Your financials are telling you a story but can you make sense of the story? Is the story just a blob of numbers with no beginning or ending? If so, these slides will help YOU read and understand your company’s financials. The Financials consist of Profit and Loss aka an (Income Statement) and a Balance Sheet.

1. De-Mystify Financial
Statements
HOW TO READ AND UNDERSTAND
YOUR COMPANY’S FINANCIAL STATEMENTS

2. WELCOME!
My objective for this webinar is for you to take away and implement
one thing that will make you be a better manager and decision maker
using your company’s financial statements.
Beth Bockenhauer, CPA
Email: beth@bethbcpa.com
Blog: www.bethbcpa.com
Twitter: @bethbcpa
Facebook: Go to my website

3. CASH vs. ACCRUAL
 Cash – recognize sale and expense when PAID
 Accrual – recognize sale when earned;
recognize expense when incurred.
 Implications – AR & AP; Customer deposit;
Prepaid Expenses

4. PROFIT AND LOSS
 INCOME – GENERATION OF REVENUES
 COSTS OF GOODS SOLD
 These costs are directly related to generation of revenue
 Direct labor
 Direct costs (aka brick and mortar)
 Retail item costs
 Costs to construct
 Costs to provide service
These costs are known as variable costs.

5. PROFIT AND LOSS - GP
 INCOME – COST OF GOODS SOLD = GROSS PROFIT
Jan - Dec 15 % of Incom e
Incom e
Discounts -11.98 -0.01%
Landscaping Services 194,118.30 95.11%
Markup Incom e 815.00 0.4%
Retail Sales 620.54 0.3%
Service 8,568.00 4.2%
Total Incom e 204,109.86 100.0%
Cost of Goods Sold
Direct Labor 98,499.96 48.26%
Cost of Goods Sold 7,561.18 3.7%
Total Cost of Goods Sold 106,061.14 51.96%
Gross Profit 98,048.72 48.04% GP%
GROSS PROFIT IS ALSO KNOW AS MARGIN

6. PROFIT AND LOSS - GP
 HOW DO YOU ANALYZE GROSS PROFIT?
 Gross profit (GP) = sales price – costs
 Gross profit % (GP%) = gross profit/sales price
 Markup = Costs * Markup %
 $15 = $100 * 15%
• So the sales price = $115.00
Markup and Margin ARE NOT THE SAME
Above example has a Markup of 15%
HOWEVER the GP% = 13% (Gross Profit)/Sales Price =
$115 – 100= $15 (GROSS PROFIT)/ $115 = 13%

7. PROFIT AND LOSS
Act. Cost Act. Revenue ($) Diff. (%) Diff.
Inventory GP GP% MARKUP
Irrigation Hose
1/2" Line 77.64 97.05 19.41 20.0% 25.00%
1/4" Line 1.05 1.50 0.45 30.0% 42.86%
3/4" Line 36.00 54.00 18.00 33.33% 50.00%
Total Irrigation Hose 114.69 152.55 37.86 24.82%
Lighting 836.00 4,098.94 3,262.94 79.6% 390.30%
Pum p 811.13 1,150.00 338.87 29.47% 41.78%
Soil 524.20 676.50 152.30 22.51% 29.05%
Sprinkler Hds 686.31 915.45 229.14 25.03% 33.39%
Sprkl pipes 4,580.10 5,997.75 1,417.65 23.64% 30.95%
Total Inventory 7,552.43 12,991.19 5,438.76 41.86%

8. PROFIT AND LOSS
 HOW DO YOU ANALYZE GROSS PROFIT?
 The gross profit is an indicator of a company’s ability to
cover direct costs and have profits remaining to cover
overhead (fixed) costs.
 Gross profit tells the reader of the financial statement
how much gross profit every dollar of revenue a
company is earning.

9. PROFIT AND LOSS - GP
Jan - Dec 15 % of Income
Income Using this example from before,
Discounts -11.98 -0.01%
Landscaping Services 194,118.30 95.11%
it costs 52 cents to generate $1
Markup Income 815.00 0.4%
dollar of revenue.
Retail Sales 620.54 0.3%
Service 8,568.00 4.2%
Total Income 204,109.86 100.0%
OR, the company keeps 48 cents
Cost of Goods Sold for each $1 of revenue generated
Direct Labor 98,499.96 48.26%
Cost of Goods Sold 7,561.18 3.7%
Total Cost of Goods Sold 106,061.14 51.96%
Gross Profit 98,048.72 48.04%
A high gross profit indicates that a company has the potential for an
overall profit, as long as the company keeps overhead costs in control.

