MILE HIGH CHAPTER
Understanding
Financial Statements:
The Organizational Scorecard
Dan Chenoweth, MBA/CPA
1
Premise
• Every organization needs a “Scorecard”
to measure success
• Financial Statements are the Scorecard
• Two types of Accounting Records
• Textbook (“Accrual Basis”) Financial
Statements
• Cigar Box (“Cash Basis”) Financial
Statements
2
Presentation Objectives
•
THE BASICS
Overview of Accrual Basis Financials
•
•
•
•
Definition
Overview of the “Big 3” Financial Statements
Importance of Key Ratio Analysis
Overview of Cash Basis Financials
•
•
Definition
Internal Controls
LATEST FINANCIAL REPORTING TRENDS
•
Turning Data into Information: The Balanced Scorecard
3
Accrual Basis Financials
DEFINITION: Financial Statements prepared in
accordance with Generally Accepted
Accounting Principles (GAAP):
• Revenues recorded at time goods and services
are delivered, regardless of when customer pays
• Expenses recorded at time goods and services
are purchased, regardless of when you pay the
bill
4
Accrual Basis Financials
The “Big 3”
Balance Sheet
“A Snapshot in Time”
Income Statement
“The Moving Picture”
Statement of Cash Flow
“Cash is King”
5
Balance Sheet
Overview
Purpose: A “snap shot” in time regarding organization’s financial
position
Components: Assets = Liabilities + Owners’ Equity
Assets – Liabilities = Owners’ Equity
Current Assets:
• Cash
• Accounts Receivable
• Client Trust Funds
• Deposits & Prepaids
Fixed Assets (Net of Accum. Depr.)
TOTAL ASSETS
Current Liabilities:
• Accounts Payable
• Accrued Expenses
• Short-Term Loans/Debt
Long-Term Loans/Debt
Capital & Draw (Owners’ Equity)
• Partners’ Capital Contribution
• (Partners’ Draw / Distributions)
• Retained Earnings
TOTAL LIABILITIES / CAPITAL & DRAW
6
Balance Sheet
Example
Current Assets:
• Cash
$100
• Accounts Rec.
300
• Client Trust Funds
500
• Deposits & Prepaids
50
Total Current Assets
950
Fixed Assets (Net of A/D) 1050
TOTAL ASSETS
$2000
Current Liabilities:
•Accounts Payable
•Accrued Expenses
•S-T Loans/Debt
Total Current Liabilities
L-T Loans/Debt
Total Liabilities
Capital & Draw (Owners’ Equity)
•Beginning Capital
•Partners’ Capital Contribution
•(Partners’ Draw / Distributions)
•Profit (Loss)
Total Capital & Draw
TOTAL LIABILITIES / CAP & DRAW
$200
50
250
500
600
1100
780
20
(10)
???
???
$ ???
7
Balance Sheet
Answers
Current Assets:
• Cash
$100
• Accounts Rec.
300
• Client Trust Funds
500
• Deposits & Prepaids
50
Total Current Assets
950
Fixed Assets (Net of A/D) 1050
TOTAL ASSETS
$2000
Current Liabilities:
•Accounts Payable
•Accrued Expenses
•S-T Loans/Debt
Total Current Liabilities
L-T Loans/Debt
Total Liabilities
Capital & Draw (Owners’ Equity)
•Beginning Capital
•Partners’ Capital Contribution
•(Partners’ Draw / Distributions)
•Profit (Loss)
Total Capital & Draw
TOTAL LIABILITIES / CAP & DRAW
$200
50
250
500
600
1100
780
20
(10)
110
900
$ 2000
8
Balance Sheet
Key Questions
Liquidity: Is Working Capital positive? That is,
are there enough Current Assets to pay all
Current Liabilities?
Solvency: Is Capital & Draw (Owners’ Equity)
positive?
Debt vs. Equity: Who has more “skin in the
game”? The partners or the bank?
