Students to Start-Ups Entrepreneurial Skills Workshop Series

1
Students to Start-UpsEntrepreneurial Skills
Workshop Series
Center for Entrepreneurship and Innovation
Presents Demystifying Financial Statements
By Jim Chamberlain
2
Financial Measurement Tools

• The number one reason for small business failure
  is inadequate planning and record keeping
• Understanding of basic accounting and finance
  principles is vital to your success
• Vincent McCoy, Inland Empire SBDC

3
Financial Statements

• Chart of Accounts
• What is right for your business?
• Structure it for your own business model
• Get it right the first time!
• Management vs. tax account structure
• Design it to capture profitability points
• Design it to measure Breakeven easily
• Variable and Fixed Costs separation
• Internal Control
• Important in any size business
• Must be given some thought

4

• BALANCE SHEET
• 12-31-01
• ASSETS
• CASH 100
• ACCOUNTS RECEIVABLE 200
• LESS ALLOWANCE FOR BAD DEBTS (20)
• NET ACCOUNTS RECEIVABLE 180
• INVENTORY 600
• LESS ALLOWANCE FOR OBSOLESCENCE (75)
• NET INVENTORY 525
• PREPAID EXPENSES 10
• TOTAL CURRENT ASSETS 815
• DEPOSITS 50
• FIXED ASSETS
• PROPERTY, PLANT EQUIPMENT 800
• CONTRUCTION IN PROCESS 50
• TOTAL GROSS FIXED ASSETS 850
• LESS ACCUMULATED DEPRECIATION
  (300)

5

• INCOME STATEMENT
• TWELVE MONTHS ENDED 12-31-01
• GROSS SALES 1,600
• SALES RETURNS ALLOWANCES 200
• NET SALES 1,400
• COST OF SALES VARIABLE
• MATERIALS 200
• DIRECT LABOR 300
• OTHER VARIABLE COSTS 100
• TOTAL VARIABLE COSTS 600
• CONTRIBUTION MARGIN 800
• 57
• FIXED LABOR OVERHEAD 300
• TOTAL COST OF SALES 900

6

• STATEMENT OF CASH
• TWELVE MONTHS ENDED 12-31-01
• NET INCOME 65
• ADD NON CASH EXPENSES
• DEPRECIATION 100
• CHANGES IN ASSETS LIABILITIES
• INCREASE IN ACCOUNTS RECEIVABLE 50
• INCREASE IN INVENTORY 30
• INCREASE IN PREPAID EXPENSES 10
• INCREASE IN ACCOUNTS PAYABLE 20
• DECREASE IN ACCRUED EXPENSES 15
• TOTAL CASH PROVIDED BY OPERATIONS 80
• CASH FLOWS USED FROM INVESTING ACTIVITIES
• PROPERTY, PLANT EQUIPMENT 50
• CASH FLOWS FROM FINANCING ACTIVITIES
• NET INCREASE IN BANK DEBT 75

7
Financial Decision Techniques

• Measure these monthly actual versus budget
• Return on Investment the real bottom line
• Operating Cash Flow / Net Tangible Assets
• Break Even Points efficiency performance
• Fixed Costs / Contribution Margin
• Current Ratio liquidity
• Current Assets / Current Liabilities
• Quick Ratio liquidity
• (Cash Accounts Receivable) / Current
  Liabilities
• Debt to Equity solvency risk
• Total Long Term Debt / Net Tangible Assets

8
Financial Decision Techniques

• Measure these monthly actual versus budget
• A/R Turnover funds management
• A/R Current Month Credit Sales Previous Month
  Credit Sales
• Inventory Turnover funds management
• Cost of Goods Sold / Average Inventory Value
• Contribution Margin efficiency
• Contribution Margin / Net Sales
• SGA as a Percent of Sales efficiency
• SGA / Net Sales
• Working Capital how much is too much? risk?
  incremental increases based on sales increases?
• Current Assets Current Liabilities

9
Questions

• Jim Chamberlain
• James.Chamberlain_at_SCORE114.org

10
Making the Right Financial DecisionsCritical to
Success

• Business Performance Terminology
• How to Measure Performance Using Financial
  Statements
• Balance Sheet
• Income Statement
• Statement of Cash Flow
• Techniques and Tools for Making Financial
  Decisions
• Successful Business Pointers

11
Additional Resources

• Web
• Financial templates http//www.score114.org/busine
  ss_library_1.html
• Creating a profit loss statement (free online
  workshop) http//www.va-interactive.com/score/
• Financial ratios and business statistics by
  industry http//www.bizstats.com/
• Key business ratios http//www.score114.org/PDFs/s
  as-67_key_ratios.pdf
• More links at http//www.score114.org and
  www.sba.gov

12
Additional Resources

• People
• UCI Center for Entrepreneurship and Innovation
  CEI_at_Merage.uci.edu
• SCORE Orange County www.score114.org

13
Students to Start-UpsEntrepreneurial Skills
Workshop Series
UPCOMING WORKSHOPS February 7th March
21st Demystifying Financial Statements Driving
Growth Through Distribution Channels and
Sales Management February 21st April 4th
Sure-Fire Secrets to Entrepreneurial Nuts
Bolts of Business Structure Success and
Licensing March 7th April 18th Finding
Start-Up Capital Refine Your Unique Value
Proposition RSVP CEI_at_MERAGE.UCI.EDU
14
Next Steps

• Sign up for future Student to Start Up
  workshops
• Decide what specific area of your business
  (raising money, distribution, marketing, etc)
  would benefit from counseling
• Contact UCI Center for Entrepreneurship and
  Innovation to arrange no-cost counseling from
  SCORE