The document provides an agenda for a workshop on understanding and using financial statements. The workshop will cover income statements, cash flow statements, balance sheets, and how to use financial statements to run a business. It will include exercises on profit margin analysis, sensitivity analysis, calculating returns, and benchmarking. The expected outcomes are for participants to improve their ability to interpret financial statements to manage operations and plan growth. The full-day workshop will include presentations, exercises, breaks and a Q&A session.

1. By David Rudofsky
UNDERSTANDING
AND USING FINANCIAL
STATEMENTS
5/17/2017

2. 2Proprietary to David Rudofsky
EXPECTED OUTCOMES
By the end of the workshop you should have an improved:
• Ability to use and interpret financial statements to manage current operatons, and plan
your profitable growth
• Profit and Loss
• Cash Flow
• Balance Sheet
• Understanding how to project the cash needed to fund future growth
• Knowledge of the pros and cons of debt vs. equity inancing, and what makes a company a
good candidate for each

3. 3Proprietary to David Rudofsky
TODAY’S AGENDA
Introductons - 10 minutes
Financial Statement Basics (slides 4-17) – 40 minutes
Short Break – 5 minutes
Using Financial Statements to Run Your Business – 40 min.
Calculate Returns for your Business – 30 minutes
Break – 10 minutes
Funding Solutons (slides 32-37) – 30 minutes
Review / Q&A – 15 minutes

4. 4Proprietary to David Rudofsky
FINANCIAL STATEMENT BASICS
• Income Statement
• Cash Flow Statement
• Balance Sheet

5. 5Proprietary to David Rudofsky
INCOME STATEMENT BASICS
• Financial results, over a period of time
• Revenue – Expense = Operating Income (or EBIT)*
• Recognition of expenses timed to matched the
• revenue they generate, e.g.:
»» Cost of Goods Sold
»» Depreciation of capital equipment
• Gross Profit: Revenue less “Cost of Revenue”
• Operating Income +/- interest– taxes = Net Income
*EBIT: Earnings Before Interest and Taxes

6. 6Proprietary to David Rudofsky
NAME THAT INCOME STATEMENT
3 months ending 9/06
$ millions
Company A Company B Company C Company D
Revenue 2,690 1,433 546 1,691
Cost of Revenue 1,049 663 343 1,244
Gross Profit 1,641 769 203 447
% of Revenue 61% 54% 37% 26%
Research & Dev. 313 42 0 0
Selling, General &
Administrative
397 443 128 632
Other Op. Expenses 0 7 (7) (627)
Operating Income 931 277 82 442
% of Revenue 35% 19% 15% 26%
Taxes 306 78 24 96
Interest 21 52 19 166
Other Income/Exp. (108) 4 1 (4)
Net Income 733 148 40 177
Pitney Bowes Google
Harrah’s Burger King

7. 7Proprietary to David Rudofsky
CASH FLOW STATEMENT
Cash moving in and out of a Company over a period of time, broken into
three categories:
• Cash Flow from Operations – starts with earnings adds back depreciation, plus or minus
change in working capital
• Cash Flow from Investing – primarily the cash used for capital expenditures
• Cash Flow from Financing – cash to or from investors and lenders

8. 8Proprietary to David Rudofsky
CASH USED BY OPERATING ACTIVITIES
OPERATING ACTIVITIES
Net loss.................................................... $(61,778)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 997
Amortization of deferred stock-based compensation......... 2,118
Common and preferred stock issued for intellectual
property............................................... 416
Common stock issued for services.......................... 1
Changes in:
Inventories............................................ (6,756)
Prepaid marketing expenses............................. (7,223)
Other prepaid expenses and current assets.............. (999)
Certificate of deposit................................. (845)
Other assets........................................... (330)
Accounts payable, accrued expenses and other........... 8,700
Payable to related parties............................. 370
--------
Net cash used in operating activities....................... (65,329)
1000’s omitted

9. 9Proprietary to David Rudofsky
CASH USED BY INVESTING ACTIVITIES
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (12,188)
Purchase of preferred stock in PetPlace.com................. (2,085)
Issuance of note receivable................................. (150)
Purchase of intangible software and intangible assets....... (75)
--------
Net cash used in investing activities....................... (14,498)

