Week 9: David rudofsky%27s presentation 051017
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The document provides an agenda for a workshop on understanding and using financial statements. The workshop will cover income statements, cash flow statements, balance sheets, and how to use financial statements to run a business. It will include exercises on profit margin analysis, sensitivity analysis, calculating returns, and benchmarking. The expected outcomes are for participants to improve their ability to interpret financial statements to manage operations and plan growth. The full-day workshop will include presentations, exercises, breaks and a Q&A session.
Week 9: David rudofsky%27s presentation 051017
- 1. By David Rudofsky UNDERSTANDING AND USING FINANCIAL STATEMENTS 5/17/2017
- 2. 2Proprietary to David Rudofsky EXPECTED OUTCOMES By the end of the workshop you should have an improved: • Ability to use and interpret financial statements to manage current operatons, and plan your profitable growth • Profit and Loss • Cash Flow • Balance Sheet • Understanding how to project the cash needed to fund future growth • Knowledge of the pros and cons of debt vs. equity inancing, and what makes a company a good candidate for each
- 3. 3Proprietary to David Rudofsky TODAY’S AGENDA Introductons - 10 minutes Financial Statement Basics (slides 4-17) – 40 minutes Short Break – 5 minutes Using Financial Statements to Run Your Business – 40 min. Calculate Returns for your Business – 30 minutes Break – 10 minutes Funding Solutons (slides 32-37) – 30 minutes Review / Q&A – 15 minutes
- 4. 4Proprietary to David Rudofsky FINANCIAL STATEMENT BASICS • Income Statement • Cash Flow Statement • Balance Sheet
- 5. 5Proprietary to David Rudofsky INCOME STATEMENT BASICS • Financial results, over a period of time • Revenue – Expense = Operating Income (or EBIT)* • Recognition of expenses timed to matched the • revenue they generate, e.g.: »» Cost of Goods Sold »» Depreciation of capital equipment • Gross Profit: Revenue less “Cost of Revenue” • Operating Income +/- interest– taxes = Net Income *EBIT: Earnings Before Interest and Taxes
- 6. 6Proprietary to David Rudofsky NAME THAT INCOME STATEMENT 3 months ending 9/06 $ millions Company A Company B Company C Company D Revenue 2,690 1,433 546 1,691 Cost of Revenue 1,049 663 343 1,244 Gross Profit 1,641 769 203 447 % of Revenue 61% 54% 37% 26% Research & Dev. 313 42 0 0 Selling, General & Administrative 397 443 128 632 Other Op. Expenses 0 7 (7) (627) Operating Income 931 277 82 442 % of Revenue 35% 19% 15% 26% Taxes 306 78 24 96 Interest 21 52 19 166 Other Income/Exp. (108) 4 1 (4) Net Income 733 148 40 177 Pitney Bowes Google Harrah’s Burger King
- 7. 7Proprietary to David Rudofsky CASH FLOW STATEMENT Cash moving in and out of a Company over a period of time, broken into three categories: • Cash Flow from Operations – starts with earnings adds back depreciation, plus or minus change in working capital • Cash Flow from Investing – primarily the cash used for capital expenditures • Cash Flow from Financing – cash to or from investors and lenders
- 8. 8Proprietary to David Rudofsky CASH USED BY OPERATING ACTIVITIES OPERATING ACTIVITIES Net loss.................................................... $(61,778) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation.............................................. 997 Amortization of deferred stock-based compensation......... 2,118 Common and preferred stock issued for intellectual property............................................... 416 Common stock issued for services.......................... 1 Changes in: Inventories............................................ (6,756) Prepaid marketing expenses............................. (7,223) Other prepaid expenses and current assets.............. (999) Certificate of deposit................................. (845) Other assets........................................... (330) Accounts payable, accrued expenses and other........... 8,700 Payable to related parties............................. 370 -------- Net cash used in operating activities....................... (65,329) 1000’s omitted
- 9. 9Proprietary to David Rudofsky CASH USED BY INVESTING ACTIVITIES INVESTING ACTIVITIES Purchase of fixed assets.................................... (12,188) Purchase of preferred stock in PetPlace.com................. (2,085) Issuance of note receivable................................. (150) Purchase of intangible software and intangible assets....... (75) -------- Net cash used in investing activities....................... (14,498)
- 10. 10Proprietary to David Rudofsky CASH PROVIDED BY FINANCING ACTIVITIES FINANCING ACTIVITIES Proceeds from issuances of common stock..................... 14 Proceeds from exercise of stock options..................... 788 Proceeds from issuance of convertible notes payable......... 7,385 Net proceeds from issuances of Series A preferred stock..... 10,021 Net proceeds from issuances of Series B preferred stock..... 91,831 Repayments on capital lease................................. (16) -------- Net cash provided by financing activities................... 110,023 -------- Net increase in cash and cash equivalents................... 30,196 Cash and equivalents at beginning of period................. -- -------- Cash and equivalents at end of period....................... $ 30,196
- 11. 11Proprietary to David Rudofsky BASED ON THIS CASH FLOW, IN YEAR LEADING UP TO IPO, WOULD YOU WANT TO INVEST…… Cash flow From Inves0ng Cash flow from Financing Cash ($65 million) $110 million ($15 million) ….. and why or why not?
