,197 1,197 1,233 1,258 1,258 1,197 1,161 1,136 1,076 14,001
4. Outside Services 758 758 808 859 859 889 909 909 859 828 808 758 10,002
5. Supplies (Office and operating) 383 383 408 434 434 449 459 459 434 418 408 303 4,972
6. Repairs and maintenance 390 390 416 422 422 458 468 468 442 426 416 390 5,108
7. Advertising 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 50,400
8. Car, Delivery and Travel 2,700 2,700 2,800 2,900 2,900 2,960 3,000 3,000 2,900 2,840 2,800 2,700 34,200
9. Professional Services (Accounting, legal, etc.) 1,500 001,500 000001,500 004,500
10. Rent 1,950 1,950 1,950 1,950 1,950 1,950 1,950 1,950 1,950 1,950 1,950 1,950 23,400
11. Telephone 278 278 296 315 315 326 333 333 315 303 296 278 3,666
12. Utilities 400 400 400 400 400 400 400 400 400 400 400 400 4,800
13. Insurance 0 450 450 450 450 450 450 450 450 450 450 0 4,500
14. Taxes (real estate, etc.) 0 750 00750 00750 00750 0 3,000
15. Interest (on loans) 500 498 495 493 490 488 485 482 480 477 475 472 5,835
16. Other/Miscellaneous Expenses (specify) 0000000000000
17. Subtotal 24,893 54,591 67,223 69,590 70,337 71,137 71,488 69,735 66,597 66,559 62,953 60,785 755,888
F. Other Operating Costs:
1. Loan Principal Payment 293 295 298 300 303 305 308 310 313 316 318 321 3,359
2. Capital Purchases (ex., Buy a computer) 000005,000 00 00005,000
3. Other Start-up Costs 0000000000000
4. Reserve and/or Escrow (ex., Pay $100K loan) 10,000 10,000 10,000 5,000 10,000 10,000 10,000 10,000 10,000 5,000 5,000 5,000
100,000
5. Owner’s Withdrawal 2,000 2,000 2,000 3,000 3,000 3,000 3,000 3,000 3,000 4,000 4,000 4,000 36,000
G. Total Cash Paid Out (E17 + F1 through F5) 37,186 66,886 79,521 77,890 83,640 89,442 84,796 83,045 79,910 75,875 72,271 70,106
H. Cash Position (End of month, D minus G) 5,627 13,741 10,470 13,830 15,190 11,498 15,202 22,157 30,997 39,372 48,601 57,245
I. Essential Operating Data (Non-cash flow info)
1. Accounts Receivable (End of month) 117,188 117,188 120,938 124,688 124,688 126,938 128,438 128,438 124,688 122,438 120,938 117,188
2. Bad Debt (End of month, if applicable) 000000000000
3. Inventory on Hand (End of month) 77,500 82,500 85,000 86,500 89,000 90,000 87,500 83,500 81,000 77,500 75,000 75,000
4. Accounts Payable (End of month) 71,000 83,500 83,500 85,000 86,000 86,000 83,500 82,000 81,000 78,500 78,500 78,500
Loan Payment
Loan received a month before these
projections. Purchases are paid,
up to date. They are now taking
advantage of 30-day payment
terms. The Income Statement
will record the purchases as an
Accounts Payable but it won't be
recorded here until paid.
Loan Principal
Loan principal appears here but
not in the Income Statement. If
the loan was used for real estate,
furniture, fixtures and equipment
or machinery, that portion will
be depreciated over time (as
allowed by the IRS) on the
Income Statement.
Cash Position
This company has
a positive cash flow.
Summary
Good information
to calculate
F O R M U L A
F
O R M U L A
F O R M U L A
F O R M U L A
L I Q U I D I T Y R AT I O S
How “cash rich” is a company?
Liquidity ratios show a company’s
ability to turn an asset into cash.
QUICK OR ACID TEST RATIO
Number Source: Balance Sheet
N O T E : This shows how many days it takes to
collect money owed to you.
Lower answer is better.
A S S E T M A N A G E M E N T
R AT I O S
How effectively are you
managing your assets?
INVENTORY TURNOVER
Number Source: Balance Sheet
& Income Statement
N
O T E :
Shows if a company has enough cash to
pay bills. This example shows an excess amount
after paying all current liabilities. The answer
must be positive. More money is needed to meet
expenses if the answer is a negative number.
Higher number is better.
N O T E : This formula shows how many days it
takes you to turnover (or sell) your inventory.
Lower answer is better.
Total Current Assets of $170,000
less Inventory of $85,000
Eliminates
inventory
from current
assets
and cash.
“Quick” means
items can
be turned
into cash.