10. 10Proprietary to David Rudofsky
CASH PROVIDED BY FINANCING ACTIVITIES
FINANCING ACTIVITIES
Proceeds from issuances of common stock..................... 14
Proceeds from exercise of stock options..................... 788
Proceeds from issuance of convertible notes payable......... 7,385
Net proceeds from issuances of Series A preferred stock..... 10,021
Net proceeds from issuances of Series B preferred stock..... 91,831
Repayments on capital lease................................. (16)
--------
Net cash provided by financing activities................... 110,023
--------
Net increase in cash and cash equivalents................... 30,196
Cash and equivalents at beginning of period................. --
--------
Cash and equivalents at end of period....................... $ 30,196

11. 11Proprietary to David Rudofsky
BASED ON THIS CASH FLOW, IN YEAR LEADING UP TO IPO,
WOULD YOU WANT TO INVEST……
Cash flow From
Inves0ng
Cash flow from
Financing
Cash
($65 million)
$110 million
($15 million)
….. and why or why not?

12. 12Proprietary to David Rudofsky
P&L RESULTS
Net sales................................................... $ 5,787
Cost of goods sold.......................................... 13,412
----------
Gross margin................................................ (7,625)
Operating expenses:
Marketing and sales(1).................................... 42,491
Product development(2).................................... 6,481
General and administrative(3)............................. 4,254
Amortization of deferred stock-based compensation......... 2,118
----------
Total operating expenses.................................... 55,344
----------
Operating loss.............................................. (62,969)
Interest income, net........................................ 1,191
----------
Net loss.................................................... $ (61,778)
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO DECEMBER 31, 1999

13. 13Proprietary to David Rudofsky
FOUR KEY QUESTIONS
Lenders and Investors want to know:
• How much money do you need?
• How much money are you putting into your business?
• For what will you use the money?
• How will you pay back the money?
(Loan plus interest or investment plus
dividends/capital gains)

14. 14Proprietary to David Rudofsky
NAME THAT BALANCE SHEET
$ millions Company A Company B Company C Company D
Cash 202.7 146.0 671.9 10,428.7
Accounts Receivable 2,000.0 159.0 780.8 1,082.6
Inventory 244.5 13.0 60.7 0
Fixed Assets 1,109.0 871.0 13,663.1 2,174.3
Goodwill 1,788.1 20.0 3,239.5 337.1
Other Assets 4,076.6 1,204.0 2,762.4 1,670.5
TOTAL ASSETS 9,420.9 2,413.0 21,178.4 15,693.2
Accounts Payable 3,042.8 377.0 1,649.0 1,127.7
Long Term Debt 3,349.0 1,011.0 10,725.5 0
Other Liabilities 2,045.0 426.0 2,731.3 168.4
TOTAL LIABILITIES 8,436.8 1,814.0 15,105.8 1,296.1
EQUITY 957.1 599.0 6,072.6 14,397.1
Pitney Bowes Google
Harrah’s Burger King

15. 15Proprietary to David Rudofsky
USING FINANCIAL STATEMENTS TO RUN YOUR BUSINESS
• Profit Margin Analysis
• Sensitivity Analysis
• Calculation of Returns
• Benchmarking

16. 16Proprietary to David Rudofsky
PROFIT AND LOSS STATEMENT
Things to keep in mind:
• Sometimes less is more – easier to focus on less information
• Make liberal use of margin analysis – i.e. % of revenue
• Doing so for summary Profit and Loss will bring major themes to light

17. 17Proprietary to David Rudofsky
PROFIT MARGIN ANALYSIS –DELI FOODS MANUFACTURER
Total 2009 TOTAL 2010 TOTAL 2011
31 WEEKS 12/25/09 53 WEEKS 12/31/10 52 WEEKS 12/30/11
Sales, net $ 6,899,226 100.0% $27,209,000 100.0% $40,768,000 100.0%
Cost of Goods Sold 8,056,010 116.8% 21,569,560 79.3% 29,324,720 71.9%
Gross Profit (1,156,784) -16.8% 5,639,440 20.7% 11,443,280 28.1%
Operating Expenses
Shipping 695,956 10.1% 2,699,614 9.9% 3,948,328 9.7%
Selling 910,131 13.2% 2,165,130 8.0% 2,484,078 6.1%
General and administrative 1,093,790 15.9% 2,107,781 7.7% 2,165,163 5.3%
Income from Operations (3,856,662) -55.9% (1,333,085) -4.9% 2,845,712 7.0%

18. 18Proprietary to David Rudofsky
PROFIT AND LOSS STATEMENT
Things to keep in mind:
• Sometimes less is more – easier to focus on less information
• Make liberal use of margin analysis – i.e. % of revenue
• Doing so for summary Profit and Loss will bring major themes to light
• Good to model Profit and Loss below and above expected customer activity level