How well is the firm doing in utilizing and
managing its assets and leveraging its
debt?
9
Income Statement
Overview
Purpose: A statement of income and expenditures over a
specified time period to determine if profits or losses have been
earned.
Components: Revenue – Expenses = Profit or Loss
Revenue:
• Fees from Insurance Companies
• Fees from Private Clients
• Other Income (Rental, Interest, etc.)
TOTAL REVENUE
Expenses:
$2000 50%
1800 45%
200 5%
4000 100%
Guaranteed payments, Payroll, Payroll Taxes, Fringe Benefits, Education,
Rents, Supplies, Depreciation, Entertainment, Dues, Insurance, Telephone
Operating Profit or Loss
Interest Expense
Net Income
3850
150
-40
$ 110
96%
4%
1%
3%
10
Income Statement
Key Questions
PROFITABILITY:
• Did we earn a profit? What is our rate of return?
INTERNAL BENCHMARKING / TRENDS:
• Are revenues higher or lower than the last period?
• Are expenses higher or lower than the last period?
• How did we do this month vs. last month? This quarter vs. last
quarter? This year vs. last year?
• How do our actual results compare to budget?
EXTERNAL BENCHMARKING:
• How do our firm’s financials compare to others in our industry?
Did we earn a reasonable profit commensurate
with the risk assumed?
11
Statement of Cash Flow
Overview
Purpose: Explains movement of money in and
out of the organization’s cash accounts during
a particular time period. Provides explanation
for changing amounts in the organization’s
accounts.
Components: The “bridge” between the
Balance Sheet and Income Statement as it
contains elements of both. Must know both
beginning AND end of period Balance Sheet
amounts.
12
Statement of Cash Flow
Example
Begin Cash Balance (Per Prior Year’s B/S)
$110
Cash Flow from Operating Activities
• Net Income (Per Income Statement)
110
• Add back Depreciation Expense (Per I/S)
20
• Changes in Current Assets & Liabilities (Per B/S)
-40
Net Cash Provided by Operating Activities
90
Cash Flow from Investing Activities:
• Purchase Fixed Assets (Per B/S)
-50
Cash Flow from Financing Activities:
• Repay Bank Loans (Per B/S)
-60
• Partners’ Capital Contributions $20 less Draw $10
10
Ending Cash Balance (Ending Balance per this year’s B/S) $100
13
Statement of Cash Flow
Key Questions
SOLVENCY: Did we have positive cash flow from operating activities?
(If answer is “no,” indicator of big problems!)
CASH MANAGEMENT: How did we invest any excess cash? Did we
reinvest in the business? Purchase CD’s?
FINANCING:
• Did we have to borrow more money in order to finance operations or
invest in the business? Did the partners have to contribute more?
• Did we generate enough cash that we could repay some or all of our
bank debt? Is there sufficient cash for partner draws / distributions?
FORECASTING: Do we have sufficient cash on hand to cover normal
operating expenses for next few months?
“Where does our money come from and
where does it go?”
14
Key Ratio Analysis
“Not everything that counts can be counted; not
everything that can be counted really counts.”
Albert Einstein
“So now that we have all these numbers, what
are we going to do with them?” Dan Chenoweth
I earned $1 million in the stock market last
year. Is that a good return?
15
Results to Resources Ratio
RRR
RRR DEFINED: What Resources were spent to
achieve what Result?
• Resources: Time, space, equipment,
people, budget, training, etc.
• Result: Did activity improve our
profits?
RATIO = Numerator / Denominator
RRR = Results / Resources
16
Key Ratio Analysis
(Examples - See Handout)
1.
2.
3.
4.
5.
