Make Your Financial

Statements Work for You

Christa Casey, CA

Why you need financial

statements

Business owners & managers

Determine needs
Past decisions
Predict future

Banks, creditors & suppliers

Extend credit
Credit terms

Income tax authorities

Financial Statements

Income Statement
Balance Sheet
Cash Flow

Income Statement
For year ended December 31, 2004
Sales Product A
Sales Product B
Total sales

$100,000
200,000
300,000

Cost of goods sold Product A

Cost of goods sold Product B
Total cost of goods sold

20,000
100,000
120,000

Gross profit

180,000

Expenses
Wages
Rent
Office supplies
Vehicle
Interest
Depreciation
Total expenses

66,000
24,000
5,000
4,000
3,000
7,000
109,000

Income before taxes

Income tax expense
Net income

71,000
14,200
$56,800

Balance Sheet
At December 31, 2004
Assets

Current Assets
Cash
Accts receivable
Inventory
Prepaid expenses

Capital Assets
Equipment, at cost
Less: Acc. depn
Net book value
Total Assets

100
25,000
125,000
2,000
152,100
70,000
7,000
63,000

$215,100

Liabilities
Current Liabilities
Bank loan
Accounts payable
Sales tax payable
Income tax payable
Long-Term Debt
Total liabilities
Capital stock

$ 42,000
38,250
4,750
14,200
99,200
56,000
155,200

Equity

100

Retained earnings, opening

Net income
Less: Dividends
Retained earnings, ending

4,000
56,800
1,000
59,800

Total equity

59,900

Total liabilities & equity

$215,100

Capital Assets
Equipment purchased in year
Cost
$70,000
Useful life = 10 years
Depreciation expense = Cost / Useful life
$70,000 / 10 = $7,000
Net Book Value = Cost Accumulated
depreciation
$70,000 $7,000 = $63,000

Balance Sheet
At December 31, 2004
Assets

Current Assets
Cash
Accts receivable
Inventory
Prepaid expenses

Capital Assets
Equipment, at cost
Less: Acc. depn
Net book value
Total Assets

100
25,000
125,000
2,000
152,100
70,000
7,000
63,000

$215,100

Liabilities
Current Liabilities
Bank loan
Accounts payable
Sales tax payable
Income tax payable
Long-Term Debt
Total liabilities
Capital stock

$ 42,000
38,250
4,750
14,200
99,200
56,000
155,200

Equity

100

Retained earnings, opening

Net income
Less: Dividends
Retained earnings, ending

4,000
56,800
1,000
59,800

Total equity

59,900

Total liabilities & equity

$215,100

Balance Sheet
Sole Proprietorship

At December 31, 2004

Assets
Current Assets
Cash
Accts receivable
Inventory
Prepaid expenses
Capital Assets
Equipment, at cost
Less: Acc. depn
Net book value
Total Assets

Liabilities
$

100
25,000
125,000
2,000
152,100
70,000
7,000
63,000

$215,100

Current Liabilities
Bank loan
Accounts payable
Sales tax payable
Income tax payable
Long-Term Debt
Total liabilities

$ 42,000
38,250
4,750
14,200
99,200
56,000
155,200

Owners Equity
Owners equity, opening
Net income
Less: Draws
Owners equity, ending
Total liab. & owners equity

4,100
56,800
1,000
59,800
$215,100

Balance Sheet
Partnership

At December 31, 2004

Assets

Current Assets
Cash
Accts receivable
Inventory
Prepaid expenses

Capital Assets
Equipment, at cost
Less: Acc. depn
Net book value
Total Assets

100
25,000
125,000
2,000
152,100
70,000
7,000
63,000

$215,100

Liabilities
Current Liabilities
Bank loan
Accounts payable
Sales tax payable
Income tax payable
Long-Term Debt
Total liabilities
Owners Equity
Partner As equity, opening
Share of net income
Less: Draws
Partner As equity, ending

$ 42,000
38,250
4,750
14,200
99,200
56,000
155,200
3,000
28,400
500
30,900

Partner Bs equity, opening

Share of net income
Less: Draws
Partner Bs equity, ending

1,100
28,400
500
29,000

Total owners equity

59,900

Total liab. & owners equity

$215,100

Statement of Cash Flows

Summary of cash inflows and outflows

for a period of time

Comparative
Balance Sheet
At December 31, 2004
Assets

2004

2003

Current Assets
Cash
$
100 $ 500
Accts receivable
25,000 10,000
Inventory
125,000 75,000
Prepaid expenses
2,000
2,000
152,100 87,500

Current Liabilities
Bank loan
$ 42,000
Accounts payable
38,250
Sales tax payable
4,750
Income tax payable 14,200
99,200

