A Salesperson’s Guide to Understanding Financial Statements Jamie Watson, MAS, CPA Why is it important for salespeople to understand financial results? • Having financial knowledge will impress your clients. • The “why” of your sales pitch will be more persuasive. • You will gain an advantage over your competitors. • You are more likely to advance quickly in your career. • Understanding client financial triggers will make you more empathetic to a customer’s decision making process. • You will be better equipped to run your own company. What We Will Cover
• What comprises a set of financial statements • How financial statements are used • Key elements/definitions • Interpretation of financial statements/ratios • Industry norms Basic Financial Statements
• Balance Sheet • Income Statement • Statement of Cash Flows • Statement of Owner’s Equity Balance Sheet vs. Income Statement
• Balance sheet is a snapshot of what assets and liabilities have accumulated from the inception of the company • Assets = Liabilities + Owner’s Equity
• Income statement shows revenue, COGS and other expenses • Revenue – COGS = Gross Profit • Gross Profit – Operating Expenses = Net Income Cash 1,000 Accounts receivable 20,000 Amounts owed for shipped product but not paid Inventory 5,000 Product that has not been sold yet Example Total Current Assets 26,000 Fixed Assets 2,500 Assets over a certain amount that are being expensed over time
Balance Sheet TOTAL ASSETS 28,500
Key Considerations: Accounts payable 15,000 Amounts owed to vendors for products or services Accrued payroll 2,500 Amounts owed for payroll that haven't been paid Total Current Liabilties 17,500 • Current ratio Long Term Debt - Any loans that aren't due for a year or more • Long term debt Total Liabilities 17,500 Common Stock 1,000 The amount assigned to shares of stock • Positive equity Retained Earnings 10,000 Accumulation of net income or loss from beginning of company Total Equity 11,000
TOTAL LIABILITIES AND EQUITY 28,500 Revenue 1,000,000 100.00% Cost of Goods Sold 650,000 65.00% Gross Profit 350,000 35.00% Operating Expenses: Example Commissions 140,000 14.00% Salaries&wages 80,000 8.00% Taxes (including payroll taxes) 16,830 7.65% Income Emp Benefits (inc health insurance) 24,000 2.40% T&E 1,700 0.17% Statement Adv & promo 1,700 0.17% Rent/building exp 40,000 4.00% Office expense 2,300 0.23% Key Considerations: Telephone & utilities 1,650 0.17% Insurance 840 0.08% • Gross margin Acctg & Legal 1,000 0.10% CC Fees 1,100 0.11% • Commission % Website/Computer Exp 1,200 0.35% Depreciation 1,400 0.14% • High overhead expenses Other 3,450 0.35% Total Operating Expense 317,170 37.91%
Operating income 32,830 3.28% Gross Margin vs. Net Margin vs. Mark-up
• Gross Margin = Customer Price – Invoice from Vendor
• Net Margin/Net Income = Gross Margin – Operating Expense
• Mark-up % = Gross Margin Invoice from Vendor Profit vs. Cash Flow Cash flow is NOT the same as profit/net income • Accrual vs. cash based accounting • Collection of accounts receivable • Investment in inventory • Investment in fixed assets • Loan borrowings/repayments Common Financial Statement Terms
• EBITDA – Earnings before interest, taxes, depreciation and amortization • Working Capital – Current assets – Current liabilties • Accrued Liabilities – Liabilities that are due but not yet paid • Depreciation – A non-cash item that reflects the wear and tear on equipment and provides for a deduction on an annual basis • Other ?