Business Initiation

MBA-ITB ENTRE 8
Week 10th
Session 1 Financial Statements for
Small Business Management
Yulianto Suharto, Apt, MBA, MSc.
Adhi Setyo Santoso, MBA (Ph.D Candidate)
Socrates Rudy Sirait, Ph.D
Session 1

Financing for Startups

9/6/2017 2
Outline

Why you need financial statements

What financial statements you need
Construction of statements
Start-up capital exercise
Labor cost exercise
Balance sheet exercise
Breakeven analysis
Ratio Analysis
Why you need it

Applying for loans

Start-up loans, operating loans/lines, etc.

Typical loan application (loan app)

2-3 years of balance sheets, income statements
Historical, projected

Impress your lender with:

Cash flow statement and breakevens
Best/worst case scenarios
Why you need it

Powerful management tools

Compare the business to the industry averages
Identify strengths/weaknesses of the business
Identify trends within the business
Identify strategies to improve
Enterprise analysis!! (woo hoo!!)

Helps with tax preparation

Improved recordkeeping
The Main Statements

Balance sheet
Listing of what you own and how you paid for it
Assets = Liabilities + Net Worth
Value of Assets = Debt financing + Owner financing

Tells lender
Liquidity and solvency position
Outstanding debts, creditors
Assets available for collateral

Not a useful day-to-day tool for managers

The Main Statements

Income Statement
Shows the economic profit for the period (year)
Revenues COGS Overhead = EBT

Cash vs accrual accounting

Lenders & managers use to assess:

Profitability, Repayment ability, and Financial efficiency
Breakevens, sensitivity analysis

Retail operations usually do a weekly income statements

The Main Statements

Cash Flow Statement (Budget)

Shows all cash coming in/going out and the timing

Helps the lender and manager:

Estimate cash surplus/deficits for each period
Shift the timing of cash flows
Determine when to schedule loan payments
Determine operating loan needs and terms

IMO the most powerful statement for managers

Using Financial Statements

Calculate ratios and measures

Compare to benchmarks (RMA, S&P, etc.)

Available at libraries
Usually at the reference desk
Robert Morris Associates Annual Statement Studies

Look for trends over time

Compare years side-by-side
Building the Statements

Alexs preferred method

1. Start-up capital worksheet
2. Labor cost budgets
3. Balance sheet (Day 1, Year 1)
4. Projected cash flow statement
5. Projected income statement
6. Projected balance sheet (Day 1, Year 2)
7. Yadda yadda yadda
Start-up Capital Worksheet

Makes you think about all the assets you will need before
opening the doors

How you will pay for each item

Owner capital (cash or net worth)
Term loan
Hard assets - machinery, equipment, real estate, improvements
Operating loan/line
Operating assets inventory, prepaids, etc.

Use a 10-25% fudge factor

Labor Cost Estimate

For each type of employee

Manager, cashier, etc.

Estimates the payroll taxes

FICA, FUTA, Medicare, workers comp.

Estimates cost of non-cash benefits

Insurance, retirement, uniform, company car, etc.

Determines $cost/hour and $value/hour

Useful in budgeting and negotiation!
Balance Sheet

Assets = Value of things used in the business

Only what you have that day!!

Current Assets = life of about 1 year or less

Cash, savings, inventory, A/Rec., prepaids, supplies, etc.

Non-current Assets = life greater than 1 year

Machinery, equipment, real estate, improvements

List each at its purchase cost

Lenders want market value instead!
Balance Sheet

Liabilities = what you owe as of that day

Current Liabilities = owed within 1 year
Operating loan, A/Pay., principal due, accrued interest
Non-current liabilities = owed AFTER 1 year
Remaining principal balances

List the actual dollar amount owed as of that day

Net Worth = owners investment as of that day

Original cash invested withdrawals + additions
Retained Earnings ~ net income from previous years
Cash Flow Statement

Cash Budget

List cash inflows WHEN they occur

List cash outflows WHEN they occur

Bottom half deals with operating loan

Thank goodness for computers!

Helps you do your projected balance sheet & income statement

Income Statement

List of revenues and expenses

Cheaters method = use total column of cash flow statement

Except for principal payments, income taxes
Add depreciation

For accrual statements

Need to account for changes in inventories, payables,
receivables, etc.
Projected Balance Sheet

From cash flow statement

Cash balance
Operating loan balance & accrued interest

Adjust other asset values as needed

Add another year of depreciation on hard assets

From income statement

Net income helps determined retained earnings

4-step process for loans

Breakeven Analysis

Measure of minimum performance needed

1,000s of ways to calculate BEs

Key equation
(Price COGS) x Qty sold Overhead = $0

BE qty. = Overhead / (Price COGS)

BE Price = Overhead / Qty Sold + COGS

Ratio Analysis

Identify strengths and weaknesses

Develop strategies to improve the financial condition

Cost control
Pricing
Marketing
Debt structure
Labor efficiency, etc.
Financial Ratios

Liquidity ability to meet current obligations

Current Ratio current assets/current liabilities

Quick Ratio (current asset inventory)/cur. liab.

Solvency ability to meet all debts

Debt/Asset total liabilities/total assets

Debt/Worth total liabilities/net worth

Financial Ratios

Repayment ability
EBIT/Interest EBIT/Interest

Debt Coverage Ratio

(EBT + other income + Depreciation + Interest Expense Taxes &
Family Living) / Annual P&I payments

Profitability
ROA EBT/Total Assets

ROE EBT/Net Worth

Financial Ratios

Financial Efficiency

Sales/Total Assets

COGS/Sales

Operating Exp/Sales

Operating Profit Margin EBT/Sales

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