Check out this presentation from A.J. Brigati, of MBHC LLC, during New Orleans Entrepreneur Week 2016.

1. No More Smoke and Mirrors:
Knowing and Demonstrating Business Numbers
New Orleans Entrepreneur Week 2016
A. J. Brigati
MBHC LLC
www.mbhcadvisorygroup.com

2. Problem Statement
Two frequent mistakes entrepreneurs make when
discussing or pitching their business model:
1. “not knowing your numbers”
2. “your valuation is insane”

3. Objective
To empower entrepreneurs, particularly early stage, by
providing a brief overview of the essential
expectations necessary to express the financial
stability, cost containment, growth and valuation of
the business to include financial statements, core
ratios and industry metrics to arm them with a
confident foundation to demonstrate they “know their
numbers” and are appropriately valuing their
businesses.

4. Assumptions
You are an innovator or disruptor with a passion and
expertise for delivering your product or service;
however, not knowing key financial indicators is an
immediate red flag which could ultimately determine
whether or not a venture capital investor will trust
their investment with you. It could make or break
availability of early stage funding when you need it
most.

5. Expected Outcomes
As a result of this presentation and discussion, participants will
become familiar with and discover the need for maintaining the
following:
1. Financial Statements (including the balance sheet, profit and
loss statement, cash flow statement, statement of retained
earnings, management letter)
2. Core Ratios (including the Primary Reserve Ratio, Net Income
Ratio, Return on Net Assets Ratio and Viability Ratio)
3. Industry Key Performance Indicator Metrics (using a retail
example to include same store sales, sales per square foot,
inventory turns and conversion)

6. Financial Statements
1. Keep your books as if you are accountable to investors from
day one.
2. Maintain financial statements on a model of scale as if you were
a publicly traded company. If you start this way, it allows you to
refine your skills at producing accurate and potentially audit ready
financial statements. You do not want to learn how to report
financials when you get your first investors. (similarly, you
probably will not get first investors without accurate financials).
3. Know the highlights from your financial statements each
quarter and each year.

7. Financial Statements
Balance Sheet
Summarizes a company's assets, liabilities and shareholders'
equity at a specific point in time representing the state of a
company's finances at a moment in time.
The core ratios (more later) can be derived from the balance sheet.
Gives investors an idea as to what the company owns and owes,
as well as the amount invested by shareholders.
Typically used by lenders, investors and creditors to estimate the
liquidity of a business.
Formula: Assets = Liabilities + Shareholders' Equity

8. Financial Statements
On behalf of my investors, I might ask:
How much debt does the company have?
What are your payables and to whom?
How much inventory do you have?
Who are your shareholders and how much equity do
they have?

9. Financial Statements
Profit and Loss Statement
1. Summarizes the revenues, costs and expenses incurred during
a specific period of time (quarterly, annually)
2. Provide information about a company's ability or inability to
generate profit by increasing revenue, reducing costs, or both.
3. This is essentially your income or operating statement.
4. Formula: Revenues – expenses = net profit (loss)

10. Financial Statements
On behalf of my investors, I might ask:
What were your sales this past year?
What were your cost of sales?
What was your net profit (loss)?

11. Financial Statements
Cash Flow Statement
1. Reports all cash inflows a company receives from
both its ongoing operations and external investment
sources, as well as all cash outflows that pay for
business activities and investments during a given
quarter.
2. It is especially useful when there is a divergence
between the amount of profits reported and the
amount of net cash flow generated by operations.
Gives a more timely snapshot than the income
statement as the latter is often a product of accrual
accounting.

12. Financial Statements
Statement of Retained Earnings
1. The amount of net income which is left in a
business after the distribution dividends or
withdrawls by owner is called retained earnings.
2. Formula: Retained Earnings = Beginning Retained
Earnings (carryover) + Net Income − Withdrawals by
Owners

13. Financial Statements
On behalf of my investors, I might ask:
How much cash does the business have on hand?
How much of the earnings from last year(s) were
carried over or how were they spent?
What is your cost of sales?
What is your profit margin?
What is your break even?

14. Financial Statements
Management Letter
1. Issued by the company’s CPA firm to the owners and senior
management in connection with an annual audit of privately held
companies.
2. Communicates internal control related matters
3. Discloses presence or absence of control deficiencies in the financial
internal control system might represent risks to lenders and investors.
These risks could relate to collateral reporting, interim financial reporting
or possibly fraud, such as asset misappropriation.
4. In the post-great-recession-e a, investors and venture capitalists are
looking for more information about the viability of their prospects. An
unqualified audit and a management letter free of noted weaknesses give
you an advantage in seeking funding as it adds another layer of potential
validity to your financials and itnernal control methods.

15. Core Ratios
PRIMARY RESERVE RATIO
1. The Primary Reserve Ratio measures the financial strength of the institution by comparing expendable net
assets to total expenses.
2. Expendable net assets represent those assets that the institution can access quickly and spend to satisfy its
debt obligations.
3. This ratio provides a snapshot of financial strength and flexibility by indicating how long the institution could
function using its expendable reserves without relying on additional net assets generated by operations.
4. Trend analysis indicates whether an institution has increased its net worth in proportion to the rate of growth
in its operating size. The trend of this ratio is important. A negative or decreasing trend over time indicates a
weakening financial condition.

