Basic Financial Statements
Break Even Formula
Balance Sheet/Statement of Financial Position
-reflects financial position at a point in time
Total Fixed Expenses
1 –( Total Variable Expenses)
(
Net Sales
)
P&L/Income Statement/Statement of Operating Results
-reflects results over a period of time
Simplified Break Even Formula
Cash Flows/Cash In-and-Out/Statement of Cash Flows
-reflects actual flow of cash in and out of business between
two balance sheet dates
How to “Annualize” an
Interim Financial Statement
Two Basic Accounting Equations
All Expenses (except COGS)
1 – (COGS)
(Sales)
Estimate of Working Capital Needed
Assets = Liabilities + Owners Equity
1. Divide P&L account by
the number of months
in the interim YTD
2. Multiply by 12
3. This is the estimate of
what the account will
be for the year
+
+
=
Revenues – Expenses = Net Income
(or Loss)
SBA’s Rule of Thumb
+
+
=
The Six Basic Ratios
Current Ratio
= Current Assets
Current Liab
Quick Ratio
= Cash + A/R
Current Liab
Debt to Net
Worth
= Total Liab
Tangible Net Worth
A/R Turnover
= Net Sales
A/R
Inventory
Turnover
= Cost of Goods Sold
Inventory
A/P Turnover
= Cost of Goods Sold
A/P
A single ratio can be misleading and
requires an analysis over time.
Industry norms are not gospel.
Mode of operations, type of industry,
etc. can result in reasonable
aberrations.
Cash
Accounts Receivable
Inventory
Accounts Payable
Est of Working Cap
Net Profit
Non-Cash Expenses
Interest Expenses
Rule of Thumb
Pro Forma
Means “in advance of” and reflects:
-appropriate adjustments to all accounts to most accurately reflect
financial condition
-reflects intended proceeds of loan
Analyst should always prepare a Pro Forma Balance Sheet including the
loan proceeds
Common Adjustments
-remove intangibles
-remove non-business assets
-remove non-business debts
-adjust current vs. long term debts
-adjust inflated accounts
-adjust affiliate values
Credit Analysis is an art, not a science, but has several
consistent steps:
-look for events that give rise to the need for the loan
-look for the purpose of the financing
-never forget the “Second Way Out”, i.e. generally the
conversion of assets or collateral