$35,900
42,000
5,000
500
83,400

Capital Assets
Equipment - cost
Less: Acc. depn
Net book value

Long-term Debt
Total liabilities

Total Assets

2004

70,000
7,000
63,000

2003

0
0
0

$215,100 $87,500

Liabilities

56,000
155,200

0
83,400

100

100

Ret. earnings, opening 4,000

Net income
56,800
Less: Dividends
1,000
Ret. Earnings, ending 59,800

2,000
2,000
0
4,000

Total equity

59,900

4,100

Total liab. & equity $215,100

$87,500

Equity
Capital Stock

Statement of Cash Flows

Operating Activities
Net income
Depreciation expense
Change in levels of:
Accounts receivable
(10,000 25,000)
Inventory
(75,000 125,000)
Prepaid expenses
(2,000 2,000)
Accounts payable
(38,250 42,000)
Sales taxes payable
(4,750 5,000)
Income taxes payable
(14,200 500)
Total operating activities

(15,000)
(50,000)
0
(3,750)
(250)
13,700
8,500

Investing Activities - Purchase of capital asset

(70,000)

$56,800
7,000

Financing Activities
Bank loan proceeds (42,000 35,900)
Long-term debt proceeds, net of repayment
Total financing activities

6,100
56,000
62,100

Other Dividends paid

(1,000)

Decrease in cash (8,500 - 70,000 + 62,100 1,000)

Cash, beginning of year
Cash, end of year

(400)
500
$100

How Daily Decisions Affect

Financial Statements
Borrowing

Lease vs. Buy

Disadvantages of leasing

Hefty early termination penalties

Mandatory maintenance requirements

Advantages of leasing

Monthly payments are usually lower

Smaller down payment required
Greater flexibility
Less obsolescence risk
Possible larger tax deductions
Off-balance-sheet financing

Income Statement
For year ended December 31, 2004
Sales Product A
Sales Product B
Total sales

$100,000
200,000
300,000

Cost of goods sold Product A

Cost of goods sold Product B
Total cost of goods sold

20,000
100,000
120,000

Gross profit

180,000

Expenses
Wages
Rent
Office supplies
Vehicle
Interest
Depreciation
Total expenses

66,000
24,000
5,000
4,000
3,000
7,000
109,000

Income before taxes

Income tax expense
Net income

71,000
14,200
$56,800

Balance Sheet
At December 31, 2004
Assets

Current Assets
Cash
Accts receivable
Inventory
Prepaid expenses

Capital Assets
Equipment, at cost
Less: Acc. depn
Net book value
Total Assets

100
25,000
125,000
2,000
152,100
70,000
7,000
63,000

$215,100

Liabilities
Current Liabilities
Bank loan
Accounts payable
Sales tax payable
Income tax payable
Long-Term Debt
Total liabilities
Capital stock

$ 42,000
38,250
4,750
14,200
99,200
56,000
155,200

Equity

100

Retained earnings, opening

Net income
Less: Dividends
Retained earnings, ending

4,000
56,800
1,000
59,800

Total equity

59,900

Total liabilities & equity

$215,100

Lease vs. Buy

Debt-to-equity ratio
Used by banks & creditors
= total liabilities
total equity
= 2.55

155,200
60,900

Loans vs. Selling Shares

Both appear on balance sheet

Loans are in liabilities
Shares are in equity

Issuing shares helps lower (improve)

debt/equity ratio

Financing Short-Term
vs. Long-Term

How long to finance a loan for

When will you be able to pay it back
What are you financing?

Financing Long-Term
vs. Short Term

Current ratio (or working capital ratio)

Determines whether you are able to pay
debts when they are due
= Current Assets
Current Liabilities
= 1.53

$152,100
$99,200

Should usually be at least 1

Borrowing Requirements

Use your financial statements and

forecasts to help you plan & make
better decisions.

How Daily Decisions Affect

Financial Statements
Managing Cash & Profit

Statement of Cash Flow

Identifies where your cash came from

and where it went
Helps predict your future cash flows
Provides useful information that is not
on income statement

Statement of Cash Flow

Can answer common questions

Business is profitable, why is there no
cash?
Why is there so much cash, if there is so
little profit?

Provides information about operating,

investing and financing activities

Liquidity

How quickly you can convert assets to

cash
Cash is your most liquid asset
Working capital = current assets
current liabilities
= 152,100 99,200
= 52,900

Where are you making

your money?

Track each products revenues &

expenses separately
Compare gross margin percentages

Where are you making

your money?
Sales
Cost of sales
Gross Profit

Product A
$100,000
20,000
$ 80,000

Gross Profit %
80%
(Gross Profit / sales x 100)

Product B
$200,000
100,000
$100,000
50%

Planning & Forecasting

Long-run success = proper planning &

financial controls
Past financial statements help predict
the future
Identifies trends

Certain expenses may be based on

sales volume
Helps evaluate past decisions

Comparative
Income Statement
For year ended December 31, 2004

2004

2003

$100,000
200,000
300,000

110,000
40,000
150,000

Cost of goods sold Product A

Cost of goods sold Product B
Total cost of goods sold

20,000
100,000
120,000

25,000
24,000
49,000

Gross profit
Expenses
Wages
Rent
Office supplies
Vehicle
Interest
Depreciation
Total expenses

