FINANCIAL BASICS

FINANCIALBASICS

Business 2.010 at the Library Brown Bag Seminar Series

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course objectivesFINANCIAL BASICS:

• Identify names of financial reports

• Describe their purpose

• Use information to make important decisions about running your business

• Learn financial vocabulary to communicate with professional advisors

• Referral to SBDC ADVISOR

• Access SBDC Resources

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Numbers Tell A Story:

• Sports and Recreation• 28• 1• 300

• School• GPA• Report Card

• Financial Reports = Report Card for your Business

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FINANCIAL BASICS

Why are Financial Statements necessary?

• Making a profit or losing money?

• Healthy business?

• Bookeeping & taxes

• Enough cash?

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Source of Financial Statements:

• Accounts (Record Results of Financial Activities)• Sale of goods• Pay telephone bill• Purchase assets

• 5 Types• Assets• Liabilities• Capital (equity)• Revenue (income; sales)• Expenses

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FINANCIAL BASICS

Common Financial Statements:

• Balance Sheet

• Profit & Loss (Income) Statement

• Breakeven Analysis

• Cash Flow

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balance sheet

Definition:

Shows state of financial health of your company on a particular day

• A ‘financial snapshot’

• “Assets = Liabilities + Equity”

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balance sheet terms:

Assets -What a company owns• Cash• Accounts Receivable• Equipment• Software

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balance sheet terms:

Liabilities -What a company owes• Bills to vendors• Loans• Mortgages• Accrued taxes• etc.

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balance sheet terms:

Equity -

What a company owns

minus what a company owes

OR

What your business is worth

at book value (not market value)

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balance sheet terms:

The sum of:

Owner’s Equity –

Money invested by owners

Retained earnings

Profit and losses to date

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balance sheetExample:

10/31/10

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profit & loss statement

Definition:

The income and expenses from your business operations that occurred during a specified period of time.

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profit & loss statement Example:

Gross Revenues $3,200

Less Cost of Goods Sold = -1,200

Gross Profit/Loss $2,000

Less Operating Expenses = -2,200

Net Profit/(Loss) $ (200)

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profit & loss statement Terms:

Gross Revenues=Total amount of money that comes

into a business through sales of product or providing a service

(Monthly Racoon Rib sales

= $3,200)

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profit & loss statement Terms:

Cost of Goods Sold =Total amount of labor and material

to produce the products

(Monthly cost to produce Ribs

= $1,200)

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profit & loss statement Terms:

Gross Profit =What’s left after subtracting

CoGS from Gross Revenue

($2,000)Also called “Gross Margin”

or “Contribution Margin”

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profit & loss statement Terms:

Operating Expenses (Overhead) =Other business operating costs,

not associated with production.

($2,200)

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profit & loss statement Terms:

Net Profit/(Net Loss) = Gross Profit minus Operating

Expenses

($200 [loss])

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profit & loss statement Terms:

Net Profit is the money the owner(s) can:

• take out of the business

• reinvest in the business (after loans and taxes are paid).

• This amount is what you pay income tax on.

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profit & loss statement Example:

Month of October 2010

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breakeven analysis

Calculates:

What I have to sell

at a given price

to pay all my expenses

with no profit.

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breakeven analysis Terms:

Contribution Margin Percent:

• Is the percentage of sales remaining after subtracting CoGS

• Is the percentage of Sales that contributes to Fixed Expenses and Profit.

= Gross Profit/Sales

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breakeven analysis Terms:

Break Even Point (BEP) in sales/revenue =Fixed Expenses = $2200

Contribution Margin % .625

BEP in units = Fixed Expenses = $2200 = 440

Contribution Margin/unit 5

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Cash Flow IN

• Sources of Cash Flow in:• Sales Revenue• Sale of Assets • Loan proceeds• Investment in the business

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Cash Flow Out

• Sources of Cash Flow out:• Operating expenses• Asset purchases• Loan reduction (pay back of

principal)• Equity reduction

(withdrawal of investment equity)

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Positive Cash Flow

• Positive Cash Flow is not the same as operating profit

• Negative Cash Flow is not the same as operating loss

• Cash in the bank is <not => positive cash flow

• Cash Flow management = analyzing cash flow trends

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Cash Flow Management

Three rules for effective

Cash Flow Management

1. PLAN

2. PLAN

3. PLAN

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Cash Flow Projection

• Make a Cash Flow projection (Plan)

• Cash MUST come in faster than it goes out

• Hold on to cash as long as you can

• Compare cash flow projection to actual cash flow

Cash FlowStatement

Example:

Cash Flow Statement for Month of October 2010

Beginning Cash $0

Sources of Cash

Owner’s Investment $4,900

Revenue $3,200

Loan Proceeds $5,000

Accounts Payable $5,000

Accrued Liability $1,000

Total Cash In $19,100

Uses of Cash

CoGS $1,200

Operating Expenses $2,200

Inventory $2,000

Equipment $10,000

Loan Payment (Principal) $500

Tax Reserve $200

Accounts Receivable $1,000

Owner's Draw $1,000

Total Cash Out $18,100

Ending Cash $1,000

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Wrap Up:

Resources:

WEB SITES• www.centralcoastsbdc.org • www.edd.ca.gov• www.irs.gov • www.nolo.com• www.sba.gov• www.calgold.ca.gov• www.co. santa-cruz.ca.us

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evaluations & wrap-upFINANCIAL BASICS

• Turn in seminar evaluations

• Sign up for advising or other seminars

• Thank you to our sponsors: