Dear Client:
In an effort to bring you more value as a financial management advisor, we have
initiated a program to present your financial statements in an easier-to-read and more
useful format. We are very excited about this program because it will provide you with
a plain-language translation of your financial statements. The report highlights the
areas of your business which are the strongest, and those which may need
improvement, as well as outline some of the ways in which we can help you to define
and reach your financial goals. The experts at Tax Force / Pizza Force have one
primary objective: to make your business more profitable by simplifying your workload.
Look for this new report with the next set of financial statements we send you – we look
forward to the discussion it will initiate.
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This report is designed to
assist you in your business'
development. Below you will
find your overall ranking,
business snapshot and
narrative write-up.
Snapshot of:
Pizza Restaurant
Industry:
72211 - Full-Service Restaurants
Revenue:
$1M - $10M
Periods:
12 months against the same 12 months from the
previous year
Financial Score for Restaurant
LIQUIDITY A measure of the company's ability to meet obligations as
they come due.
PROFITS & PROFIT MARGIN A measure of whether the trends in profit are favorable for the
company.
SALES A measure of how sales are growing and whether the sales are
satisfactory for the company.
BORROWING A measure of how responsibly the company is borrowing and
how effectively it is managing debt.
ASSETS A measure of how effectively the company is utilizing its gross
fixed assets.
EMPLOYEES A measure of how effectively the company is hiring and
managing its employees.
Financial Analysis for Restaurant
LIQUIDITY
A measure of the company's ability to meet
obligations as they come due.
Operating Cash Flow Results
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Conditions in this area are strong, currently. The company is generating solid, positive cash flow from
operations. It is particularly nice to see this in combination with the overall liquidity results, which are also
very good (this will be discussed in more depth below). Ultimately, cash flow drives long-run liquidity for
almost every business, so it is good to see a strong relationship between cash flow and profits.
General Liquidity Conditions
The company has performed well in this area. The firm's liquidity is strong in several areas, and moreover, this
strength has been maintained since last period. Best of all, high growth in sales and profits were
combined with positive liquidity. Often, it's difficult for companies to grow because growth puts constraints
on cash or liquidity. In this case, the company has expanded the business and maintained its solid liquidity
position.
Also, it should be noted that the company's liquidity position is "strong" relative to the industry. This can turn
into a competitive advantage if superior liquidity is consistently maintained relative to the competition.
Still, it's noteworthy to mention that it is management's charge to make sure that the integrity of current asset
accounting is solid. For example, there should be checks in place to make certain that the amounts listed in
the current assets portion of the Balance Sheet actually reflect real economic value. This may be obvious, but
it is sometimes the case that balances on the Balance Sheet are not quite correct.
Currently, the company's inventory days and accounts payable days ratios are about average as compared to
other companies in the industry. This generally means that the company is converting inventory to sales and
paying its bills in a typical manner. Generally, it is positive that these turnover ratios look to be in line.
Tips For Improvement
Liquidity is a challenge that is never solved. Managers might possibly consider the following actions to
maintain or improve conditions over time:
•
•
•
•
Use reliable suppliers that can deliver goods when they are needed. For example, suppliers that can
deliver within one day can make it easier for the restaurant to keep inventory low and fresh.
Accept multiple forms of payment, such as credit and debit cards, to help cut down on the number of
denied payments (bad checks). Watch the payment terms of credit cards since longer terms will delay
collection until much later.
If cash is a constraint, try to establish a sufficient line of credit from the bank. The restaurant should
obtain, but not necessarily use, as much financing as possible. If you decide to obtain external
financing, structure it as long-term rather than short-term in order to decrease monthly payments.
Monitor the impact tax payments may have on cash. Keep enough money aside to be able to meet
future tax obligations based on earnings.
LIMITS TO LIQUIDITY ANALYSIS: Keep in mind that liquidity conditions are volatile, and this is a general
analysis looking at a snapshot in time. Review this section, but do not overly rely on it.
Generally, this metric measures the overall liquidity
position of a company. It is certainly not a perfect
barometer, but it is a good one. Watch for big
decreases in this number over time. Make sure the
accounts listed in "current assets" are collectible. The
This is another good indicator of liquidity, although by
itself, it is not a perfect one. If there are receivable
accounts included in the numerator, they should be
collectible. Look at the length of time the company
has to pay the amount listed in the denominator
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higher the ratio, the more liquid the company is.
This metric shows how much inventory (in days) is on
hand. It indicates how quickly a company can respond
to market and/or product changes. Not all companies
have inventory for this metric. The lower the better.
(current liabilities). The higher the number, the
stronger the company.