Liquidity Ratios: Indicator of short-term solvency
Profitability Ratios: Indicator of return on
investment (i.e. return for resources expended)
Activity Ratios: Indicator of how well
organization’s resources have been utilized
Leverage Ratios: Indicator of extent to which
operations are financed with borrowed money vs.
owners’ money
Other Ratios: Primarily associated with publicly
held companies
17
Key Ratio Analysis
Benchmarking
Internal Benchmarking / Trend Analysis:
Compare yourself with yourself
•
•
Current month vs. previous month
Current year vs. previous year
External Benchmarking: Compare your organization with
others in the same industry.
Your
Org.
Industry
Avg.
Current Ratio: CA/CL $950/$500
1.90
2.00
ROI: NI / Total Assets $110/$2000
5.50%
5.68%
45 days
30 Days
1.22
1.45
Avg. Collection Period: (Avg. A/R ) / (Revenues/365)
Debt/Equity: $1100/$900
18
Cash Basis Financials
“Cigar Box” Accounting
DEFINITION
• Revenues recorded at time
cash is received from
customers
• Expenses recorded at time
cash is paid to vendors
19
Internal Controls
QUIZ: How Weak Are Your Internal Controls?
20
How to Improve Internal Controls
#1: Outside Audit
#2: “Checks and Balances”
• Cash Receipts
• Cash Disbursements
#3: Accounting Personnel
• Integrity and Rotation
#4: Partners / Owners Financial Review
• Involvement - Budget / Forecast
• Understanding
• Questioning
21
Organization Stakeholders
Successful organizations make decisions that
consider the best interests of four primary
stakeholders
CLIENTS
EMPLOYEES
OWNERS
SOCIETY
22
Balance of Measures
•
•
•
•
•
Quality
Cost
Delivery / Cycle Time
Safety / Morale
Reputation
23
The Balanced Scorecard
• Associated with Kaplan and Norton at Harvard
University.
• Choose key performance indicators (KPIs)
based on critical success factors (CSFs):
• Based on unique business strategy.
• Measurables for companies in the same industry
should be different.
24
The Balanced Scorecard
Financial
Learning
& Growth
Strategy & Vision
Customer
Operations
25
Learning & Innovation
Measurable examples:
•
•
•
•
•
Number of new services introduced
Service introduction lead-time
Training hours per person
Employee turnover
Employee satisfaction
26
Operational
Measurement Examples:
•
•
•
•
Operational efficiency, e.g. lack of errors
Billable hours
Revenue per employee
Revenue per type of
service offered
• Revenue per client
27
Customer Perspective
Measurement examples:
•
•
•
•
•
Customer Quality Ratings
Speed of Service
Repeat Customers
New Customer Acquisition
Market Share
28
Financial Perspective
Measurement examples:
•
•
•
•
•
Profit
Shareholder value-added (SVA)
Debt/Equity
Return on investment
Return on assets
29
Southwest Airlines
30
Executive Education, Inc.
Objectives
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Customer
Profitable
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4.6 Presentation
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Sharing
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Average
Knowledge,
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High
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Targets
(5-pt. scale)
“Go” Rate
Operations
Registrations
Repeat
Attendees
Learning
Executive Education, Inc., © 2011
New
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Analysis
0% Passives
40 Readability
12 Grade level
“Story” Cases
New Editing
Standards
31
Balanced Scorecard Example
From Professional Services Firm
ALLEN, LEACH & TUREK, PC
32
33
34
Final Quiz
1.
2.
3.
4.
5.
6.
7.
What are the “Big 3” Financial Statements?
Which of these Financial Statements is the “bridge”
between the other two?
What does “RRR” mean?
Why is Key Ratio Analysis important?
Which is better: Accrual basis accounting
or Cash basis accounting?
Who are an organization’s four key stakeholders?
What are the components of the “Balance of
Measures”? HINT: Q,C,D,S,M,R
35
Conclusion
“If you torture numbers long
enough, you can make them
confess to anything.”
Former NM Senator Pete Domenici in discussing the
Federal Government budgeting process
Don’t be a number torturer and don’t
let numbers torture you! Instead,
understand the critical elements in
Financial Statements and know how
to turn data into information!
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