Pco business f s basics final v2

THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
PCO Business Financial
Statement Basics
By: Daniel S. Gordon, CPA

Intro To Cash or
Accrual…..That Is the
Question
Financial Statement
Basics
How does A Banker
Look at Your Financials
Games People
Play
How does a potential
Purchaser or Equity
Partner Look at Your
Financials
A word about getting
money out of the
company – The Good
the Bad and the Ugly
Case Study
Putting It All
Together 2

PCO
BOOKKEEPERS
Introduction
3

PCO
BOOKKEEPERS
Remember a Time When
Business Was Easy?
We Got A
Call
Took Care
of the
Customer’s
Problem
Made a
Profit for
Doing so.
4

PCO
BOOKKEEPERS
Then we decided to grow our Business. In growing we
recognized the fact that we have stakeholders. These
stakeholders need to be fed information. Who
are these Stakeholders?
5

PCO
BOOKKEEPERS
We Are Entrepreneurs; Not Accountants
Observation: The Most Successful Businesses
have a leader who is…
6

PCO
BOOKKEEPERS
Notice we didn’t say a business leader needs to
be a great accountant. However, there is a
requirement for a growing Business:
A trusted member of Leadership needs to
be intimately involved with Accounting:
• He must be able to access the quality
of the accounting data compiled
• He must be able to interpret a
financial statement.
7

PCO
BOOKKEEPERS
On the Subject of Accounting Data:
On the Subject of GIGO:
“Paper accepts all Ink” – Anonymous
This Information and presentation must be in
accordance with a consistent method of accounting
Any Accounting System can produce
Financials – What’s under the hood?
8

PCO
BOOKKEEPERS
To Accrue, or not to
Accrue…..That is the Question
9

PCO
BOOKKEEPERS
The most widely used methods of Accounting for
small business:
Modified Accrual
Accrual
Cash
10

PCO
BOOKKEEPERS
Cash
The cash method is simple in that the business's books are kept
based on the actual flow of cash in and out of the business
• Income is recorded when it's received, and expenses are
reported when they're actually paid
• From a tax standpoint, it's sometimes advantageous for a
business to use the cash method of accounting
• That way, recording income can be put off until the next tax year,
while expenses are counted right away
11

PCO
BOOKKEEPERS
Accrual
Revenues are recognized when they are earned rather than when
the cash is received creating A/R on the Balance Sheet
Expenses are recorded when they are incurred as opposed to
when they are paid creating A/P on the Balance Sheet
The balance sheet is affected at the time revenues are earned as opposed to
collected by:
• Either an increase in Cash (if the service or sale was for cash)
• An increase in Accounts Receivable (if the service was performed on
credit); or
• A decrease in Unearned Revenues (if the service was performed after
the customer had paid in advance for the service)
12

PCO
BOOKKEEPERS
Modified Accrual
A method mainly to accommodate timing of reporting such that we don’t
have to wait for documents thereby delaying the closing process
While accruals can be made for certain items, many times it’s worth it to
record them when they arrive as long as the item is recorded at least
monthly
Over time the Modified Accrual is relatively close to Accrual
The most important idea here is that the information is consistently
recorded period to period.
Cash or accrual is acceptable for Tax reporting. Modified Accrual is not
and adjustments must be made at year end to convert data to one of
the acceptable methods
13

PCO
BOOKKEEPERS
Accounting Methods – Which one shall I use to get the most useful
information?
In all cases Accrual or Modified Accrual Accounting
presents a much more accurate picture of the results
of your operation as well as what you own, what you
owe and the equity you have in your business.
Which Method Should the Growing PCO Use?
ACCRUALACCRUAL OR MODIFIED ACCRUAL TO RUN THE
BUSINESS!!!
What about Taxes? The IRS allows us to use either method subject to certain
rules which most of us will meet for reporting on a cash basis. So there are
many good reasons to report on a cash basis – Taxes and simplicity for
example.
14

PCO
BOOKKEEPERS
Are you telling me to keep 2 sets of books?
15

PCO
BOOKKEEPERS
YEP!
16

PCO
BOOKKEEPERS
Financial Statement Basics
Dan’s Approach to PCO Financial
Statements
17

PCO
BOOKKEEPERS
Wealth Maximization!! That’s It!!
Your Financials need to be created using Generally
Accepted Accounting Principles (GAAP) and a PCO chart
of accounts (with minor departures as required).
Definition:
Chart of Accounts (COA): A list of
the accounts that describe items
on your B/S and P/L.
18

PCO
BOOKKEEPERS
Think about increasing the value of your firm when devising your
COA. How is it organized? It’s all about management of
information that will allow you to manage your company to build
maximum value.
You also need to manage your
Financial Risk. Many companies have
gone broke getting Rich!!
It’s irrelevant whether you want to sell or
not. The value of your company is the
scoreboard and you score runs by making
annual increases. Will those increases be
Singles? Doubles? Triples? or Home
Runs?
19