This ratio shows the average number of days that
lapse between the purchase of material and labor, and
payment for them. It is a rough measure of how
timely a company is in meeting payment obligations.
Lower is normally better.
PROFITS & PROFIT MARGIN
A measure of whether the trends in profit are
favorable for the company.
A stronger net profit margin and higher sales have combined to improve this company's overall net profitability
position significantly this period. Specifically, net profit margins have improved by 26.49% while sales have
increased by 28.00%. The company is generating significantly more revenue than last period and managing it
better by improving net margins -- an excellent combination. It looks like the company is pushing itself nicely
within its "relevant range" -- the company's operating range for its current cost structure. This situation could
also imply that the company may be able to push sales and profits higher concurrently in the future, which is
not always easy to achieve.
Overall net profitability here is excellent. This means that the net profit margin is good even compared to what
similar companies are earning. This puts the challenge on managers to make sure that they are moving money
back into the company to improve future profitability. As long as net margins don't slide too much, it is
important to invest in the company to take advantage of this excellent strategic position. Managers should also
make sure to put money aside to pay taxes on the extra earnings.
Tips For Improvement
The following ideas to improve profitability might be useful and can be thought-through by managers:
•
•
•
•
Try to hire employees with restaurant experience in serving, cooking, etc. Call previous employers to
assess the employee’s skills.
Create cost menus so that each menu item has a cost associated with it. This will help in figuring out
what the profit margins are for each dish and which items should be removed. If needed, adjust menu
item marketing to improve profitability.
Track the effectiveness of advertising by the additional customer visits generated from the campaign.
Consider doing advertising/marketing in-house to reduce costs, as long as quality can be maintained.
Monitor the amount of money that is being used for activities unrelated to the business.
Page 4 / 17
This number indicates the percentage of sales revenue
that is not paid out in direct costs (costs of sales). It
is an important statistic that can be used in business
planning because it indicates how many cents of gross
profit can be generated by each dollar of future sales.
Higher is normally better (the company is more
efficient).
This is an important metric. In fact, over time, it is
one of the more important barometers that we look
at. It measures how many cents of profit the company
is generating for every dollar it sells. Track it carefully
against industry competitors. This is a very important
number in preparing forecasts. The higher the better.
This metric shows advertising expense for the
company as a percentage of sales.
This metric shows rent expense for the company as a
percentage of sales.
This metric shows G & A payroll expense for the
company as a percentage of sales.
This metric shows total payroll expense for the
company as a percentage of sales.
Page 5 / 17
SALES
A measure of how sales are growing and whether the
sales are satisfactory for the company.
It is interesting that sales have significantly risen at the same time that the employee base has also
significantly risen. It is good to see large increases in sales accompany the relatively large increases in the
employee base, even if the new employees have not directly helped elevate sales. A side observation is that
fixed asset levels have stayed approximately the same as they were last period. This means that a larger
amount of sales revenue is being generated by each dollar of assets. Finance professionals refer to this as
increasing the business's "asset turns," which is a key performance measure in this specific industry. The
company is now driving more sales through about the same level of assets, which can help improve
profitability over the long run if expenses can be managed.
BORROWING
A measure of how responsibly the company is
borrowing and how effectively it is managing debt.
The company performed very well with respect to debt use. Borrowing increased and net profitability improved
at an even faster rate. This is a favorable result, and should provide improved returns for owners if the trend
continues over time. In addition, not only did profitability in dollars improve from last period, but the net profit
margin also improved by 26.49% -- an unusual and important combination when adding debt.
Even when a company receives a good score in this area, it is still quite important to evaluate real returns. For
example, the trend here is good but the company will still want to determine the rates of return on assets and
borrowed money. This report only indicates trends, not acceptable rates of return on borrowed funds.
The overall trend in this area seems to be positive. The company has a relatively low level of debt as
compared to its equity, and has demonstrated the ability to generate adequate earnings (before interest and
non-cash expenses) to cover its interest obligations. Since the company seems to be able to cover its current
debt obligations and is not highly levered, it may be able to borrow effectively to help foster future growth. Of
course, this must be carefully evaluated by the company’s management.
It could be helpful to carefully analyze the following question: Did the increase in debt directly help improve
profitability? The improved profitability could have been caused by other factors unrelated to debt. The answer
to this question could point the direction for optimal debt decisions in the future.
This ratio measures a company's ability to service
debt payments from operating cash flow (EBITDA). An
increasing ratio is a good indicator of improving credit
quality. The higher the better.
This Balance Sheet leverage ratio indicates the
composition of a company’s total capitalization -- the
balance between money or assets owed versus the
money or assets owned. Generally, creditors prefer a
lower ratio to decrease financial risk while investors
prefer a higher ratio to realize the return benefits of
financial leverage.
