Notes on Financial Statements (for practical assignment GE I)

posted 7 Oct 2012, 05:47 by Nils de Witte   [ updated 7 Oct 2012, 05:53 ]

Notes on the financial statements

Usually four simple statements are enough. Planning more than two or three years ahead is pointless.

Investment Budget and Costs Calculation

Overview of major expendirures with explanations.

Investment Budgetpre start1st year2nd yearetc
Product developmment(depriciate)
Capitalgoods(depreciate or lease)
Start-up costs(may be depreciated)
Furnishings and equipment(depreciation or lease)
Production or procurement
Marketing and Sales
Other overheads

Cost calculationeach1st year2nd yearetc
The list price minus av. discounts (excl. VAT)
minus costs for service and warranty
Minus margin distribution and sales channel
Minus outbound warehousing, insurance, freight, handling, (import)duties and taxes.
= the selling price
minus costs for sales and marketing
minus inbound storage and logistics
minus production or processing costs
minus purchasing costs
= gross margin
minus overheads
minus depriciation and amortization
minus capital costs

Cash-flow analysis

Create a quarterly overview of all payments (both received and payed). A cash flow analysis is similar to a summary of your the bank statement. Make sure to include payments on investments but also costs for incorporation, rental guarantees, acquisition costs of capital, et cetera. Also plan loan disbursements and repayments and capital disbursements and divident payments. Please make sure you are as conservative as possible with revenues from sales, which have a habit of being dissapointing in the early stages of yiur business. Consider payment periods (delays) and VAT payments.

Cash Out
Investments (capital goods, R&D, market development etc.)
Fixed and variable cost (overheads excluding depreciation, amortisation and reservations)
Guarantees and advances
Interest, (loan)repayments and dividend
corporate taxes and VAT
Total Cash Out
Cash In
Revenues from sales and deposits
Repaid guarantees and advances
Disbursements of loans, subsidy and capital
Total Cash In
Net cash per period

Profit and loss account

The profit and loss account is a statement of operating revenue and expenses, again per quarter. The difference with the cash flow analysis is that loans, capital, guarantees and investments are not included as such. Investments in capital goods are spread by amortization. This means that each time a portion of the amount invested is recorded, untill the entire investment paid off.

A simple profit and loss account is as follows:

Other income
Purchasing and/or production costs
Gross margin = (sales - purchases) / Sales
Warehousing and logistics
Other expenses
Operating profit / loss = revenue - expenses (EBITDA)
Depreciation and amortisation
Interest payments
Special costs / benefits (reservations)
Profit / loss before tax
Income tax
Net profit / loss (after tax)

If you provide profit forecasts or return on investment for investors, these are always based on Net Profits after Tax, unless explicitly stated otherwise.

Balance Sheet

The balance sheet provides an overview of the distribution of capital. On one side states what the capital is used for and the other side states where the capital originates (who it belongs to). A balance sheet is a snapshot. It states the situation at a specific moment (unlike the Cash-flow statement and the P/L). An important balance is the opening balance at the start of the company and the balance sheets just before and after new shareholders come on board.

Example of a simple balance sheet:

Assets (property)Liabilities (financing)
Real EstateEquity capital
Capital goods   from shareholders
Inventories and ordersRetained profit / loss
Loans from shareholders
Money (cash or bank)
Bank loans (short and long)
Accounts receivable Supplier credit
Other assetsOther liabilities (lease?)

Note that the total assets must equal the total liabilities. Loans from shareholders are not formally regarded as equity, but under particular circumstances they are regarded as “guaranteed capital”. Long-term liabilities such as rent and lease, do not really belong on the balance sheet, but because they are important for the solvency (and thus for the shareholders), they better be included be on the liabilities side of the balance. Investors can calculate ratios themselves. They're usually better at it than the entrepreneurs. One ratio remains important: the ratio between equity (or the guarantee capital) and loans (and long-term liabilities).

Finally, limit the financial annexes to two or three pages. They only serve to illustrate the business model.