- 12. 12Proprietary to David Rudofsky P&L RESULTS Net sales................................................... $ 5,787 Cost of goods sold.......................................... 13,412 ---------- Gross margin................................................ (7,625) Operating expenses: Marketing and sales(1).................................... 42,491 Product development(2).................................... 6,481 General and administrative(3)............................. 4,254 Amortization of deferred stock-based compensation......... 2,118 ---------- Total operating expenses.................................... 55,344 ---------- Operating loss.............................................. (62,969) Interest income, net........................................ 1,191 ---------- Net loss.................................................... $ (61,778) STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA) PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO DECEMBER 31, 1999
- 13. 13Proprietary to David Rudofsky FOUR KEY QUESTIONS Lenders and Investors want to know: • How much money do you need? • How much money are you putting into your business? • For what will you use the money? • How will you pay back the money? (Loan plus interest or investment plus dividends/capital gains)
- 14. 14Proprietary to David Rudofsky NAME THAT BALANCE SHEET $ millions Company A Company B Company C Company D Cash 202.7 146.0 671.9 10,428.7 Accounts Receivable 2,000.0 159.0 780.8 1,082.6 Inventory 244.5 13.0 60.7 0 Fixed Assets 1,109.0 871.0 13,663.1 2,174.3 Goodwill 1,788.1 20.0 3,239.5 337.1 Other Assets 4,076.6 1,204.0 2,762.4 1,670.5 TOTAL ASSETS 9,420.9 2,413.0 21,178.4 15,693.2 Accounts Payable 3,042.8 377.0 1,649.0 1,127.7 Long Term Debt 3,349.0 1,011.0 10,725.5 0 Other Liabilities 2,045.0 426.0 2,731.3 168.4 TOTAL LIABILITIES 8,436.8 1,814.0 15,105.8 1,296.1 EQUITY 957.1 599.0 6,072.6 14,397.1 Pitney Bowes Google Harrah’s Burger King
- 15. 15Proprietary to David Rudofsky USING FINANCIAL STATEMENTS TO RUN YOUR BUSINESS • Profit Margin Analysis • Sensitivity Analysis • Calculation of Returns • Benchmarking
- 16. 16Proprietary to David Rudofsky PROFIT AND LOSS STATEMENT Things to keep in mind: • Sometimes less is more – easier to focus on less information • Make liberal use of margin analysis – i.e. % of revenue • Doing so for summary Profit and Loss will bring major themes to light
- 17. 17Proprietary to David Rudofsky PROFIT MARGIN ANALYSIS –DELI FOODS MANUFACTURER Total 2009 TOTAL 2010 TOTAL 2011 31 WEEKS 12/25/09 53 WEEKS 12/31/10 52 WEEKS 12/30/11 Sales, net $ 6,899,226 100.0% $27,209,000 100.0% $40,768,000 100.0% Cost of Goods Sold 8,056,010 116.8% 21,569,560 79.3% 29,324,720 71.9% Gross Profit (1,156,784) -16.8% 5,639,440 20.7% 11,443,280 28.1% Operating Expenses Shipping 695,956 10.1% 2,699,614 9.9% 3,948,328 9.7% Selling 910,131 13.2% 2,165,130 8.0% 2,484,078 6.1% General and administrative 1,093,790 15.9% 2,107,781 7.7% 2,165,163 5.3% Income from Operations (3,856,662) -55.9% (1,333,085) -4.9% 2,845,712 7.0%
- 18. 18Proprietary to David Rudofsky PROFIT AND LOSS STATEMENT Things to keep in mind: • Sometimes less is more – easier to focus on less information • Make liberal use of margin analysis – i.e. % of revenue • Doing so for summary Profit and Loss will bring major themes to light • Good to model Profit and Loss below and above expected customer activity level