Page 6 / 17
This ratio measures a company's ability to repay debt
obligations from annualized operating cash flow
(EBITDA).
ASSETS
A measure of how effectively the company is utilizing
its gross fixed assets.
These are some very good results, at least for this section. The company considerably improved profitability
with about the same level of resources (fixed assets). This means that the company is now using its assets
more effectively. It may also indicate that the company might have some room to further grow profitability
within its current operating environment (while maintaining relatively the same level of assets). Furthermore,
note the improvement in the net profit margin. The company has become more efficient within its present
structure.
Other positive points include the above average return on assets and return on equity that the company
earned this period. If profits are moving positively against fixed assets and the company is generating good
returns on those assets, this area will continue to score very well, as has been the case this period.
This measure shows how much profit is being
returned on the shareholders' equity each year. It is a
vital statistic from the perspective of equity holders in
a company. The higher the better.
This calculation measures the company's ability to use
its assets to create profits. Basically, ROA indicates
how many cents of profit each dollar of asset is
producing per year. It is quite important since
managers can only be evaluated by looking at how
they use the assets available to them. The higher the
better.
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This asset management ratio shows the multiple of
annualized sales that each dollar of gross fixed assets
is producing. This indicator measures how well fixed
assets are "throwing off" sales and is very important
to businesses that require significant investments in
such assets. Readers should not emphasize this metric
when looking at companies that do not possess or
require significant gross fixed assets. The higher the
more effective the company's investments in Net
Property, Plant, and Equipment are.
EMPLOYEES
A measure of how effectively the company is hiring
and managing its employees.
Perhaps no other resource management area is more important than the proper management of employees,
including the hiring and releasing of staff. This company has managed its employee base well since the prior
period. The company has increased its employee base significantly, but net profitability has improved at an
even faster rate. Basically, the company has leveraged employees effectively. In the future, managers may
want to consider bringing in more people, but only if this action will continue to improve net profitability.
However, managers do need to note that all hiring decisions should be based upon an assessment of future
conditions. Consequently, it is prudent to plan for hiring in the same way that the company plans for any other
expenditure.
Page 8 / 17
INDUSTRY-SPECIFIC PERFORMANCE RATIOS
What are the Key Performance Indicators for the business?
This section of the report provides Key Performance Indicators (or KPIs) for the business being analyzed.
A KPI can be either a financial or a non-financial metric, but it is typically a number or ratio that is easily
obtained and tracked by the business as an early indicator of how well it is performing. The ratio calculations,
graphs, and benchmarks displayed below are specific to the particular industry this business operates in.
Tracking these KPIs over time as a trend and also as they relate to the industry comparison benchmark can
help lead to more effective management of the business, although it is important to be aware that a KPI may
be more of a rough measure of effectiveness than a precise indicator.
Food Costs to Sales = Food Costs / Sales
Sales Per Seat = Sales / Seats
Sales Per Square Foot = Sales / Square Feet
Seat Turnover = Customers Served per Day / Seats
Page 9 / 17
Direct Labor Ratio = Direct Labor / Sales
Food Costs to Food Sales = Food Costs / Food Sales
Beverage Costs to Beverage Sales = Beverage Costs /
Beverage Sales
Page 10 / 17
RAW DATA
12/31/2009
12/31/2010
$1,250,000
$1,600,000
Food Sales
$600,000
$850,000
Beverage Sales
$350,000
$320,000
$590,000
$742,000
$10,000
