Understanding the Power of Your Financial Statements
Jim Wilkerson
Investor and Mentor || Business Sales and Acquisitions Advisor- I Help Business Owners Prepare and Sell Their Business For a Successful Exit or Grow Through Acquisition.
You must be able to understand your financial statements as a busines owner.
I believe that it is imperative that you have up to date financials
Think of your Financial Statements as your report card just like when you were in school.
3 basic documents: P&L , Income Statement, Cash flow Statement
There are only 3 areas that affect changes in your P&L:
Revenue, COGS, Overhead
P and L
7 numbers: Revenue, COGS, Gross Profit, GP %, Ovehead, Net profit, NP%
3 key numbers:
1. REV minus Cogs = GP
2. gp% = gp/revenue x 100
3. Net Income= fixed costs
4. NP= GP- overhead
5. NP% = NP/ Rev
3 numbers to focus on, Rev, COGS, Overhead
Profit Growth Calculator
10% increase in 5 areas could double your net profits with additional expenses
**Professional service Providers who have no or very little COGS:
Biz Coach, Financial Planner, Web Designer, Chiropractor, Law Firm, Consultant, Accountant, Biz Broker… Breakeven is the Overhead
Six ways to Increase Revenue
2. JV Partners
3. Upsell/Cross-sell
4. Downsell
5. Bundling- remove price competition
6. Introduce new or added products or services
Breakeven= Overhead / GP%
Reducing overhead has a 250% greater impact vs. increasing revenue
Increasing price and cutting costs always returns 100% to your bottom line
Using exponential growth with small incremental impacts in all areas.
Find your B/E
Get AR under control
Manage your Accounts receivables
6 Options to increase Revenue:
Increase Prices, Sell more stuff, Lower your BE, Leverage the P & L, Use exponential growth, Itemize, review and track accounts receivables.
Factors Affecting Your Costs of Goods Sold / COGS
(1 minus profit %) is the multiplier for GP
GP/ Revs is GP %
Discounting: For a 10% discount, Revenue has to increase by 50% to reduce GP
A 10% price increase will give you a 33% increase in profits
Supplier price increases COGS reducing profits
Warranty and Returns…
Warranty = returns-increases in material/ labor + Opportunity cost
Scrap- increases material/labor + OPP cost
Excess Inventory- COGS can easily become inventory
All increase COGS … a 10% increase in COGS can reduce profits by 30%
6 ways to Lower Your COGS
1. Misunderstood Pricing
Price properly… Use Google for business pricing margins, or Bundle which removes price comparisons.
2. Discounting… Destroys profit margins
3. Confront Supplier Price Increases – price shop, contract for quantity discounts, look at buying through associations ( ex. AARP ), negotiate payment terms. Ask for net 30, check on Warranty or Returns
4. Warranty and Returns
5. Scrap
6. Excess Inventory … inventory management software or go Just in Time
Ways to Lower Overhead
1. Lower Supplier and Vendor Costs
If an expense doesn’t help you get or keep a customer…. Get rid of it!
Audit :
Vendors
Internet Provider
Phone
Office Supplies
Janitorial Services
Insurance
Garbage
Repair and maintenance
Landscaping
Ask for payment terms
Barter
Negotiate long term supplier agreements
Outsource Accounting, Bookkeeping, IT, Maintenance / Repair
For seasonal demand replace full time with temps
Offer employees a cost reduction plan with bonuses
Offer landscaping and janitorial to your employees ( moonlighting )
Cancel Dues or unnecessary subscriptions
Refinance Debt
Shop Banking fees
Replace travel with Video Conferencing
Setup a results based compensation model ex.(mbo)
Lease vs Own
Spreads costs out over time protecting cash flow.
Legal Loophole and Overlooked Tax Savings
Recommended by LinkedIn
Check out Corporate structure llc or S or C
LLC or S corp…. elect to be as an S corp while retaining your LLC structure and take a reasonable salary with the rest taken as dividends taxed at capital gains rates. You only pay FICA and Medicare taxes on the salary portion.
Put your kids on the payroll. And can become deductions up to $12,200 in income for each.
How To Build a P&L From Scratch
Revenue, COGS, Overhead
Reviewing bank statements.
Add up all deposits = revenue
Add up all withdrawals and breakdown into COGS or Overhead/( fixed )
Discover Your Business Financial Potential
Uncover Your Business Average Gross Profit %
How to find out if you are above or below average profit
Average is 50% so it is mediocre!
Use Google to “gross profit margin for (industry)”. Are you above or below?
Use this information to Unlock Hidden Wealth
FB advertising myth
FB marketing is usually not profitable
How to find out?
What is the ltv of the client vs cost.
Your private crystal ball detailing how much you can spend on FB ads!
FB Ad for an Accountant Seminar
Set ad budget $1000
CPC $1.72
Divide 1000/ 1.72= 581
Conversion rate .921%
Number of prospects leads 54 ( 582 x .0921 )
Percent that actually attend 25% ( 13 )
Close Rate to New Clients 15%
Number of New Clients 2 ( 15-13 or 15%)
LTV of a client = ex. $7920 ( $1500/yr x 6 years with 88% NP )
Total GP from FB Campaign = $7920 x 2= $15840
Subtract FB ad cost $1000
Total Net Profit = $14,840 This is good!
Income Statement
Descriptive and Functional income statements
Naming Conventions: There are many names …
Income Statement, Profit and Loss, Profit or Loss, Statement of Financial performance, Statement of Comprehensive Income
Consolidated Income Statement, Consolidated Statement of Earnings, Consolidated Statement of Income, Consolidated statement of Operations
They all have Revenue, Expenses, Income, Net Income and a net result, Net Profit or Net Income
Like a Video Metaphor: Measures performance across a specific amount of time… 1/4ly, bi-annual, or annual
Performance Statements: The income statement is about the ability to earn profit over a specific time
Aggregates all income and expenses and combines these to the list of net profit / net income
Top line Income Categories listed in their respective dollar figures and a sumnation
Inflows or enhancements of assets or decreasing liabilities
Broken down by Revenue and Gains in categories
Expenses: same as above only as debits outflows, or liabilities that result in a decrease of equity, or losses
Formatting Options: Income or Revenue – COGS= GP, Income – Expenses= Net Income
Other expenses- Operating Expenses= Operating Income, Other expenses=income before tax-tax=net income
Balance Sheet
Assets vs Liability and Equity
Position Statement or snapshot of the company in a reporting period
Assets: Things that business owns or controls for a future economic benefit
Liabilities: A present obligation leading to an outflow of economic resources
Current or non-current liabilities, within a year then longer
Provisions and Contingent Liabilities
Provision is an uncertain amount ex( warranties)
Contingent Liabilities is a “possible obligation” like an unsettled lawsuit that are disclosed in the “notes” section
Liabilities trends are a good measure of company risk or viability
Equity: The residual interest in the assets of the entity after deducting all liabilities
Cash Flow:
Derived From Operating Activities, Direct, Indirect, and Investing
Operating Activities:
Ar Ap and trends of each
Net Change in Cash = Cash Flow from Operating Activities
Cash flow totals: Investing activities + Cash flow from Financing Activities
Direct and Indirect Cash Flow Activities: Provide same result.
Net change in Cash = CF from Investing + CF from Financing
Analyzing Business Health from Cash flow Statements: Trends
CF statements offer insight into the success and ongoing viability of a business unavailable through the Income statement and Balance Sheet
The business lifeycle
SBA loan or IPO raises cash to invest in income generating non-current assets along with a well executed strategy
Business Health: Can be predicted by analyzing outflows and inflows from investing activities and financing activities