«

»

Sep 09

Business Brokerage Training – Financial Statements and Their Uses

Financial statements are used in most areas of business, and in business brokerage they are crucial. This brief article covers some of the training we offer on the topic in our business brokerage training course.

The accounting equation is a standard in finance and accrual accounting, and is as follows: owned resources must be equal to the sources of funds for the resources owned.

There are two types of accounting. They are: Accrual Method & Cash Method of Accounting. The first is based on matching expenses incurred and revenue earned regardless of when the cash transaction takes place. This is the standard accounting method utilized in business today. In some smaller businesses you may still see financial statements based on the Cash Method which recognizes the economic impact of an expense incurred or revenue earned based on when the cash transaction takes place. Cash based financial statements are of little value in assessing a company’s performance.

There are a few main components when it comes to financial statements:

The Income Statement
The Balance Sheet
The Statement of Cash Flows

In the Income Statement, you will find: Gross and Net Revenue, Direct Costs, and Gross Margin. The equation used there is: Gross Revenue (Total Income produced) – Subcontractor Fees/Pass-throughs (Work performed by others) = Net Revenue (Revenue earned by the Company’s Operations). From that, you can calculate Net Revenue – Direct Costs (Costs associated with earning the revenue) to realize the Gross Profit or Gross Margin (Key financial index).

Direct costs generally vary with the Net Revenue and are referred to as variable costs. This also makes the gross margin fairly constant. Gross Margin reveals how efficient the income producing assets are being used and can reveal whether or not contracts are priced properly.

Gross Profit or Gross Margin – Operating Expenses (Company expenses that support the production of revenue but do not directly impact or generate revenue) = Operating Profit (Profit generated by the Company’s Operations also Pretax Income). From Operating Profit, you can deduct Provision for Income Taxes and find the Net Income.

Operating Profit is another key financial indicator. It is impacted only by indirect operating expenses which are generally fixed and easier to control. Some Buyers will seek companies with healthy Gross Margins and weak operating income, which can be purchased at a bargain.

The Balance Sheet Equation is as follows: Assets = Liabilities + Shareholders Equity. This covers two main areas, items the company has, and the way in which the company acquired their assets.

These two categories include:

Assets

– Cash

– Accounts Receivable

– Notes receivable

– Property, Plant and Equipment

– Goodwill

– Intellectual Property

– Prepaid Expenses

Liabilities

– Notes Payable

– Trade Payables

– Long Term Debt

Shareholder’s Equity

– Common Stock

– Additional Paid in Capital

– Retained Earnings

To conclude, these financial statements are used in valuation and as such, are important to get right. For more training on business brokerage, the Certified Business Broker training certification course is a great place to start.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Leave a Reply