- 19. 19Proprietary to David Rudofsky 2005 2006 Low Medium High Low Medium High # clients (a) 90 240 450 108 288 540 Revenue per client (b) $255 $255 $255 $305 $305 $305 Gross revenue $22,950 $61,200 $114,750 $32,940 $87,840 $164,700 % discounts (c.) 3% 3% 3% 3% 3% 3% Net revenue $22,262 $59,364 $111,308 $31,952 $85,205 $159,759 Cost of services (d) 2,025 5,400 10,125 2,430 6,480 12,150 Gross Margin $20,237 $53,964 $101,183 $29,522 $78,725 $147,609 per client $225 $225 $225 $273 $273 $273 % revenue 91% 91% 91% 92% 92% 92% Marketing (e) $28,125 $28,125 $28,125 $25,725 $25,725 $25,725 per client $313 $117 $63 $238 $89 $48 % revenue 126% 47% 25% 81% 30% 16% Mgmt. Salary & Benefits $25,000 $25,000 $25,000 $50,000 $50,000 $50,000 % revenue 112% 42% 22% 156% 59% 31% Other overhead (f) $34,100 $34,100 $34,100 $31,420 $31,420 $31,420 per client $379 $142 $76 $291 $109 $58 % revenue 153% 57% 31% 98% 37% 20% Operating Profit ($66,989) ($33,261 ) $13,958 ($77,623 ) ($28,420 ) $40,464 % Net Revenue -301% -56% 13% -243% -33% 25% Breakeven volume 388 392
- 20. 20Proprietary to David Rudofsky MANY HAPPY RETURNS!! • Return on Sales • Return on Assets • Return on Equity
- 21. 21Proprietary to David Rudofsky RETURN ON SALES • Return on Sales = Net Income / Revenue • Also know as Profit Margin • What it tells you: How much profit can you deliver from each dollar of sales, in % terms • Why it matters: Ultimately, profits are what make a business sustainable • What is an “attractive” Return on Sales? 5% or greater • Way to improve your Return on Sales? Focus sales efforts on higher margin products/accounts
- 22. 22Proprietary to David Rudofsky PRODUCT LINE PROFITABILITY Leatherwork Metalwork TOTAL Revenue $1,200,000 $800,000 $2,000,000 Variable Cost $1,216,667 Fixed Cost $150,000 Gross Margin % Revenue $633,333 31.7% Selling, G&A $300,000 Operating Profit % Revenue $333,333 16.7% Tax $133,333 Net Profit % Revenue $200,000 10.0% For which line should this business owner try to grow sales?
- 23. 23Proprietary to David Rudofsky PRODUCT LINE PROFITABILITY Leatherwork Metalwork TOTAL Revenue $1,200,000 $800,000 $2,000,000 Variable Cost $916,667 $300,000 $1,216,667 Fixed Cost $100,000 $50,000 $150,000 Gross Margin % Revenue $183,333 15.3% $450,000 56.3% $633,333 31.7% Selling, G&A $300,000 Operating Profit % Revenue $333,333 16.7% Tax $133,333 Net Profit % Revenue $200,000 10.0%
- 24. 24Proprietary to David Rudofsky RETURN ON ASSETS • Return on Assets = Net Profit / Avg. Assets • What it tells you: How much profit can you deliver from each dollar invested in assets, in % terms • Why it matters: It is easier to grow a business with high return on assets with internal cash flow • What is an “attractive” Return on Assets? 10% or higher • Ways to improve your Return on Assets? »» Improve management of Accounts Receivable (collections, credit, etc.) »» Reduce needed investment in Inventory (improve “turns”)
- 25. 25Proprietary to David Rudofsky RETURN ON EQUITY • Return on Equity = Net Profit / Avg. Equity • Reminder: Equity = Assets (what you own) – Liabilities (what you owe) • What it tells you: How much profit can you deliver from each dollar of equity, in % terms • Why it matters: You want to get a high return on the capital you (or others) invest in your business • What is an “attractive” Return on Equity? 15% or higher • Way to improve your Return on Equity? Take on debt, responsibly, so not all your financing is equity
- 26. 26Proprietary to David Rudofsky NAICS 333298 – $5-10 MILLION SALES - DUPONT IDENTITY Return on Equity = 19.7% Return Equity Multiplier = 2.92 Return on Assets = 6.75% Total Assets Turnover = 1.83 Sales = $6,971,302 Total Assets = $3,818,953 Fixed Assets = $1,050,212 Current Assets = $2,768,741 Profit Margin = 3.70% Profit Before Tax = $257,938 X X / / +Source: “Annual Report Studies,” 2005- 2006, Risk Management Associates
