A Salesperson’s Guide to Understanding

Financial StatementsJamie 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

Total Current Assets 26,000

Fixed Assets 2,500 Assets over a certain amount that are being expensed over time

TOTAL ASSETS 28,500

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

Long Term Debt - Any loans that aren't due for a year or more

Total Liabilities 17,500

Common Stock 1,000 The amount assigned to shares of stock

Retained Earnings 10,000 Accumulation of net income or loss from beginning of company

Total Equity 11,000

TOTAL LIABILITIES AND EQUITY 28,500

Example Balance Sheet

Key Considerations:

• Current ratio

• Long term debt

• Positive equity

Revenue 1,000,000 100.00%

Cost of Goods Sold 650,000 65.00%

Gross Profit 350,000 35.00%

Operating Expenses:

Commissions 140,000 14.00%

Salaries&wages 80,000 8.00%

Taxes (including payroll taxes) 16,830 7.65%

Emp Benefits (inc health insurance) 24,000 2.40%

T&E 1,700 0.17%

Adv & promo 1,700 0.17%

Rent/building exp 40,000 4.00%

Office expense 2,300 0.23%

Telephone & utilities 1,650 0.17%

Insurance 840 0.08%

Acctg & Legal 1,000 0.10%

CC Fees 1,100 0.11%

Website/Computer Exp 1,200 0.35%

Depreciation 1,400 0.14%

Other 3,450 0.35%

Total Operating Expense 317,170 37.91%

Operating income 32,830 3.28%

Example Income Statement

Key Considerations:

• Gross margin

• Commission %

• High overhead expenses

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 ?