High Speed Growth
Managing Business Financials
for Growth
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The SCORE Foundation
would like to thank
for showing their support of America’s small businesses
by sponsoring this series.
The content provided in the Simple Steps for Growing Your Business
materials is intended as a business resource only and does not guarantee a
successful outcome when applied to individual business use.
To find additional resources on growing your business,
visit www.score.org and www.openforum.com
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Using Financial Statements to
Manage Your Business
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Important Terms: Bookkeeping
Methods
Cash:
• Cash basis bookkeepers recognize income
and expenses when they are received/paid
Accrual:
• Accrual basis bookkeepers recognize
income and expenses when the
product/service is delivered
Jennifer Behar
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Accounting Terminology
• Gross sales (revenues)
• Cost of goods sold
• Gross profit
• Sales, general and administrative expenses
• Operating profit
• Interest expenses and depreciation
• Net profit
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Cost of Goods Sold
• Components of COGS varies from industry to industry
• Generally includes all direct and indirect costs of
producing a product
• Does not include sales, general and administrative
expenses (SG&A)
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Sales, General & Administrative
Expenses
Expenses that support the company’s operations, including
sales, but are not directly related to COGS
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Using Financial Statements to
Manage Your Business
Sales Revenues
COGS
Gross Profits
SG&A
Operating
Profits
Net
Profit
Gross Profits
• Profits after you subtract
COGS from sales revenue
Operating Profits
• Profits after you subtract
SG&A from Gross Profits
Net Profits
• Profits after you subtract taxes,
interest paid and depreciation
from Gross Profits
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Financial Statements
A typical set of financial statements is made up of:
• Income Statement (P&L)
• Balance Sheet
• Statement of Cash Flows (optional)
Douglas S. Cavanaugh
Optional:
• Accounts Receivable Aging Summary
• Accounts Payable Aging Summary
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Financial Statement Discussion
Review the sample Income Statement and
Balance Sheet with the instructor and discuss
the different components of each.
Theresa Alfaro Daytner
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Income Statement
Top section shows revenues
• Gross revenues
• Adjustments to revenues
• Cost of goods sold (COGS)
• Adding/subtracting the figures above = gross profit
Bottom section shows expenses
• Logical categories of expenses
• Revenues – expenses = net profit for period
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Balance Sheet
The Balance Sheet
Organized in sections
Organized in Sections
Assets:
Liabilities:
-Current
-Short-term
-Long-term
-Long-term
Shareholders’
Equity:
-Common stock
-Retained
earnings
-Current income
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Statement of Cash Flows
• Shows all inflows and outflows of cash for a period of
time
• Lets management see how much cash has been added to
or subtracted from operations
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A/R and A/P Aging
• Though these two summary aging reports are not
technically part of the financial statement, most financing
sources want to see them with the other three
components
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Pros of In-House Bookkeeping vs.
Outsourcing
In-House:
Outsourcing:
 Bookkeeper devoted to
your business
 Familiarity with your
business
 May have additional
expertise
 May handle other tasks
 May cost less
 Off-the-shelf software
allows easy data transfer
 Technology enables secure
sharing of sensitive data
 May gain access to multiple
skill sets
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Using Financial Statements to
Manage Your Business
Types of Financial Statements
CPA Audited
CPA Reviewed
CPA Compiled
Internally
Prepared
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Understanding and Using Financial
Ratios
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Financial Ratios
• Liquidity
• Profitability
• Leverage
• Efficiency
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Liquidity Ratios
Used to measure the quality and adequacy of
current assets to meet current obligations as
they come due
• Current ratio
• Quick ratio
Surendra N. Kumar
• Days of cash
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Liquidity Ratios: Current Ratio
Indicates the extent to which current assets are available to satisfy current liabilities
• Stated as values such as 2.5 to 1.0 or simply 2.5
• A ratio of 1.5:1 or higher is considered adequate. A 2:1 ratio is strong.
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Liquidity Ratios: Quick Ratio
Indicates the extent to which more liquid assets are available to satisfy
current liabilities
• Stated as values such as 1.5 to 1.0 or simply 1.5
• A quick ratio of 1:1 or higher is generally considered liquid
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Liquidity Ratios: Days of Cash
Indicates the number of days revenue held in cash
• Days of cash = safety cash
• Every business will require a different level of safety cash
• Cash equivalents include money market holdings, short-term liquid
investments, marketable securities and government bonds and bills
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Profitability Ratios
Used to measure performance of a company
and how well its assets are being used to
generate revenues
• Gross profit margin
• Return on assets
Elizabeth Feichter
• Return on equity
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Profitability Ratios: Gross Profit
Margin
The percentage of money left after sales when cost of goods sold (COGS)
is subtracted
Formula:
Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit
Margin
Example:
Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) =
Gross Profit ($4,000)
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Profitability Ratios: Return on
Assets
The profit generated by the total assets employed by a company
What it means: Higher ratio reflects a more effective employment of
company assets
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Profitability Ratios: Return on
Equity (ROE)
The profit generated by the net assets employed
ROE is the single most important financial ratio applying to
small business owners and the best measure of performance by
management
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Leverage Ratios
Key measurements in determining a company’s
vulnerability to business downturns as well as
its capacity for credit and internal capital needs
• Debt to Equity
Andrew Dunn
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Leverage Ratios: Debt to Equity
Indicates how well a business is leveraging its debt against the capital
invested by its owners
If liabilities exceed net worth, creditors have a greater stake than the
shareholders
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Efficiency Ratios
Measurements of the effectiveness of using
current assets and managing current liabilities
• Days of accounts receivable (A/R)
• Days of inventory
• Days of accounts payable (A/P)
Marta E. Maxwell
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Efficiency Ratios: Days A/R
Outstanding
Indicates the number of days to collect a period’s worth of accounts
receivable
Though industries vary, if you can keep your A/R collection cycle close
to 30 days or less, you have an efficient collection process
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Efficiency Ratios: Days of Inventory
Indicates the number of days it takes to turn over your inventory
If your business is seasonal, you may want to start your season with a
higher number of days of inventory and end it with fewer days
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Efficiency Ratios: Days of A/P
Indicates the number of days of trade and service payables your company is
owing
If your vendor offers net 30 terms with a 2% prompt payment
discount (within 10 days), taking the discount when you can is
important
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Financing Growth
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Funding For Strategic Growth:
Equity
• Friends and family
• Angel Investors (Equity)
• Small Business Investment Companies (SBICs)
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Funding For Strategic Growth:
Debt
• SBA Microloan – up to $50,000
• SBA Express Loan Program – up to $350,000
• SBA 7 (a) Loan Program – up to $5 million
• USDA B&I loans
• Community Development Financial Institutions (CDFI)
• Banks and Credit Unions (Conventional)
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For More Information
SCORE
www.score.org
SCORE (Local Chapter)
www.scorechapter.org
American Express Open Forum
www.openforum.com
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