PCO
BOOKKEEPERS
What is the most important formula
in the world?
20

PCO
BOOKKEEPERS
A=L+OE
E=MC2
What is the most important Formula in the world?
21
The Origin of Energy in Nuclear Processes
OR
The Accounting Formula

PCO
BOOKKEEPERS
A=L+OE
E=MC2
Accounting Formula: A=L+OE
22

PCO
BOOKKEEPERS
Balance Sheet Basics
23

PCO
BOOKKEEPERS
Assets;
What You Own
Liabilities;
What You Owe
OE
(Owners
Equity);
Difference
Between The
Two
24

PCO
BOOKKEEPERS
What does it tell us?
Assets;
What You Own
Liabilities;
What You Owe
OE
(Owners
Equity);
Difference
Between The
Two
25

PCO
BOOKKEEPERS
Assets
Assets;
What You Own
26

PCO
BOOKKEEPERS
Liabilities;
What You
Owe
OE (Owners
Equity);
Difference
Between The
Two
Liabilities and Owners Equity
27

PCO
BOOKKEEPERS
Example
28

PCO
BOOKKEEPERS
The Profit and Loss Statement
29

PCO
BOOKKEEPERS
Show Me The Money!!
30

PCO
BOOKKEEPERS
Revenues
In the PCO world we speak in terms of valuing our firm as a
multiple of recurring revenues. In order to quickly assess our
revenues, we want to define them in the following manner:Commercial
•One
Times
•Initials
•Route
Work
•Renewals
•Product
Sales
Residential
•One
Times
•Initials
•Route
Work
•Renewals
•Product
Sales
WDI
•One
Times
•Initials
•Route
Work
•Renewals
•Product
Sales
Other
•One
Times
•Initials
•Route
Work
•Renewals
•Product
Sales
You can add divisions as needed, but you need to separate recurring vs.
non recurring work
31

PCO
BOOKKEEPERS
Direct Costs – All costs associated with putting a
technician on the road
32

PCO
BOOKKEEPERS
Gross Margin – The single most important KPI in
determining what multiple you will get when valuing
your company. It determines:
What should your Gross Margin Be? Why will it
determine the value of your company?
33

PCO
BOOKKEEPERS
Marketing Expense
All amounts spent to bring in a Sales lead. What % of revenue
should I spend on Marketing? 6%? 8%?......
Marketing Math:
Lifetime Value of Customer = Annual Gross Revenue X Gross
Margin X Average Life Of A Customer
Lets take a look at an example…
34

PCO
BOOKKEEPERS
Marketing Expense Example
Lifetime Value = $500 x 50% x 5 Answer: $1250 (ignoring time
value of money for the real financial junkies in class with us today)
• Annual Gross Revenue = $500
• Gross Margin = 50%
• Average life = 5 Years
What would you pay for this customer? It’s up to you but would
$125 be unreasonable? What is the % of revenue?
How many customers do you want? Is it a function of a % of
revenue?
35

PCO
BOOKKEEPERS
Sales Expense
All amounts spent to close a lead generated by marketing.
Includes:
How much do you spend on Sales?
36

PCO
BOOKKEEPERS
General & Admin Expense
Everything else that goes on in the office
What do you spend on G&A?
37

PCO
BOOKKEEPERS
Overhead Allocation (Firms with Multiple Branches)
For those who have multiple branches we allocate common expenses to
all by:
38

PCO
BOOKKEEPERS
P&L Example
39

PCO
BOOKKEEPERS
How does A Banker Look at Your
Financials?
40

PCO
BOOKKEEPERS
“Give a man a gun and he can rob a bank. Give
a man a bank and he can rob the world” -
Anonymous
41

PCO
BOOKKEEPERS
How Does A Banker Look At Your Financials
Using Financial Metrics and Ratios including:
42

PCO
BOOKKEEPERS
Liquidity
Lets us know if the Company has the cash
available to pay its bills
Current Ratio =
Current Assets
Current Liabilities
Quick Ratio =
Cash
Accounts Payable
Liquidity Ratios:
43

PCO
BOOKKEEPERS
Liquidity
Example
Liquidity Ratios:
ABC Company
Balance Sheet
Cash 500
Accounts Rec 200
Inventory 100
Current =
Cur. Assets
Cur. Liab.
=
800
500
= 1.6
Quick =
Cash
AP
=
500
300
= 1.66
Machinery / Equip 25000
Accum Depreciation (12000)
Total Assets 13800
Accounts Payable 300
Credit Cards Payable 200
Notes Payable 8500
Current Net Income 800
Retained Earnings 4000
Total Liabilities & Equity 13800
44