$12,000
Direct Labor
$200,000
$280,000
Food Costs
$250,000
$300,000
Beverage Costs
$130,000
$150,000
$660,000
$858,000
52.80%
53.63%
Depreciation
$4,000
$5,000
Amortization
$0
$0
$260,000
$262,000
$200,000
$200,000
Rent
$50,000
$50,000
Advertising
$10,000
$12,000
Other Operating Income
$0
$0
Other Operating Expenses
$0
$0
$396,000
$591,000
$1,500
$3,000
$0
$0
Other Expenses
$100,500
$112,000
Net Profit Before Taxes
$294,000
$476,000
Adjusted Net Profit before Taxes
$294,000
$476,000
23.52%
29.75%
$299,500
$484,000
Taxes Paid
$0
$0
Extraordinary Gain
$0
$0
Extraordinary Loss
$0
$0
$294,000
$476,000
12/31/2009
12/31/2010
$265,000
$275,000
$0
$0
$12,000
$15,000
$0
$0
Income Statement Data
Sales (Income)
Cost of Sales (COGS)
Direct Materials
Gross Profit
Gross Profit Margin
Overhead or S,G,& A Expenses
G & A Payroll Expense
Operating Profit
Interest Expense
Other Income
Net Profit Margin
EBITDA
Net Income
Balance Sheet Data
Cash (Bank Funds)
Accounts Receivable
Inventory
Other Current Assets
Page 11 / 17
Total Current Assets
$277,000
$290,000
Gross Fixed Assets
$500,000
$500,000
$0
$0
$500,000
$500,000
Gross Intangible Assets
$0
$0
Accumulated Amortization
$0
$0
Net Intangible Assets
$0
$0
$12,000
$15,000
$789,000
$805,000
$40,000
$50,000
Short Term Debt
$0
$0
Notes Payable / Current Portion of Long Term Debt
$0
$0
Other Current Liabilities
$50,000
$50,000
Total Current Liabilities
$90,000
$100,000
Notes Payable / Senior Debt
$0
$0
Notes Payable / Subordinated Debt
$0
$0
Other Long Term Liabilities
$40,000
$50,000
Total Long Term Liabilities
$40,000
$50,000
Total Liabilities
$130,000
$150,000
Preferred Stock
$0
$0
Common Stock
$0
$0
Additional Paid-in Capital
$0
$0
$432,000
$426,000
$0
$0
$432,000
$426,000
12.0
15.0
1,200.00
1,200.00
50.00
50.00
200.00
250.00
Accumulated Depreciation
Net Fixed Assets
Other Assets
Total Assets
Accounts Payable
Other Stock / Equity
Ending Retained Earnings
Total Equity
Number of Employees (FTE)
Other Non-Financial Accounts
Square Feet
Seats
Customers Served per Day
Page 12 / 17
COMMON SIZE STATEMENTS
12/31/2009
12/31/2010
100%
100%
Food Sales
48%
53%
Beverage Sales
28%
20%
47%
46%
1%
1%
Direct Labor
16%
18%
Food Costs
20%
19%
Beverage Costs
10%
9%
53%
54%
Depreciation
0%
0%
Amortization
0%
0%
21%
16%
16%
13%
Rent
4%
3%
Advertising
1%
1%
Other Operating Income
0%
0%
Other Operating Expenses
0%
0%
32%
37%
Interest Expense
0%
0%
Other Income
0%
0%
Other Expenses
8%
7%
Net Profit Before Taxes
24%
30%
Adjusted Net Profit before Taxes
24%
30%
EBITDA
24%
30%
Taxes Paid
0%
0%
Extraordinary Gain
0%
0%
Extraordinary Loss
0%
0%
24%
30%
12/31/2009
12/31/2010
34%
34%
Accounts Receivable
0%
0%
Inventory
2%
2%
Other Current Assets
0%
0%
Total Current Assets
35%
36%
Gross Fixed Assets
63%
62%
Income Statement Data
Sales (Income)
Cost of Sales (COGS)
Direct Materials
Gross Profit
Overhead or S,G,& A Expenses
G & A Payroll Expense
Operating Profit
Net Income
Balance Sheet Data
Cash (Bank Funds)
Page 13 / 17
Accumulated Depreciation
0%
0%
63%
62%
Gross Intangible Assets
0%
0%
Accumulated Amortization
0%
0%
Net Intangible Assets
0%
0%
Other Assets
2%
2%
100%
100%
Accounts Payable
5%
6%
Short Term Debt
0%
0%
Notes Payable / Current Portion of Long Term Debt
0%
0%
Other Current Liabilities
6%
6%
11%
12%
Notes Payable / Senior Debt
0%
0%
Notes Payable / Subordinated Debt
0%
0%
Other Long Term Liabilities
5%
6%
Total Long Term Liabilities
5%
6%
Total Liabilities
16%
19%
Preferred Stock
0%
0%
Common Stock
0%
0%
Additional Paid-in Capital
0%
0%
55%
53%
0%
0%
55%
53%
Net Fixed Assets
Total Assets
Total Current Liabilities
Other Stock / Equity
Ending Retained Earnings
Total Equity
*The industry common size figures shown above were taken from all private company data for companies with industry code 72211
for all years in all areas with yearly sales $1 million to $10 million.
Page 14 / 17
INDUSTRY SCORECARD
Financial Indicator
Current Period
Industry Range
Distance from
Industry
2.90
1.30 to 2.20
+31.82%
Current Ratio
= Total Current Assets / Total Current Liabilities
Explanation: Generally, this metric measures the overall liquidity position of a company. It is certainly not a
perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the
accounts listed in "current assets" are collectible. The higher the ratio, the more liquid the company is.
