Small Business

There are basically three levels of financial statement services a CPA can provide. They are a Compilation, a Review and an Audit(sometimes referred to as an examination). The least expensive service is the Compilation and is generally accepted by banks for small personal loans, mortgages and small business loans, where an individual is required to guarantee the loan personally.

Financial statements provide a starting point for understanding a company. Ratio analysis is another tool to monitor a companys condition. It involves the methods of calculating and interpreting financial ratios to assess the companies performance and status. Each industry has its own different acceptable levels for its ratios. It is hard to interpret ratios properly without using industry averages.

Operating Income divided by Net Sales = ROROS Ratio. This ratio illustrates how much net profit was derived from every dollar of sales. It helps indicate if the business is generating enough sales to cover fixed costs and leave an acceptable residual profit.

The Gross Profit Margin measures the percentage of each sales dollar remaining after the business has paid for its goods. The higher the gross profit margin the better and the lower the relative cost of merchandise sold. Sales minus cost of goods sold divided by sales = Gross Profit Margin.

The P/E Ratio reflects the amount investors are willing to pay for each dollar of the business's earnings. The higher the P/E Ratio, the greater the investors confidence in the firm. The P/E ratio represents the "multiple" that the stock market places on the earnings of a company. Market price per share of common stock divided by Earnings per share of common stock = P/E Ratio.

This ratio illustrates how many times your initial inventory is replaced in a year. Cost of Goods Sold divided by Average Inventory = IT Ratio. Also Days in the year divided by the Inventory Turnover Ratio = Number of days in Inventory Ratio. Faster turnovers are viewed as a positive trend. The result is meaningful only when compared to other business's in the same industry or the same business's past inventory turnover.

The gross profit on inventory is divided by the average profit of the inventory. Low end items may be marked up 500% while a high end is only 30%. Usethe average profit across all inventory items. If the average is 10, that means for every dollar you invested, you earned $10 more in profit.

Why are you selling your business? How many years have you been in business? How many years have you been in business at the present location? Did you create the business or did you buy the business from someone else? Do you have a formal sales agreement prepared that I could have my lawyer look at? Are you a sole proprietorship, partnership or S or C corporation? Do you have tax returns and financial statements that my local CPA can look at? Which bank do you do business with? What types of insurance must your business carry? How many hours did you work per week in your business? How many employees do you have? Do family members work in your business? Will the family members stay after the sale? What type of entity are you? Are you willing to take a note and be paid over time instead of all at once? Will you stay and work for a while after the business is sold? How is inventory controlled? How often do you take a physical inventory?

Does the franchise give you an exclusive territory for the length of the franchise period, or can the franchiser sell other franchises in your territory? Under what circumstances can you end the franchise contract, and at what costs to you? How many years has the firm offering you the franchise been in operation? If you sell your franchise, will you be compensated for your goodwill or will it be lost to you? Does the company offering you this franchise have a reputation for honesty and fair dealing among its franchisees? Has the franchiser shown you any certified figures indicating exact net profits of one or more of its members, and have you personally checked the figures with these people? Will the franchiser assist you with: a) A management training program? b) An employee training program? c) A public relations and advertising program? d) Capital? e) Credit? f) Merchandising ideas? If needed, will the franchiser assist you in finding a suitable location? Is the franchising firm adequately financed so that it can carry out its stated plans? Does the franchiser have experienced management, trained in depth? What can the franchiser do for you that you cannot do for yourself? Has the franchiser investigated you carefully enough to assure itself that you can successfully operate at a profit to both of you? Does your state have a law regulating the sale of franchises, and has the franchiser complied with that law to your satisfaction? How much equity capital will you need to purchase the franchise and operate it until your income equals your expenses?