Total Current Liabilities
$27,375,000
$900,000
=
30.4
Accounts Receivable
($75,000 x 365 days)
Net Sales Figure
I
t takes
30 days
to collect
b
ills
$31,025,000
$540,000
=
57.4
Inventory Figure
($85,000) x 365 days
Cost of Goods Sold
57 days to
turnover or
sell the in-
ventory
$170,000
- $150,000
=
$20,000
Current Assets
Subtract Current Liabilities
ACCOUNTS RECEIVABLE TURNOVER
Number Source: Balance Sheet
& Income Statement
$85,000
$150,000
=
.56
N O T E : Inventory may become no longer useful.
This ratio eliminates inventory from current
assets and cash. It’s called “quick” because it
includes items that can be turned into cash.
Answer should be 1 or higher.
N O T E : Tests a company’s short-term debt
paying ability. This means there is is $1.13 in
cash and current assets available to pay every
$1 of current liabilities.
The higher the number, the better.
Answer should be 2 or more
$170,000
$150,000
=
1.13
Total Current Assets
Total Current Liabilities
CURRENT RATIO
Number Source: Balance Sheet
Think of ratios as
your business’
financial scores
RR aa tt ii oo ss
10
U N D E R S T A N D I N G W H E R E Y O U S T A N D
F
O R M U L A
WORKING CAPITAL
Nu mber Source: Balance Sheet
A company’s
short-term
debt paying
ability.
Shows if
a
company
has enough
cash to
p
ay bills.
Answer
must be
p
ositive
W H AT R AT I O S S H O W Y O U ?
Ratios help you identify your strengths and
weaknesses. Use them to compare your
business to standards in your industry.
Lenders look very carefully at ratios.
The numbers for ratios are taken from the
Income Statement and the Balance Sheet,
but not the Cash Flow Statement.
F O R M U L A
F O R M U L A
F O R M U L A
F O R M U L A
CASH FLOW TO CURRENT MATURITIES
(DEBT SERVICE) RATIO
Number Source: Balance Sheet
& Income Statement
PROFIT MARGIN ON SALES
Number Source: Income Statement
ACCOUNTS PAYABLE TURNOVER
Number Source: Balance Sheet
& Income Statement
LEVERAGE (OR DEBT TO WORTH) RATIO
Number Source: Balance Sheet
NO T E : Shows how quickly a company pays its suppliers.
Lower numbers (30 days or less) are better.
N O T E : Shows the percentage of net profit for every
dollar of sales. The higher the number, the better.
If the profit margin is too low:
1. the prices are too low
2. the cost of goods is too high
3. expenses are too high
Note: Shows your ability to pay term debts after
owner(s) withdrawals. New businesses, use
one year's worth of loan payments.
Answer of 2 or more is preferred.
N
O T E :
Determines if a company has enough equity.
Lower answers are better.
Answer of 3 or lower is preferred.
$204,000
$87,000
=
2.34
T
otal Liabilities
T
otal Capital
T
he company
is leveraged
2.34 times.
F
or every $1
owners have
invested,
l
enders and
creditors
have invested
$
2.34
$53,000
$900,000
=
.0588
Net Profit
N
et Sales
The
profit
m
argin
is 5.9%
$66,000
$6,000
=
$11
N
et Profit of $53,000 + Depreciation of
$13,000 (amount created for this example)
Current Portion of
Long Term Debt.
F
or every
dollar of
payments
$
11 is
available to
pay it
$14,965,000
$350,000
=
42.75
Accounts Payable at
$
41,000 x 365 days
Purchases
Accounts
P
ayable
are paid
every
4
3 days
D E B T M A N A G E M E N T R AT I O S
Shows how much money owners have
invested in the business versus lenders.
P R O F I TA B I L I T Y R ATI O S
Shows company’s ability to make a profit
R
atio Comparisons
Ratios should be
compared to prior
years, acceptable
lending ranges, and
industry averages.
Industry ratios are averages.
Some firms are above and
some firms are below these
numbers. Differences are due
to the age of the company,
locations, managers, and
operations, to name a few.
A ratio of 38% compared to
an industry average of 39%
seems like a small 1%
difference. If sales are $4
million, 1% is $40,000.
If net profits are $100,000,
then the $40,000 is very
important.
