This document discusses financial statements and accounting methods for pest control businesses. It explains that accrual or modified accrual accounting provides the most accurate picture of a business's financial performance and position, though cash accounting can be used for tax purposes. The key financial statements - the balance sheet and income statement - are also summarized. The balance sheet outlines assets, liabilities, and owners' equity, while the income statement focuses on revenues, costs, gross margin, and expenses. Marketing expense is discussed as well as using the lifetime value of a customer to determine appropriate spending.

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

2. 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

3. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Introduction
3

4. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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

5. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Remember a Time When Business Was Easy?
5

6. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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?
6

7. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
We Are Entrepreneurs; Not Accountants
Observation: The Most Successful Businesses
have a leader who is…
7

8. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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 the Leadership
needs to be intimately involved with
Accounting. He must be able to access
the quality of the accounting data
compiled and he must be able to
interpret a financial statement.
8

9. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
On the Subject of Accounting Data:
On the Subject of GIGO:
“You can put Lipstick on a Pig, It’s still a
Pig.” – Barack Obama
“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?
9

10. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
To Accrue, or not to
Accrue…..That is the Question
10

11. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
The most widely used methods of Accounting for
small business:
Modified Accrual
Accrual
Cash
11

12. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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
12

13. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Accrual
Revenues are recognized when they are earned rather than when
the cash is received. The balance sheet is also affected at the time
revenues are earned as opposed to collected by:
Expenses are
recorded when
they are incurred
as opposed to
when they are
paid creating
Accounts Payable
on the Balance
Sheet
13

14. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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 these items, many times it’s worth it to
record certain items when they arrive and as long as the item is recorded
at least monthly, over time the accrual based income is relatively close
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
14

15. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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?
ACCRUAL
ACCRUAL 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.
15

16. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Are you telling me to keep 2 sets of books?
16

17. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
YEP!
17

18. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Financial Statement Basics
Dan’s Approach to PCO Financial
Statements
18

19. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Wealth Maximization!! That’s It!!
Your Financials need to be created using Generally
Accepted Accounting Principles (GAAP) (with minor
departures as required).
Definition:
Chart of Accounts (COA): A list of
the accounts that describe items
on your balance sheet and P/L.
19

20. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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?
20

21. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Financial Statement Basics
What is the most important formula
in the world?
21

22. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
A=L+OE
E=MC2
What is the most important Formula in the world?
22

23. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
A=L+OE
E=MC2
It depends on if your objective is an explanation for the
origin of energy in nuclear processes; or
You want to understand how a Balance Sheet works
23

24. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
A=L+OE
E=MC2
Accounting Formula: A=L+OE
24

25. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Financial Statement Basics
Balance Sheet Basics
25

26. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Assets;
What You Own
Liabilities;
What You Owe
OE (Owners
Equity);
Difference
Between The
Two
26

27. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
What does it tell us?
Assets;
What You Own
Liabilities;
What You Owe
OE (Owners
Equity);
Difference
Between The
Two
27

28. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Assets
Assets;
What You Own
28

29. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Liabilities;
What You
Owe
OE (Owners
Equity);
Difference
Between The
Two
Liabilities and Owners Equity
29

30. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Example
30

31. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Financial Statement Basics
The Profit and Loss Statement
31

32. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Show Me The Money!!
32

33. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Revenues
In the PCO world we speak in terms of valuing our firm as a
multiple of revenues. While we speak this way, later I will show
you how it’s really derived. However, in order to get to the
answer quickly, we want to define our revenues 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
33

34. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Direct Costs – All costs associated with putting a
technician on the road
34

35. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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?
35

36. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Marketing Expense
All amounts spent to bring in a Sales lead. What % of revenue
should I spend on Marketing?
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…
36

37. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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?
37

38. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Sales Expense
All amounts spent to close a lead generated by marketing.
Includes:
How much do you spend on Sales?
38

39. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
General & Admin Expense
Everything else that goes on in the office
What do you spend on G&A?
39

40. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Overhead Allocation (Firms with Multiple Branches)
For those who have multiple
branches we allocate common
expenses to all by:
40

41. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
P&L Example
41

42. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
How does A Banker Look at Your
Financials?
42

43. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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
43

44. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
How Does A Banker Look At Your Financials
Using Financial Metrics and Ratios including:
44

45. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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:
45

46. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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
46

47. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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
47

48. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Strength
Example
Debt Ratios:
ABC Company
Balance Sheet
Cash 500
Accounts Rec 200
Inventory 100
Debt =
Liabilities
Assets
=
9,000
13,800 = 65.2%
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
=
=
48

49. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Efficiency
Accounts Receivable
Accounts Payable
Accounts Receivable /(Annual Sales/365)
49

50. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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
50

51. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Games People Play
51

52. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Balance Sheet
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%
52
Let’s Play
Who
Owns The
Company?

53. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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?
Take $100 of Cash and Pay $100 A/P – Debt Ratio 44%
Debt Ratio + 400 Liab /900 Liab +Equity = 44%
53

54. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Assets Liabilities
Cash
A/R
Equipment
Total
100
200
600
300
A/P
Notes Payable
Total
0
100
100
Current Income 50
450
Equity
Capital
Total
Total Liab. & Equity
500
600
100%
16.6%
83.3%
Let’s Play Who
Owns The
Company?
Sell $400 of Equip and pay A/P $200 and N/P $200 – Debt Ratio 16.66%
100 Liab / 600 Liab + Equity = 16.66%
54

55. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Assets Liabilities
Cash
A/R
Equipment
Total
600
200
1500
700
A/P
Notes Payable
Total
200
500
300
Current Income 50
950
Equity
Capital
Total
Total Liab. & Equity
1000
1500
100%
33.3%
66.7%
Let’s Play Who
Owns The
Company?
Owner Contribute $500 to Cash as a Capital Contribution – Debt Ratio 33.33%
500 Liab / 1500 Liab + Equity = 33.33%
55

56. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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:
56

57. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
How Does a Potential Purchaser or
Equity Partner Look at Your
Financials?
57

58. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Value and Potential Return
Value – What is the company worth?
P/E Approach:
Lets take a look at an example…
58

59. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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
59

60. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
What about Operations?
Revenue Per Employee…But how do we chunk it
down to departments?
60

61. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
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?
61

62. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
How does a Potential Purchaser or Equity
Partner Look at Your Financials?
62

63. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
A word about getting money out
of the company – The Good the
Bad and the Ugly
63

64. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
A word about getting money out of the company –
The Good the Bad and the Ugly
64

65. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Case Study
65

66. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Your Next Steps
66

67. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
So You want to Grow Your Firm?
67

68. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS
Dan@PCOBookkeepers.com
www.PCOBookkeepers.com
68

69. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS 69

70. THE PEST CONTROL INDUSTRY’S MOST TRUSTED ACCOUNTING FIRM
PCO
BOOKKEEPERS 70