PCO
BOOKKEEPERS
Strength
Measured by the percentage of the company that is owned by the owners (Equity)
vs. the percentage of the company owned by creditors (Liabilities). Usually
measured by Debt to Equity Ratios. Companies get Capital in 1 of 2 ways:
Debt Ratio =
Liabilities
Assets
Debt to Equity =
Debt
Owners Equity
Debt Ratios:
Interest Coverage Ratio =
EBITDA
Interest Expense
45

PCO
BOOKKEEPERS
Strength
Example
Debt Ratios:
ABC Company
Balance Sheet
Cash 500
Accounts Rec 200
Inventory 100
Debt =
Liabilities
Assets
=
9,000
13,800 = .652
Debt to Equity =
Debt
OE
=
9000
4800
= 1.875
Machinery / Equip 25000
Accum Depreciation (12000)
Total Assets 13800
Accounts Payable 300
Credit Cards Payable 200
Notes Payable 8500
Current Net Income 800
Retained Earnings 4000
Total Liabilities & Equity 13800
Interest
Coverage
Ratio
EBITDA
Interest
Expense
Minimum of
1.25 on SBA
Debt
==
46

PCO
BOOKKEEPERS
Efficiency
Accounts Receivable
Accounts Payable
Accounts Receivable /(Annual Sales/365)
47

PCO
BOOKKEEPERS
Efficiency
How well do you manage growth?
Degree of Operating Leverage –
Are we Holding our Margins at the
Incremental Revenue Dollar?
% Change in Net Income
% Change in Revenues
48

PCO
BOOKKEEPERS
Games People Play
49

PCO
BOOKKEEPERS
Assets Liabilities
Cash
A/R
Equipment
Total
100
200
1000
700
A/P
Notes Payable
Total
200
500
300
Current Income 50
450
Equity
Capital
Total
Total Liab. & Equity
500
1000
100%
50%
50%
50
Let’s Play Who Owns The Company?
Debt Ratio = .5 500/1000
Debt Equity Ratio = 1.0 500 /500

PCO
BOOKKEEPERS
Assets Liabilities
Cash
A/R
Equipment
Total
0
200
900
700
A/P
Notes Payable
Total
100
400
300
Current Income 50
450
Equity
Capital
Total
Total Liab. & Equity
500
900
100%
44%
56%
Let’s Play Who Owns The Company?
Debt Ratio = .44 400/900
Debt Equity Ratio = .8 400 /500
51
Let’s take
$100 of cash
and pay
$100 of A/P

PCO
BOOKKEEPERS
What happens if the Note Payable is from a Shareholder? Is it Debt
or is it Equity?
Why do people play these games with their Balance Sheet? The
CFO Function is about minimizing financial risk
It’s all about Managing Financial Risk!! And a good banker can cut
through all this to understand how much debt a company can
handle based on their parameters
As a Seasonal business you will:
52

PCO
BOOKKEEPERS
How Does a Potential Purchaser or
Equity Partner Look at Your
Financials?
53

PCO
BOOKKEEPERS
What is a PCO’s Largest Expense?
Revenue Per Employee…But how do we chunk it
down to departments?
54

PCO
BOOKKEEPERS
Value and Potential Return
Value – What is the company worth?
P/E Approach:
Lets take a look at an example…
55

PCO
BOOKKEEPERS
Conversion from Price to Annual Revenue to P/E
Multiple of
Revenue
Net
Profit %
P/E
Ratio
0.8 5% 16.00
0.8 10% 8.00
0.8 15% 5.33
1 5% 20.00
1 10% 10.00
1 15% 6.67
1.2 5% 24.00
1.2 10% 12.00
1.2 15% 8.00
1.5 5% 30.00
1.5 10% 15.00
1.5 15% 10.00
56

PCO
BOOKKEEPERS
By the way when a business appraiser looks at
your company does he value it this way?
Most Appraisers use a balance sheet approach ignoring most
of the value in the customer list.
Ever try to tell a banker
what your company is
worth?
When is this approach
good?
57

PCO
BOOKKEEPERS
Business Appraisals performed in accordance
with ASA standards
58

PCO
BOOKKEEPERS
A word about getting money out
of the company – The Good the
Bad and the Ugly
59

PCO
BOOKKEEPERS
A word about getting money out of the company –
The Good the Bad and the Ugly
60

PCO
BOOKKEEPERS
Case Study
61

PCO
BOOKKEEPERS
Wrap Up - So You want to Grow Your Firm?
62

PCO
BOOKKEEPERS
Dan@PCOBookkeepers.com
www.PCOBookkeepers.com
63

PCO
BOOKKEEPERS 64

PCO
BOOKKEEPERS 65

Pco business f s basics final v2

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to Pco business f s basics final v2

Similar to Pco business f s basics final v2 (20)

More from PCO Bookkeepers

More from PCO Bookkeepers (8)

Recently uploaded

Recently uploaded (20)

Pco business f s basics final v2