These reference books
include industry
information:
RMA Annual
Statement Studies
Almanac of Business and In-
dustrial Financial Ratios
(gathered from U.S. Treasury
and IRS information)
Dunn and Bradstreet
Other good industry
sources (especially
when your company
is smaller than those
used in the reference
books):
Trade Associations
Magazines and newspapers
for your industry
Small Business Administra-
tion/SBA
R AT I O S AT A G L A N C E
R A T I O G E T N U M B E R S F R O M :
A S S E T M A N AGE M E N T
Accounts Receivable Turnover . . . . . . . .Balance Sheet & Income Statement
Inventory Turnover . . . . . . . . . . . . . . . . .Balance Sheet & Income Statement
L I Q U I D I T Y RAT I O S
Working Capital . . . . . . . . . . . . . . . . . . . .Balance Sheet
Quick or Acid Test . . . . . . . . . . . . . . . . .Balance Sheet
Current . . . . . . . . . . . . . . . . . . . . . . . . . .Balance Sheet
D E B T M A N A GEME N T R AT I OS
Leverage (or Debt to Worth) . . . . . . . . . .Balance Sheet
Accounts Payable Turnover . . . . . . . . . .Balance Sheet & Income Statement
P R O F I TA B I L I T Y
Profit Margin on Sales . . . . . . . . . . . . . . .Income Statement
Cash Flow to Current
Maturities (Debt Service) . . . . . . . . . . . .Balance Sheet
11
U N D E R S T A N D I N G W H E R E Y O U S T A N D
Ability to Pay.
Ability to pay loans from future
business’ profits.
Accounts Payable (A/P).
Expenses incurred from
purchases made on credit.
Accounts Receivable (A/R).
Sales
m
ade but money not collected. Credit is granted.
Assets.
What a company owns.
Asset-based Lending.
Financing secured by pledging
assets (inventory, receivables, or other collateral).
Available Credit.
The unused portion of a line of credit.
Balloon.
A stop point or early maturity of a loan.
Business Credit.
Loans made to businesses in the form
of a term loan or a line of credit.
Business Plan.
An overview of a new or existing
company which is used to obtain financing.
Capacity.
Borrower’s ability to handle a certain level
of debt.
Capital Leases.
Leases with a buyout price of $1 which
are shown on the Balance Sheet.
Commercial Mortgage.
A loan on business’ real estate.
Rates and terms are negotiated and the interest rate
is usually related to the prime rate.
Cost of Goods Sold.
Cost to make a product, including
materials, labor, and related overhead.
Credit Rating.
Credit rating as determined by a credit
reporting agency.
Credit Scoring.
A process used to approve or reject
commercial loan applications, based on ratios and
other factors.
Current Assets.
Assets that can be converted into cash
in one year.
Current Liabilities.
Liabilities due within one year.
Depreciation.
Except for land, assets wear out.
They are devalued or depreciated every year.
Draw Down.
Taking an advance on a line of credit.
Equity.
The book value of a business.
Assets minus liabilities.
Fair Market Value (FMV).
The price of an asset,
product or service in a current, competitive market.
Fixed Assets.
Assets including furniture, fixtures,
equipment, machinery, and real estate.
Gross Profit.
Gross sales less cost of goods sold.
Also called gross margin.
Gross Sales.
Revenue or income from sales before
returns and allowances.
Intangible Asset.
Have no physical properties but
represent something of value (for example, patents
and trademarks).
Inventory.
Assets held for resale. May be in the form of
raw materials, work in progress, or finished goods.
Liquid Collateral.
Collateral that can be converted to
cash quickly.
Line of Credit (LOC).
A short-term loan (usually used
to finance accounts receivable and/or inventory)
Liquid Asset.
Asset that can be turned into cash quickly,
within one year
Long-Term Liabilities.
Expenses, loans, and payables
due after one year
Net Profit.
Money left after all expenses have been paid.
Used to pay loan principal and to grow the company.
Net Sales.
Revenue or income from sales after returns
and allowances are deducted.
Net Worth.
Assets less liabilities. Show equity value.
Non-Current Assets.
Assets that take one year or more
to turn into cash.
Operating Lease.
Leases which allow you to buy the item
at the end of the lease, for a set price. These leases do not
appear on the Balance Sheet.
Owners’ Investment.
The money owners have invested
in a business.
Prime Rate.
The rate of interest lenders give to its prime
customers from time to time. Most business owners are
charged the prime rate plus a percentage.
Pro Forma.
Projecting or forecasting future income,
expenses, and cash flow.
Retained Earnings.
Net profits accumulated through
the company’s life and reported in the net worth or
equity section of the balance sheet. Note: Can be
negative if losses occur.
Secured Loan.
Loan secured by collateral (which will
be liquidated if the borrower defaults on the loan).
Tangible Asset.
Real property (machinery, equipment,
furniture and fixtures).
Term.
A loan’s maturity, stated in months or years.
Term Loan.
Loan, usually given in one lump sum at
the closing. Repayment is monthly over a stated term.
Trend Analysis.
Analysis of financial statements and
ratios to determine the financial strength over time.
Working Capital.
Difference between current assets and
current liabilities. An indication of liquidity and the ability
to meet current obligations.
GG ll oo ss ss aa rr yy
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