- 27. 27Proprietary to David Rudofsky CALCULATE DUPONT IDENTITY FOR YOUR BUSINESS!! Return on Equity = Return Equity Multiplier =Return on Assets = Total Assets Turnover = Sales = Total Assets = Fixed Assets = Current Assets = Profit Margin = Profit Before Tax = X X / / +
- 28. 28Proprietary to David Rudofsky BENCHMARKING PROFITABILITY 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% $1-3 $3-5 $5-10 $10-25 *$25 + Revenue of participating companies, in millions Gross Profit Margin Operating Profit Margin Source: Risk Management Associates, Annual Statement Studies, 2004-2005, all other misc food *55 companies, averaging $133 million revenue
- 29. 29Proprietary to David Rudofsky FUNDING SOLUTIONS • Obstacles to Fund Raising • Seven Critical Things • Report Card • Debt or Equity • Typical Sources
- 30. 30Proprietary to David Rudofsky OBSTACLES TO FUND RAISING What holds back small and mid-sized businesses from external fund raising? • Lack of understanding of the process they need to follow • Lack of internal resources to create the business plan • Don’t know the funding sources • Reluctance to take on debt, or sell equity “my dog ate the term sheet”
- 31. 31Proprietary to David Rudofsky SEVEN CRITICAL THINGS 1. Be credible – don’t exaggerate the opportunity 2. Gain knowledge of the industry you are planning to enter 3. Demonstrate strong justification for revenue assumption 4. Plan a salary for yourself that makes the effort sustainable 5. Seek expert help (as needed) for Balance Sheet and Cash Flow 6. Focus on capital requirements – both short and long term 7. Check your ability to withstand revenue shortfalls
- 32. 32Proprietary to David Rudofsky FUND RAISING – REPORT CARD • Able to calculate the amount of funds needed to hit various milestones as well as the ability to provide a financial return to stakeholders • Awareness of what is the most likely type of funder by stage/amount • Understand the implications of raising debt vs. equity and advantage/disadvantages of each
- 33. 33Proprietary to David Rudofsky CALCULATING FUNDS NEEDED Develop model with financial projections based on the assumptions for the following: • Sales, production, inventory plan • Capital expenditures for automation or to increase capacity as needed • Pricing and cost for each of the products/channels • Promotional and marketing costs, both introductory and ongoing • Staffing and other organizational costs • Needed working capital investments Projections by month for yr. 1, then annually, 3-5 years in total, and to include: • Profit and Loss, Balance Sheet, Cash Flow • Sources and Uses • Sensitivity Analysis
- 34. 34Proprietary to David Rudofsky DEBT VS. EQUITY CONSIDERATIONS • Debt is more tax efficient, and potentially lower cost • Equity investors are focused on earnings growth • Debt investors more concerned about safety of principal • Private companies can use equity to lure talent • Selling equity can let private company owners diversify their personal wealth
- 35. 35Proprietary to David Rudofsky TYPICAL SOURCES OF FINANCING BY STAGE OF BUSINESS Stage Re- search Commitment to Start Business Product Develop- ment Launch Early Growth Growth Problems/ Barriers Mid-Life Growth Maturity Level of Rev. 0 0 Under $100k Under $100k Under $500k $500k - $1M Over $1M Over $5M Entrepreneurs’ personal resources √ √ √ √ Relatives √ √ √ Friends, mentors, etc. √ √ √ √ √ √ Suppliers √ √ √ √ √ √ Angels √ √ √ √ Banks √ √ √ √ √ √ VC √ √ √ √ √ √
- 36. 36Proprietary to David Rudofsky REVIEW QUESTIONS • Return on Equity = _______ / Avg. Equity • Which is more tax efficient funding, debt or equity? • Equity investors are more concerned about _____? • Equity = ________ - Liabilities • Two ways to manage and improve return on assets?