Df how to read financial statements

ACCOUNTING FOR
THE NUMBERPHOBIC
A Survival Guide for Small Business Owners
Professor Dawn Fotopulos
Founder, Best Small Biz Help.com

ACCOUNTING FOR THE NUMBERPHOBIC
H o w t o r e a d y o u r
F i n a n c i a l S t a t e m e n t s
( a n d f i n d i n n e r p e a c e )
2

Who Has Benefitted?
– Jewelry Designer who avoided bankruptcy
• Reduced expenses, cut products, increased gross profit
– Photographer who showed her largest profit ever
• Changed target audience, prices, marketing strategy
– Interior Designer who tripled earnings
• Changed prices, focused services, improved collections
Dreamers who launch small businesses
3

Did You Know…
• Learn how to read your financial dashboard and you’re ahead
of 99% of small business owners.
• 50% of small businesses fail in the first five years; but those
who know how to read their financials have a much better
chance for survival.
• You don’t have to be an accountant to learn the basics and
improve your chances for profitability and long term success.
4

The 3 big questions…
– Are you making a profit?
– Is there enough cash to run the
business?
– Is the business building wealth
or destroying it?
5

Your financial dashboard
Three Key Gauges: Chapter 1
– Net Income Statement
– Cash Flow Statement
– Balance Sheet
6

Are you making money?
– Showing a profit
• Net Income is positive
– Showing a loss
• Net Income is negative
– Breaking even
• Net Income is zero
Net Income Statement
7

Start at the top; work our way down
– Revenues=Units sold x Unit price
Example:
– T-shirt Company
– Sold 1,000 T-shirt
– $10 each
– Revenues= $10,000
Where does it get captured?
8

Revenues= Sales= “Top line”
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Revenues $15,000
Cost of Goods Sold $5,000
Gross Margin or Gross Profit $10,000

Remember
– Revenues are “net revenues”- less discounts
– You don’t run your business on sales or revenues
– You run your business on Gross Margin
– All expenses come out of Gross Margin
• Higher Gross Margin; easier to pay expenses
10

Gross Margin
Ratio must be 30%
or higher to stay in business
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How to Increase Gross Margin?
• Increase unit price
• Sell more units for more total Gross Margin
• Reduce Cost of Goods Sold
– Direct materials (re-engineer product)
– Direct labor (more efficient)
– Save cycle time (service businesses)
– Reduce errors in production
12

• Expenses
– Cost of Goods Sold (direct costs)
• Direct Labor and Direct Material
– Fixed Costs (no matter how much you sell)
• Rent, insurance
– Variable Costs (fluctuate with volume)
• Marketing
– Taxes on earnings
13

Revenues $ 15,000
Less: Cost of Goods Sold $ (5,000)
Gross Margin or Gross Profit $ 10,000
Less: Fixed Costs $ (2,000)
Less: Variable Costs $ (3,000)
Earnings Before Taxes $ 5,000
Less: Taxes $ (2,500)
Net Income $ 2,500
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• C ompare revenues t o expenses
• Ratio of Revenues vs. Expenses
• For every $1 of R evenues..N et Income?
• Grocery st ore: One dollar..one penny
Your industry norm?
15

ACCOUNTING FOR THE NUMBERPHOPIC
Do you have enough Cash to pay
your bills?
Cash Flow Statement
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• Checkbook- starting cash, cash in, cash out, ending cash
• Gas in your tank-
– how far you can travel
– how long you can run the business w/o needing more cash
• Gas gauge doesn't tell you to buy gas
You must interpret where the needle is
C a s h F l o w S t a t e m e n t : Chapter 5
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Cash Flow Statement: Chapter 5
• Beginning Cash
– Add Cash In
– Subtract Cash Out
• Ending Cash
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Cash Flow Statement
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Cash Flow Statement
Beginning Cash $ 10,000
Cash In $ 3,000
Cash Out
Rent ($ 5,000)
Insurance ($ 2,000)
Ending Cash $ 6,000

Revenues and Cash Not the Same
– Delays in payment
– Discounts to payment
– Bankruptcies
• Book Net Revenues when they happen for
accurate sales cycle reporting
• Book cash in when it arrives- accurate cash
cycle reporting
20
20

Easy to Improve Cash Flow
• Invoicing policies
• Collections policies
• Relationship building with clients
• Keep cash flow healthy!
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21

Are you building wealth
or destroying it?
The Balance Sheet holds
the answer
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22

How to Win Friends and
Influence Bankers! Chapter 8
• Balance Sheet- Net worth statement of
the business
• Personal net worth- business net worth
• Relationship between what you own;
what you owe
• Same for the business; relationship
between assets (own) and liabilities
(owe)
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 Are you building
wealth?
 Destroying wealth?
 How do you know?
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What’s the Value
of the Business?
• Just the salvage value of the
desks, computers?
• Do businesses have terminal
value?
• Can they be sold for more than
annual revenues?
Yes!
The Balance Sheet
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Net Worth=Owner ’s Equity
Chapter 9
• Three sections:
– Asset- what you own
– Liabilities- what you owe
• Owner’s Equity= the difference
The Balance Sheet
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Net Worth=Owner ’s Equity
Chapter 9
• Assets-Liabilities= Owner’s Equity
• Own-Owe=Net Worth
• Personal Lives and Business
27

Owner’s Equity is $9,000
The Balance Sheet
28
Balance Sheet
Current Assets Current Liabilities
Cash $ 5,000
Accounts
Payable $ 2,000
Receivables $ 2,000
Credit lines
Payable $ 1,000
Fixed Assets Long-term Liabilities
Building $ 15,000 Mortgage $ 10,000
Total Assets $ 22,000 Total Liabilities $ 13,000
Owner's Equity $ 9,000

Net Worth=Owner ’s Equity Improve
Owner’s Equity by:
– Increase Asset Values
• Gross Margin
• Cash
• Sell more- receivables
– Decrease Liabilities
• Pay off debt
• Use debt to invest in marketing
• Use debt to invest in assets
• Match life of asset to length of loan
The Balance Sheet Chapter 9
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Comments on N U MB ER PH OB IC :
– So much fun to read!
– Fascinating.
– I'm tired of being a starving artist..
– It should be required reading before anyone goes into
business.
– I wish I had this book ten years ago!
30

Remember:
– The financial dashboard is your GPS
– Net Income- showing profit, break even, loss
– Cash Flow- enough to run the business/ how long
– Net Worth-building or destroying wealth
Understand your dashboard; reduce risk
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Interview with
Norm Brodsky
Chapter 10
“A business is all about the numbers.
Most businesses could make it if the
owners knew even the very basics
of reading their financial dashboard.”
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Available:
Amazon.com
Barnesandnoble.com
Indiebooks.com
Email: dfotopulos@gmail.com
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Join Dawn’s Mission
• Webinar Tuesday, April 21st
• 4 PM EST
• FREE to register: www.hiddenprofitprophet.com
34

Df how to read financial statements

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