Financial Statements & Credit Reports
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The document discusses the importance of understanding financial information and statements for small business owners. It emphasizes that cash flow is more important than profit alone. It also stresses that owners should understand how their credit report and score can impact operations by affecting their ability to get financing or credit. Finally, it provides tips for interacting with lenders and highlights key factors like having a written business plan.
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Financial Statements & Credit Reports
- 1. © ASBTDC 2011 All Rights Reserved
- 2. Know what financial information is vital to operating your business Know exactly where you stand at all times Understand the difference between profit and cash flow How does my banker interpret my financial statements and my credit report How your credit report can affect your ability to operate your business © ASBTDC 2011 All Rights Reserved
- 3. Timely, accurate, and relevant financial information is perhaps the critical component of managing your business © ASBTDC 2011 All Rights Reserved
- 4. An MIS is a system that is part of the overall management process which provides information needed to manage organizations effectively. © ASBTDC 2011 All Rights Reserved
- 5. Foundation Documents Transaction Journals General Ledger Trail Balance Adjusted Trial Balance Financial Statements © ASBTDC 2011 All Rights Reserved
- 6. ◦ Income Statement ◦ Statement of Owners’ Equity ◦ Balance Sheet © ASBTDC 2011 All Rights Reserved
- 7. Sales -Cost of Goods Sold Gross Profit -Operating Expenses Income from Operations -Other Income and Expenses Net Income Before Tax © ASBTDC 2011 All Rights Reserved
- 8. Beginning Owner’s Equity +Net Income -Withdrawals Ending Owner’s Equity © ASBTDC 2011 All Rights Reserved
- 9. Assets=Liabilities + Owner’s Equity © ASBTDC 2011 All Rights Reserved
- 10. 12 Magic numbers ◦ Liquidity ◦ Profitability ◦ Efficiency ◦ Leverage © ASBTDC 2011 All Rights Reserved
- 11. Working Capital=Total Current Assets-Total Current Liabilities Current Ratio=Current Assets/Current Liabilities Quick Ratio=Cash + Accounts Receivables/Current Liabilities © ASBTDC 2011 All Rights Reserved
- 12. Gross Profit Percentage=Revenue-COGS/Revenue Net Profit Percentage=Net Income Before Tax/Sales Return on Investment=Net Income/Owner’s Equity © ASBTDC 2011 All Rights Reserved
- 13. Accounts Receivable Days ◦ (Sales/AR)=AR Turnover ◦ 365/ARTO=Collection Period Inventory Days On-Hand ◦ COGS/Inventory=Inventory Turnover ◦ 365/INVTO=Inventory Days On-Hand Operating Cycle=Inventory Days+ Collection Period © ASBTDC 2011 All Rights Reserved
- 14. Debt-to-Equity ◦ Total Liabilities/OE Interest Coverage ◦ EBIT/Interest Debt Coverage ◦ Net Profit+Depr./Current Portion of Long-term Debt © ASBTDC 2011 All Rights Reserved
- 15. Cash flow and profit are different. Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities. Net income is what remains from sales revenue after all the firm's expenses are subtracted. Cash flow is actually more important for the small business owner to focus on than profit. Companies can make a profit but still have a negative cash flow and not be able to pay their bills. Not recognizing this difference is one of the biggest mistakes a small business owner can make. © ASBTDC 2011 All Rights Reserved
- 16. © ASBTDC 2011 All Rights Reserved
- 17. http://videos.howstuffworks.com/credit-learning-center-com/704- understanding-your-credit-report-video.htm http://www.creditlearningcenter.com/Your-Credit- Score/Understanding-Your-Credit-Score.html http://www.freddiemac.com/learn/lo/creditreport/lo_credrpt.html http://www.freddiemac.com/creditsmart/pdf/threereportsamples.p df © ASBTDC 2011 All Rights Reserved
- 18. Your credit record affects all financial transactions Review your credit report and know your credit score How is my credit score calculated? The banker relies on your credit history © ASBTDC 2011 All Rights Reserved
- 19. Open a bank account Buy a car Get insurance Get a student loan Buy a house Get a credit card Buy a boat © ASBTDC 2011 All Rights Reserved
- 20. Your credit report is a compilation of your payment habits and usage of credit over time Monitor it for suspicious activity i.e. identity theft Get a free copy of your report once every 12 months from the major credit-reporting agencies: Equifax TransUnion Experian AnnualCreditReport.com Federal Trade Commission (ftc.gov/credit) © ASBTDC 2011 All Rights Reserved
- 21. © ASBTDC 2011 All Rights Reserved
- 22. 40 35 30 25 20 15 10 5 0 Payment History Amounts Owed Length of History New Credit Types of Credit © ASBTDC 2011 All Rights Reserved
- 23. Borrowing money is a very formal process Qualify your proposal when making the appointment Ask the lender for a checklist of things you should present © ASBTDC 2011 All Rights Reserved
- 24. Do have a clean credit history Don’t expect 100 percent financing Do have a written plan to present to a lender Do demonstrate an understanding of financial statements © ASBTDC 2011 All Rights Reserved
Editor's Notes
- IntroductionsAbout SCOREBusinessesfail because
- Starting or operating a firm is difficult. Among your many tasks, you have to beat the competition and turn a profit or you will soon be among that 80 percent of firms that don’t make it.Making a profitHow many hats can you wear?
- To understand f/s you have to understand their purpose. F/s are nothing more than an information system. Accounting, in one form or another has been around thousands of years but MIS as a management science degree only began in 1974.
- If you are in business to make a profit you must monitor the critical variables. In the most general terms, that means that to be successful performance at every level must be tied to standards or achievement which are tied to overall goals of the firm and they are ones that can be measured. That is where accounting comes in and where the need to interpret f/s becomes critical.
- Flow chart
- Our primary focus is going to be on the IS and the BS because they are inter-related and one can measure most of your critical variables from these two. The IS relates to these two because net income increases the owner’s equity and flows over to the b/s. We will also talk about cash flow and very briefly about the importance of break-even.
- Page 7
- Page _________in the workbook.
- Pages 13 through 16
- Page 13Common-sizing
- Ratio between capital invested by owners and funds provided by creditorsAbility to cover present interest payments and a measure of ability to handle more debt
- I think I’m making a profit so why don’t I have any cash?Sales 10 (Cash collected 0)Exp 9Profit 1
- Business in the 700sConsumer in the 600s
- 25-35 % of available creditDebt/IncomeEmploymentYears at address and employer