16. Core Ratios
PRIMARY RESERVE RATIO CONTINUED
5. It is reasonable to expect expendable net assets to increase at
least in proportion to the rate of growth in operating size. If they
do not, the same dollar amount of expendable net assets will
provide a smaller margin of protection against adversity as the
institution grows in dollar level of expenses. Source KPMG
6. The Primary Reserve Ratio is calculated as follows: Expendable
Net Assets/ Total Expenses

17. Core Ratios
NET INCOME RATIO
1. This ratio indicates whether total operational activities resulted in a surplus or a
deficit, answering the question posed in chapter 1, “Do operating results indicate the
business is living within available resources?” (mitigating excess burn rate).
2. This ratio is a primary indicator, explaining how the change in unrestricted net
assets affects the behavior of the other three core ratios. A large surplus or deficit
directly impacts the amount of funds an business adds to or subtracts from net
assets, thereby affecting the Primary Reserve Ratio, the Return on Net Assets Ratio,
and the Viability Ratio.
3. The method provides that a business display a separation between operating and
nonoperating activities as this separation presents a more informative display of an
institution’s operations, ie. Are you lean? Are your initiatives effective?
4. The Net Income Ratio, calculated when an operating indicator is presented, is as
follows:
Excess (Deficiency) of Operating Revenues Over Operating Expenses/ Total
Operating Income

18. Core Ratios
RETURN ON NET ASSETS RATIO
1. This ratio determines whether the institution is financially better off than
in previous years by measuring total economic return.
2. A decline in this ratio may be appropriate and even warranted if it
reflects a strategy to better fulfill the company’s mission. (ie. We would
have increased net assets; however, we built out our new laboratory which
will increase our production/output going forward).
3. On the other hand, an improving trend in this ratio indicates that the
business is increasing its net assets and is likely to be able to set aside
financial resources to strengthen its future financial flexibility.
4. The Return on Net Assets Ratio is calculated as follows:
Change in Net Assets/Total Net Assets

19. Core Ratios
VIABILITY RATIO
1. The Viability Ratio measures one of the most basic determinants of clear
financial health: the availability of expendable net assets to cover debt
should the business need to settle its obligations as of the balance sheet
date.
2. The formula for this ratio is: Expendable Net Assets/ Long-Term Debt
3. The numerator is the same as the numerator for the Primary Reserve
Ratio.
4. The denominator is defined as all amounts borrowed for long-term
purposes from third parties and includes all notes, bonds, and leases
payable that impact the company’s credit, whether or not the obligation is
on the balance sheet.

20. Core Ratios
VIABILITY RATIO CONTINUED
5. Although a ratio of 1:1 or greater indicates that, as of the balance sheet date, a
business has sufficient expendable net assets to satisfy debt obligations, this value
should not serve as an objective since most businesses and investors would find this
relationship unacceptable.
6. Analysis of financial statements over the past three fiscal years by KPMG indicates
that this ratio should fall between 1.25X and 2.00X and higher for the strongest
creditworthy businesses. However, the level that is “right” is company-specific. The
leadership should develop a target for this ratio, and others, that balances its
financial, operating, and programmatic objectives.
7. There is no absolute threshold that will indicate whether the company is no longer
financially viable. However, the Viability Ratio, along with the Primary Reserve Ratio
discussed earlier, can help define an company’s “margin for error.”
8. As the Viability Ratio’s value falls below 1:1, the company’s ability to respond to
adverse conditions from internal resources diminishes, as does its ability to attract
capital from external sources and its flexibility to fund new objectives.

21. Industry Metrics
The financial statements and the core ratios are a
universal business language; the industry
performance metrics are industry-specific language.
A quick glance at a case example: Retail

22. Industry Metrics
Comps/comparable-store sales, or same-store sales: measure the
change from year-to-year of a retailer's sales, in a fixed base of
stores, for a given month. Only stores open for at least a year are
included in the same-store-sales count. This prevents the number
from getting distorted by newer stores that generated disparate
sales from a company's core average.
Sales per square foot: Sales per square foot is the average
revenue a retail business creates for every square foot of sales
space.
Inventory Turns (Inventory turnover): The number of times that
your inventory cycles or turns over per year. Or cost of sales/
average inventory= Inventory turnes

23. Industry Metrics
Conversion: Of the total number of prospects that visit your store,
how many actually buy? Measures the proportion of visitors to a
retail outlet who make a purchase. Sales transactions/traffic =
conversion rate
Customer acquisition cost: (especially important for omnichannel
and online retail) cost associated with convincing a consumer to
buy your product or service, including research, marketing, and
advertising costs. What is the value of the customer to the
company and the resulting return on investment of acquisition. As
an accessory to this, what is the retention cost? (i.e. is shipping
killing you to keep them even at a loss—early Amazon, Wayfair
etc.)

24. Your Assignments!
Now that you know of the basic financial statements expected,
search examples of completed statements by businesses in your
industry, and if you have not already, develop financial statements
for your business regardless of its stage.
Once you develop your financial statements, you can then
calculate each of the four core ratios. Plan to calculate these
quarterly along with your quarterly financial statements. These
ratios provide a great and widely held barometer of fiscal stability
and position for growth.
What you can do immediately is search what key performance
indicator metrics are tracked in your specific industry and use
these as a periodic measurement of the efficacy of your day to day
operations.

25. Enjoy NOEW 2016!
Thank you and best of success.
Contact
A. J. Brigati
504.265.9924
888.317.8882
ajb@mbhcadvisorygroup.com