Historical Analysis

1
Historical Analysis

• Planning and Historical Analysis

2
Steps to Historical Analysis

• Spread your financial statements
• Calculate common size percentages
• Calculate key ratios
• Analyze cash flow
• Examine trends and compare to industry averages
• Identify areas of concern
• List solutions

3
Long-Range Plan

• Three year planning period
• Project income statements
• Project balance sheets
• Project cash flow
• Project ratios
• Update as the company progresses

4
Short-Range Plan

• Project monthly statements for the upcoming year
• Monthly sales patterns
• Monthly expenses
• Cash flow assumptions
• Monthly cash flow
• Predict areas of concern BEFORE they happen
• Manage profits through expenses
• Fixed assets must earn a return

5
Balance Sheet and Financing

• Make sure that you do NOT finance long-term needs
  on a short term basis
• Be cautious of financing fixed assets with
  current liabilities
• Looking at the numbers themselves may lead to
  false conclusions, always examine the numbers in
  relation to othersratios
• Risk Debt to Equity ratio
• Determine tolerance for risk and target D/E
• Compare to others in the industry
• Economy
• Long-term goals

6
Comparisons

• Trend Analysis
• Trends provide information on how the business is
  evolving and responding to market conditions as
  well as adjustments you may have madeCritical!
• Industry Comparisons
• Cant compare apples to oranges. Become familiar
  with the ratios in your industry.

7
Financial Impact Analysis

• The dollar financial impact of performance as
  reflected by the ratios
• Ex/ equitytarget Debt-to-equity target
  liabilities
• Target liabilities-actual liabilities financial
  impact

8
Income Statement

• Measure profitability
• Small changes in gross profit may have a large
  influence
• Income Statement Adjustments
• How are working owners paid?
• The fair wage
• There exist potential advantages to declaring no
  profit

9
Reasons for low gross profit

• Poor pricing
• Poor purchasing
• Location
• Inventory control
• Poor bookkeeping
• Poor manufacturing efficiency
• Poor product mix (margins are key!)

10
Budget Example

• Ruffware Dog Apparel sells dog packs (for the
  dog-on-the-go). The packs sell for 20 each.
  This year the owner (Dave) expects to sell 500
  packs in May, 600 packs in June, 500 packs in
  July, 700 packs in August, 900 packs in
  September, and 800 packs in October. On average,
  30 of the clients purchase on credit. Dave
  allows those customers to pay for their purchases
  the month after they have made their purchase.
  Daves policy is to end each month with an ending
  inventory equal to 20 of the next months
  projected sales. Dave pays 5 for each pack that
  he purchases. Daves supplier allows him to pay
  for his purchases 30 days after the purchase.
  Ruffware Dog Apparel expects to incur the
  following expenses for each month of the third
  quarter this year
• Rent (paid at the beginning of each
  month) 1,000
• Utilities (paid in the month after their
  use) 600
• Advertising (paid in the month of its use) 500
• Salaries (paid in the month following their
  occurrence) 2,500
• Dave must pay for his selling and general and
  administrative expenses in the month that they
  are incurred.

11
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