19. 19Proprietary to David Rudofsky
2005 2006
Low Medium High Low Medium High
# clients (a) 90 240 450 108 288 540
Revenue per client (b) $255 $255 $255 $305 $305 $305
Gross revenue $22,950 $61,200 $114,750 $32,940 $87,840 $164,700
% discounts (c.) 3% 3% 3% 3% 3% 3%
Net revenue $22,262 $59,364 $111,308 $31,952 $85,205 $159,759
Cost of services (d) 2,025 5,400 10,125 2,430 6,480 12,150
Gross Margin $20,237 $53,964 $101,183 $29,522 $78,725 $147,609
per client $225 $225 $225 $273 $273 $273
% revenue 91% 91% 91% 92% 92% 92%
Marketing (e) $28,125 $28,125 $28,125 $25,725 $25,725 $25,725
per client $313 $117 $63 $238 $89 $48
% revenue 126% 47% 25% 81% 30% 16%
Mgmt. Salary & Benefits $25,000 $25,000 $25,000 $50,000 $50,000 $50,000
% revenue 112% 42% 22% 156% 59% 31%
Other overhead (f) $34,100 $34,100 $34,100 $31,420 $31,420 $31,420
per client $379 $142 $76 $291 $109 $58
% revenue 153% 57% 31% 98% 37% 20%
Operating Profit ($66,989)
($33,261
) $13,958
($77,623
)
($28,420
) $40,464
% Net Revenue -301% -56% 13% -243% -33% 25%
Breakeven volume 388 392

20. 20Proprietary to David Rudofsky
MANY HAPPY RETURNS!!
• Return on Sales
• Return on Assets
• Return on Equity

21. 21Proprietary to David Rudofsky
RETURN ON SALES
• Return on Sales = Net Income / Revenue
• Also know as Profit Margin
• What it tells you: How much profit can you deliver from each dollar of sales, in % terms
• Why it matters: Ultimately, profits are what make a business sustainable
• What is an “attractive” Return on Sales?
5% or greater
• Way to improve your Return on Sales? Focus sales efforts on higher margin products/accounts

22. 22Proprietary to David Rudofsky
PRODUCT LINE PROFITABILITY
Leatherwork Metalwork TOTAL
Revenue $1,200,000 $800,000 $2,000,000
Variable Cost $1,216,667
Fixed Cost $150,000
Gross Margin
% Revenue
$633,333
31.7%
Selling, G&A $300,000
Operating Profit
% Revenue
$333,333
16.7%
Tax $133,333
Net Profit
% Revenue
$200,000
10.0%
For which line should this business owner try to grow sales?

23. 23Proprietary to David Rudofsky
PRODUCT LINE PROFITABILITY
Leatherwork Metalwork TOTAL
Revenue $1,200,000 $800,000 $2,000,000
Variable Cost $916,667 $300,000 $1,216,667
Fixed Cost $100,000 $50,000 $150,000
Gross Margin
% Revenue
$183,333
15.3%
$450,000
56.3%
$633,333
31.7%
Selling, G&A $300,000
Operating Profit
% Revenue
$333,333
16.7%
Tax $133,333
Net Profit
% Revenue
$200,000
10.0%

24. 24Proprietary to David Rudofsky
RETURN ON ASSETS
• Return on Assets = Net Profit / Avg. Assets
• What it tells you: How much profit can you deliver from each dollar invested in assets,
in % terms
• Why it matters: It is easier to grow a business with high return on assets with internal
cash flow
• What is an “attractive” Return on Assets?
10% or higher
• Ways to improve your Return on Assets?
»» Improve management of Accounts Receivable (collections, credit, etc.)
»» Reduce needed investment in Inventory (improve “turns”)

25. 25Proprietary to David Rudofsky
RETURN ON EQUITY
• Return on Equity = Net Profit / Avg. Equity
• Reminder: Equity = Assets (what you own) – Liabilities (what you owe)
• What it tells you: How much profit can you deliver from each dollar of equity, in % terms
• Why it matters: You want to get a high return on the capital you (or others) invest in your
business
• What is an “attractive” Return on Equity?
15% or higher
• Way to improve your Return on Equity? Take on debt, responsibly, so not all your
financing is equity