Quick Ratio
2.75
0.60 to 1.30
+111.54%
= (Cash + Accounts Receivable) / Total Current Liabilities
Explanation: This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are
receivable accounts included in the numerator, they should be collectible. Look at the length of time the company
has to pay the amount listed in the denominator (current liabilities). The higher the number, the stronger the
company.
Inventory Days
7.38 Days
5.00 to 25.00 Days
0.00%
= (Inventory / COGS) * 365
Explanation: This metric shows how much inventory (in days) is on hand. It indicates how quickly a company
can respond to market and/or product changes. Not all companies have inventory for this metric. The lower the
better.
Accounts Payable Days
24.60 Days 10.00 to 40.00 Days
0.00%
= (Accounts Payable / COGS) * 365
Explanation: This ratio shows the average number of days that lapse between the purchase of material and
labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations.
Lower is normally better.
Gross Profit Margin
53.63%
52.00% to 67.00%
0.00%
= Gross Profit / Sales
Explanation: This number indicates the percentage of sales revenue that is not paid out in direct costs (costs of
sales). It is an important statistic that can be used in business planning because it indicates how many cents of
gross profit can be generated by each dollar of future sales. Higher is normally better (the company is more
efficient).
Net Profit Margin
29.75%
0.50% to 6.00%
+395.83%
= Adjusted Net Profit before Taxes / Sales
Explanation: This is an important metric. In fact, over time, it is one of the more important barometers that we
look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it
carefully against industry competitors. This is a very important number in preparing forecasts. The higher the
better.
Advertising to Sales
0.75%
1.25% to 3.50%
+40.00%
= Advertising / Sales
Explanation: This metric shows advertising expense for the company as a percentage of sales.
Rent to Sales
3.13%
4.00% to 7.50%
+22.00%
= Rent / Sales
Page 15 / 17
Explanation: This metric shows rent expense for the company as a percentage of sales.
G & A Payroll to Sales
12.50%
18.00% to 30.00%
+30.56%
= G & A Payroll Expense / Sales
Explanation: This metric shows G & A payroll expense for the company as a percentage of sales.
Total Payroll to Sales
30.00%
N/A
N/A
= (Direct Labor + G & A Payroll Expense) / Sales
Explanation: This metric shows total payroll expense for the company as a percentage of sales.
Interest Coverage Ratio
161.33
4.00 to 12.00
+1,244.42%
= EBITDA / Interest Expense
Explanation: This ratio measures a company's ability to service debt payments from operating cash flow
(EBITDA). An increasing ratio is a good indicator of improving credit quality. The higher the better.
Debt-to-Equity Ratio
0.35
1.00 to 2.50
+65.00%
= Total Liabilities / Total Equity
Explanation: This Balance Sheet leverage ratio indicates the composition of a company’s total capitalization -the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a
lower ratio to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial
leverage.
Debt Leverage Ratio
0.31
N/A
N/A
= Total Liabilities / EBITDA
Explanation: This ratio measures a company's ability to repay debt obligations from annualized operating cash
flow (EBITDA).
Return on Equity
111.74%
8.00% to 20.00%
+458.70%
= Net Income / Total Equity
Explanation: This measure shows how much profit is being returned on the shareholders' equity each year. It
is a vital statistic from the perspective of equity holders in a company. The higher the better.
Return on Assets
59.13%
6.00% to 10.00%
+491.30%
= Net Income / Total Assets
Explanation: This calculation measures the company's ability to use its assets to create profits. Basically, ROA
indicates how many cents of profit each dollar of asset is producing per year. It is quite important since
managers can only be evaluated by looking at how they use the assets available to them. The higher the better.
Fixed Asset Turnover
3.20
2.00 to 8.00
0.00%
= Sales / Gross Fixed Assets
Explanation: This asset management ratio shows the multiple of annualized sales that each dollar of gross
fixed assets is producing. This indicator measures how well fixed assets are "throwing off" sales and is very
important to businesses that require significant investments in such assets. Readers should not emphasize this
metric when looking at companies that do not possess or require significant gross fixed assets. The higher the
more effective the company's investments in Net Property, Plant, and Equipment are.
Page 16 / 17
NOTE: Exceptions are sometimes applied when calculating the Financial Indicators. Generally, this occurs
when the inputs used to calculate the ratios are zero and/or negative.
READER: Financial analysis is not a science; it is about interpretation and evaluation of financial events.
Therefore, some judgment will always be part of our reports and analyses. Before making any financial
decision, always consult an experienced and knowledgeable professional (accountant, banker, financial
planner, attorney, etc.).
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