10. PROFIT AND LOSS - GP
 HOW DO I INCREASE GP?
 Cut costs (the most obvious)
 Perfect processes – use the right tools
 Create job budgets (estimates) and analyze to actual for variances
 Analyze sales prices
 Is the company absorbing costs that can be passed on to the
customer (shipping, software, administration)?
 ??? WHAT IF YOU INCREASED GROSS PROFIT BY $100 for 12
CLIENTS/RETAIL ITEMS PER MONTH?
 This would equate to $1200 (12*$100) is GP/month or $14,400
GP/year that could be used to cover overhead expenses and possibly
be realized in profits!!!!

11. PROFIT AND LOSS
 EXPENSES
 INDIRECT COSTS – OVERHEAD
 These costs consist of admin support & office expenses
 Insurance
 Occupancy costs (rent, utilities, Internet)
 Professional support (accounting, legal, consulting)
These costs are known as fixed costs

12. PROFIT AND LOSS - Overhead
 As mentioned before, are also referred to as fixed costs;
as revenues fluctuate these costs stay relatively the
same.
 An overhead budget should be created annually to
determine how much gross profit needs to be
generated.
 The monthly actual costs are compared to the budget to
analyze the costs controls.
 Keep in mind, when budgeting conferences, training,
company development costs should be considered.
 Also, when preparing the budget, what overhead costs
will increase to support the company’s growth. HR,
space, technology……..

13. PROFIT AND LOSS - Overhead
 Overhead costs can be expressed as a % of income
and this helps to quickly determine the company’s
largest overhead expenses.
 Uncontrolled overhead expenses can be the demise
of a company.
 What expenses provide a return?
 What expenses provide no return?
 Expenses to be aware of: interest, officer wage,
rent, utilities, office expenses, insurance. ALL OF
THEM!

14. PROFIT AND LOSS – Net Income
 REVENUES – COGS – OVERHEAD = NET INCOME
 Net Income or Operating Profit shows the
efficiency of a company controlling its costs and
expenses associated with business operations.
 This can be expressed as a percentage sales.
Jan - Dec 15 % of Income For each $1 in revenue earned, the
company retained earnings after COGS
Total Income 204,109.86 100.0% and Overhead 17 cents.
Total COGS 109,176.29 53.49%
Gross Profit 94,933.57 46.51%
Total Expense 60,639.01 29.71%
Net Income 34,294.56 16.8%

15. BALANCE SHEET
 Assets
 Includes what you OWN
 Current Assets – Liquid Cash, AR, Inventory
 Long Term Assets – Useful life > 1 Year: equipment,
vehicles, building, investments, long term receivables
 Liabilities
 What your company OWES
 Current Liabilities – Paid in 1 Operating cycle : AP, taxes,
credit cards, lines of credit
 Long Term Liabilities – Paid over a period > 1 Year: term
loans, mortgages, capital leases

16. BALANCE SHEET
 Equity
 What you HAVE
 Common Stock/Partner Equity if a corporation or partnership
 Owner; Shareholder or Partners’ draws & contributions
 Retained Earnings – this can be a negative or positive number
 Positive = the company has a history of profitable years and
has not distributed all profits to owners; “retained profits”
 Negative = the company has a history of loss years; or the
company has distributed greater than profits earned.
 Net Income – Net Income is a part of equity. At the end of
each operating cycle net income closes into retained
earnings if you are using QB as your accounting software.
 Equity = Assets – Liabilities and represents the amount of
money the company owes the owners after all liabilities are paid.

17. BALANCE SHEET
 Profit and Loss helps manage sales and
expense. You can not manage your company
from just analyzing profit.
 The Balance Sheet actually tells more about the
company than the P&L.
 Liquidity
 AR Collection Health
 Inventory Health
 Debt service coverage

18. BALANCE SHEET - Liquidity
 One of the most important ratios is
 THE QUICK RATIO – this ratio reveals the ability of a
company to pay it’s current obligations.
 Good Rule of thumb = 1
 This means that current assets can pay current liabilities
What if the QR < 1- the company has a cash-flow issue and is
unable to meet it’s current obligations.
What if the number is much higher than 1? You must
determine how much cash for a rainy day you would like to
retain. After that, too much cash on hand becomes a
wasted resource and should be invested back in the
company or distributed.