26. 26Proprietary to David Rudofsky
NAICS 333298 – $5-10 MILLION SALES - DUPONT IDENTITY
Return on Equity
= 19.7%
Return Equity
Multiplier = 2.92
Return on Assets
= 6.75%
Total Assets
Turnover = 1.83
Sales =
$6,971,302
Total Assets =
$3,818,953
Fixed Assets =
$1,050,212
Current Assets =
$2,768,741
Profit Margin
= 3.70%
Profit Before Tax =
$257,938
X
X
/ /
+Source: “Annual Report Studies,” 2005-
2006, Risk Management Associates

27. 27Proprietary to David Rudofsky
CALCULATE DUPONT IDENTITY FOR YOUR BUSINESS!!
Return on Equity =
Return Equity Multiplier =Return on Assets =
Total Assets Turnover =
Sales = Total Assets =
Fixed Assets = Current Assets =
Profit Margin =
Profit Before Tax =
X
X
/ /
+

28. 28Proprietary to David Rudofsky
BENCHMARKING PROFITABILITY
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
$1-3 $3-5 $5-10 $10-25 *$25 +
Revenue of participating
companies, in millions
Gross Profit
Margin
Operating
Profit Margin
Source: Risk Management Associates, Annual Statement
Studies, 2004-2005, all other misc food
*55 companies, averaging
$133 million revenue

29. 29Proprietary to David Rudofsky
FUNDING SOLUTIONS
• Obstacles to Fund Raising
• Seven Critical Things
• Report Card
• Debt or Equity
• Typical Sources

30. 30Proprietary to David Rudofsky
OBSTACLES TO FUND RAISING
What holds back small and mid-sized businesses
from external fund raising?
• Lack of understanding of the process they need to follow
• Lack of internal resources to create the business plan
• Don’t know the funding sources
• Reluctance to take on debt, or sell equity “my dog ate the
term sheet”

31. 31Proprietary to David Rudofsky
SEVEN CRITICAL THINGS
1. Be credible – don’t exaggerate the opportunity
2. Gain knowledge of the industry you are planning to enter
3. Demonstrate strong justification for revenue assumption
4. Plan a salary for yourself that makes the effort sustainable
5. Seek expert help (as needed) for Balance Sheet and Cash Flow
6. Focus on capital requirements – both short and long term
7. Check your ability to withstand revenue shortfalls

32. 32Proprietary to David Rudofsky
FUND RAISING – REPORT CARD
• Able to calculate the amount of funds needed to hit various milestones as well as the ability
to provide a financial return to stakeholders
• Awareness of what is the most likely type of funder by stage/amount
• Understand the implications of raising debt vs. equity and advantage/disadvantages of each

33. 33Proprietary to David Rudofsky
CALCULATING FUNDS NEEDED
Develop model with financial projections based on the assumptions for the following:
• Sales, production, inventory plan
• Capital expenditures for automation or to increase capacity as needed
• Pricing and cost for each of the products/channels
• Promotional and marketing costs, both introductory and ongoing
• Staffing and other organizational costs
• Needed working capital investments
Projections by month for yr. 1, then annually, 3-5 years in total, and to include:
• Profit and Loss, Balance Sheet, Cash Flow
• Sources and Uses
• Sensitivity Analysis

34. 34Proprietary to David Rudofsky
DEBT VS. EQUITY CONSIDERATIONS
• Debt is more tax efficient, and potentially lower cost
• Equity investors are focused on earnings growth
• Debt investors more concerned about safety of principal
• Private companies can use equity to lure talent
• Selling equity can let private company owners diversify their personal wealth

35. 35Proprietary to David Rudofsky
TYPICAL SOURCES OF FINANCING BY STAGE OF BUSINESS
Stage Re-
search
Commitment
to Start
Business
Product
Develop-
ment
Launch Early
Growth
Growth
Problems/
Barriers
Mid-Life
Growth
Maturity
Level of Rev. 0 0 Under
$100k
Under
$100k
Under
$500k
$500k -
$1M
Over $1M Over $5M
Entrepreneurs’
personal
resources
√ √ √ √
Relatives √ √ √
Friends,
mentors, etc.
√ √ √ √ √ √
Suppliers √ √ √ √ √ √
Angels √ √ √ √
Banks √ √ √ √ √ √
VC √ √ √ √ √ √

36. 36Proprietary to David Rudofsky
REVIEW QUESTIONS
• Return on Equity = _______ / Avg. Equity
• Which is more tax efficient funding, debt or equity?
• Equity investors are more concerned about _____?
• Equity = ________ - Liabilities
• Two ways to manage and improve return on assets?