180,000

101,000

66,000
24,000
5,000
4,000
3,000
7,000
109,000

67,000
24,000
2,500
4,000
1,000
0
98,500

Income before taxes

Income tax expense
Net income

71,000
14,200
$56,800

2,500
5,00
$2,000

Sales Product A
Sales Product B
Total sales

Common Size
Income Statement

For year ended December 31, 2004

2004

2003

$100,000
200,000
300,000

$110,000
40,000
150,000

Cost of goods sold Product A

Cost of goods sold Product B
Total cost of goods sold

20,000
100,000
120,000

25,000
24,000
49,000

Gross profit
Expenses
Wages
Rent
Office supplies
Vehicle
Interest
Depreciation
Total expenses

180,000
66,000
24,000
5,000
4,000
3,000
7,000
109,000

Income before taxes

Income tax expense
Net income

71,000
14,200
$56,800

Sales Product A
Sales Product B
Total sales

(40%)

(33%)

101,000
(22%)
(8%)
(2%)
(1%)
(1%)
(2%)

(5%)

67,000
24,000
2,500
4,000
1,000
0
98,500
2,500
5,00
$2,000

(45%)
(16%)
(2%)
(3%)
(1%)
(0%)

(0.3%)

Planning & Forecasting

Long-run success = proper planning &

financial controls
Past financial statements help predict
the future
Identifies trends

Certain expenses may be based on

sales volume
Helps evaluate past decisions

Quick Financial
Statement Reviews

Cash Flow Problems

& Remedies
Accounts Receivable (A/R)

The quicker you collect accounts

receivable, the more cash you have
The longer receivables remain uncollected,
the least likely they are to be repaid
Use aged receivables list to stay in control

Cash Flow Problems

& Remedies
Accounts Receivable (A/R)

Accounts receivable turnover measures

how fast you collect your accounts

Cash Flow Problems

& Remedies
Accounts receivable turnover
=
total credit sales
(beginning a/r + ending a/r)/2
=
300,000
(10,000 + 25,000)/2
= 17.14 times a year or every 21.3
days

Cash Flow Problems

& Remedies
Accounts Payable & Debt

Amounts owing to suppliers & banks can

often be reduced by controlling inventory
levels
The longer you hold inventory before you
sell it, the less cash you have
Inventory turnover measures how fast you
sell your inventory

Cash Flow Problems

& Remedies
Inventory Turnover
=
cost of goods sold
(beginning + ending inventory) / 2
=
$120,000
(75,000 + 125,000) / 2
= 1.2 times a year or every 304 days

Cash Flow Problems

& Remedies
Accounts Payable & Debt

Amounts owing to suppliers & banks can

often be reduced by controlling inventory
levels
The longer you hold inventory before you
sell it, the less cash you have
Inventory turnover measures how fast you
sell your inventory

Ongoing Cash Flow

Monitor current assets against current

liabilities
Be sure to include the following in
current liabilities:
Portion of long-term debt due within
next year
Estimated income taxes payable or
instalments

Ongoing Cash Flow

Be sure to reduce current assets by

the following:
Accounts receivable not likely to be
collected from customers
Obsolete or damaged inventory not likely
to be sold

Ensure you have enough liquid assets

to pay off liabilities
Prepare monthly cash flow statement

Monthly Cash Flow

Statement
Cash in bank (shortfall)
Revenue
Sales - Product A
Sales - Product B
Disbursements
Inventory purchases
Wages
Wage benefits
Rent
Office supplies
Income tax installments
Loan payment
Interest & bank charges
Monthly surplus (deficit)
Cash balance, end of month

January

February

March

100

(11,675)

2,550

8,500
20,000
28,500

7,500
25,000
32,500

7,500
18,000
25,500

30,000
5,500
550
2,000
400
1,200
575
50
40,275

8,000
5,500
550
2,000
400
1,200
575
50
18,275

10,000
5,500
550
2,000
400
1,200
575
50
20,275

(11,775)
(11,675)

14,225
2,550

5,225
7,775

Asset Replacement

Buying property & equipment is a large

cash outflow
Monitor condition of these assets to
determine when they will need to be
replaced
Can use net book value (cost
accumulated depreciation) to help
determine timing of replacement
Planning = time to shop around and secure
appropriate financing

Future Obligations

What have you committed your

business to?
Long-term bank loans
Purchasing commitments with suppliers
Rent increases in lease
Plan on buying out lease at end of term

Budget appropriately to meet these

obligations

Summary

Financial statements
Income statement
Balance sheet
Cash flows

Financial statement ratios

Debt-to-equity
Current (working capital)
Accounts receivable & inventory turnover
Gross profit percentage

Summary

Improving cash flow & ratios

Future commitments
Christa Casey, CA

The Entrepreneurship Centre

110 Laurier Ave. West
Ottawa, Ontario K1P 1J1
Tel.: (613) 560-6081
Fax.: (613) 560-2102
Email: entcent@ocri.ca
Helping Businesses Succeed