Microloan Readiness Series Profit and Loss Today’s Agenda: Financials’ Role in Lending ABCs of P&L Tools for P&L Analysis What a lender looks for.

Microloan Readiness SeriesProfit and LossToday’s Agenda:

Financials’ Role in Lending

ABCs of P&L

Tools for P&L Analysis

What a lender looks for

Understanding Financials

Increase your ability to see what a lender wants

Quality of your referrals affects your agency’s relationship with lenders

Prep clients so that they have a good chance of succeeding – don’t want to discourage

What Can Financials Tell Us?

Profitable

Pricing to cover all costs

Managing inventory well

Sufficient equity in business

Which products contribute most to the bottom line

Can business finance its own growth or need financing

If yes: how much, what type, does biz qualify

And much more!

Which “financials”?Example levels of financial information required

1. Loans under $15,000: 2 months bank statements, one pay stub, one year tax returns

2. Loans between $15,000 - $50,000: 3 bank statements, 2 years tax return, one year P&L

3. Over $50,000: 4 bank statements, 3 years tax returns, 3 years P&L, 3 years Balance Sheets

Each level requires increasing skills to create quality financials and to interpret for credit analysis.

Two Caveats

QuickBooks P&L – high bar for start-up micro

Microlenders often just use bank statements, pay stubs, tax return

Smart phone apps for basic income and expense: Freshbooks, Wave, SageOne

Takes more than one hour webinar The how and what for creating a quality P&L

How to interpret for lending capacity

as well as business decisions

What are lenders looking for? Accurate: Clean P&L with proper set up and

consistent data input

Business success: Growing sales, margins good for industry, smart expenditures…

Net Profit and Cash Flow

Getting to Quality P&L

Know proper QuickBooks set up* Know Profit & Loss and Balance Sheet

rules/structure Data entry accurate and consistent Might need to create new QB company

*Includes knowing what other reports owner needs for management

Common QB Mistakes

Overlapping income/expense accounts Too many income/expense accounts Relationship between COGS and inventory Debt: entered as income; principle/interest not split Balance Sheet accounts on P&L Equity accounts don’t match legal

structure

Profit and Loss

The Profit and Loss Statement measures revenues and expenses over a period of time

Measures profitability: whether the business is making a profit on what it sells

Profit and Loss

Shows the ability to successfully manage the buying and selling process.

  Measures the ability to grow,

support owner and repay debt service.

Important report from accounting software program

Profit and Loss Structure

Basic formula

+ Sales

- Cost of Goods Sold

= Gross Profit

- Overhead

= Net Profit

Sales

Income = Sales = Revenue

The revenue earned from the sale of goods and services.

Cost of Goods Sold

Expenses incurred that are directly associated with the production or service delivery for sales in that period.

Also called variable expense.

Cost of Goods Sold

Manufacturing: Direct materials, direct labor, shipping

Retail: Wholesale cost of inventory, shipping

Service: Usually don't have COGS, but in some cases labor and other costs are directly associated with service delivery.

Gross Profit

Gross Profit = Sales - COGS

Demonstrates the ability to control direct production costs:Labor and materials

Also indicates viability of pricing

Overhead

Those expenses which do not vary directly with production. Also called fixed expenses.

Everything except direct expenses.

All expenses needed to run the business, keep the doors open, etc.

Tailored to each business

Don’t use QB suggested accounts without editing – keep total P&L to one page

Net Profit

Net profit = Gross Profit - Overhead

Pays for (sole proprietor)

Owners Draw

Future expansion

Principal Loan Repayment

Income Taxes

Bad Company

Let’s look at a poorly structured P&L, typical of many microenterprises

How many errors can you find? Could a lender proceed with this? How would you help this borrower get to clean

P&L?

Key P&L Indicators

Sales: Growing

COGS: Stable / Falling

Gross Profit: Rising

Net Profit: Rising

Cash available to pay new debt service beyond owner’s draw, taxes and existing debt

Covering Debt Service

Global Cash assessment (Oct. 16th)

Looking for 1.25 coverage for monthly loan payment

Trend Analysis

Trend Analysis: Create spreadsheet to compare last 3 years to see trends

Dollar Analysis: Measure progress by looking at total sales, expenses and net profit side by side in a spreadsheet

Margin Analysis

Convert the P&L numbers into percentages of total sales for more complete analysis.

COGS/Sales = COGS margin

Overhead/Sales = Overhead margin

Net Profit/Sales = Net Profit margin

Again, each year, side by side in a spreadsheet

Trend & Margin Analysis

Track productivity

Analyze business management

Set goals

Bring more $ to bottom line

Best way to test for debt service capacity for larger deals

Ideally have three years of financials for trend and margin analysis

Good Sample P&L

Let’s look at a accurate, well-structured P&L Let’s analyze at dollars, trends and margins to

gauge business performance and “lendability”

Borrowing ‘Red Flags’

Use short-term financing or operating cash for long-term assets

Don’t invest in such a way as to increase productivity, efficiency and profitability

Use loan funds to compensate for low profitability - credit card

Discussion

Questions? Other perspectives to offer?

If you would like more in-depth training on financial statements and credit analysis, please contact me.

Susan Brown,

[email protected]

530-925-2530