19. BALANCE SHEET - AR
 Accounts Receivable Health
 AR should be monitored regularly.
 Referring back to the Quick Ratio that measures liquidity;
what if the company has a strong QR but it is because of
AR? Well this can be deceiving since AR maybe old an
uncollectible.
 A/R Turnover Ratio measure how fast a company collects its
accounts on credit and reveals the potential for future cash
crunches.
 Turnover = SALES/AVERAGE RECEIVABLES
 Days = 365/receivable turnover

20. BALANCE SHEET - AR
 EXAMPLE:
 Average AR = (beginning AR + ending AR)/2
 ($3,583 + $141,310)/2 = $72,447
 AR Turnover = Sales/Avg AR
 $202,589/$72,447 = 2.79 x's
 How can a company stay in business?
 Days Outstanding = 365 days/AR Turnover
 365/2.79 = 130.82 DOS
 Cash flow problems BEWARE!

21. BALANCE SHEET - AR
 EXAMPLE:
 Average AR = (beginning AR + ending AR)/2
 ($3,583 + $9,650)/2 = $13,233
 AR Turnover = Sales/Avg AR
 $202,589/$13,233 = 15.3 x's
 Days Outstanding = 365 days/AR Turnover
 365/15.3= 23.85 DOS
What can you do to get paid quicker and increase cash-flow?
Analyze client!!! Ask questions!!!!
Get paid ahead of time, don’t offer terms to slow payers, credit
cards, progress bill and MONITOR – don’t let it get past 60 days.

22. BALANCE SHEET - Inventory
 Just like AR – Inventory can be measured to see
how quickly inventory turns.
 Poor turnover can be a cause of cash-flow
problems. Too much cash tied up in Inventory
that does not turnover is a buzz-kill!

23. BALANCE SHEET - Inventory
 Example:
 Average Inv = (beginning Inv + ending Inv)/2
 ($2,164 + $6,937)/2 = $4,551
Inventory Turnover = COGS/Avg Inventory
 $109,176/$4,551 = 23.98 times
Inventory Days = 365/Inv Turnover
365/23.98 = 15.22 days it takes for inventory to turnover

24. BALANCE SHEET – Fixed Assets
 Return on Assets –
 ROA = net profit/average assets
 $33,628/$13,750 = 2.44
 What does this mean?
 For every dollar invested in equipment, the company has a
return of $2.44.
 The ROA should not decline but if it does it means that the
company is not using its asset wisely; or the company has
heavily invested in assets that cannot be put too work.
 So, if the company is planning on investing in equipment it
should analyze ROA and then determine how much profit the
equipment needs to generate to prevent a ROA decline.
 May the company has too many vehicles, the building is too
large, too many fancy computers, etc.

25. BALANCE SHEET - Debt
 Debt to Equity –It indicates what proportion of equity and
debt the company is using to finance its assets.
 Total LONG term liabilities/Total Equity
 $20,213/$225,572 = .089
 The result you get after dividing debt by equity is the percentage of the
company that is indebted (or "leveraged").
 If a lot of debt is used to finance increased operations (high debt to equity),
the company could potentially generate more earnings than it would have
without this outside financing.
 If this were to increase earnings by a greater amount than the debt cost
(interest).
 However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities
and become too much for the company to handle. This can lead to
bankruptcy, which would leave shareholders with nothing.

26. CASH FLOW
 Cash Management – cannot be managed by just
the balance sheet or the profit and loss.
Actually cash management has it’s own report
known as the Statement of Cash Flow. This is a
difficult report to understand.
 As an alternative to the Statement of Cash Flow,
you can manage cash with a simple Excel
spread sheet.

27. CASH FLOW
 The most asked question –
 Why do I have a profit on my profit a loss report but NO cash?
 There are many answers to this question and require analysis
of the balance sheet.
 What ways can you manage cash?
 Prepare an annual budget that will project out monthly
expenses and deferred expenses. Deferred expenses are
usually overlooked. PLAN for income and expense trends.
 Increase your AR turnover.
 Be aware that new debt will decrease cash pools.
 Credit cards not used wisely will decrease cash pools.
 Budget for quarterly tax payments and retirement goals
 Look for new profit centers

28. THANKS FOR JOINING!
FREE YOU INNER ACCOUNTANT.
Beth Bockenhauer, CPA
Email: beth@bethbcpa.com
Blog: www.bethbcpa.com
Twitter: @bethbcpa
Facebook: Go to my website