Chapter 10 -
Financial results and projections

Although it’s essential that your business plan be solid from beginning to end, many lenders will turn first to one particular section and decide immediately whether you have any hope of getting money from them. That section is your financial information, which includes your recent financial history as well as your projections of future financial statements based on your action plan.

Along with collateral, economic factors and broad assessment of your business plan, your financial statements are key to the lender’s approval or disapproval of your loan. Your financials help answer many of the questions lenders have about your company: What’s your ability to pay? What’s your financial condition? What do the financial statements say about management performance? Bankers also look at owners’ personal financial statements and tax returns, both of which you should include in supporting materials.

Your financials provide the raw data lenders use to build financial ratios that show your liquidity, profitability, degree of leverage and efficiency. Bankers have specific “comfort zones” for each of these ratios; falling outside those ranges hurts your chances of getting financing.

If you do obtain financing, a lender may insist that you keep certain financial ratios within specified limits. These requirements are called loan covenants, and lenders use your financial statements to monitor them. Exceeding limits puts you in technical default of your loan and may obligate you to take certain actions to improve your financial situation.

Your business plan should include actual financial statements for at least the last three full years and the most recent quarters since your last annual report. It also should include projections for the next three years. The documents you should include are:

• Profit-and-loss statement (also called income statement or earnings statement)
• Balance sheet
• Cash flow statement
• Any notes or supplementary informa- tion, along with accountant’s reports

The following are the three basic financial statements and, in a very summarized fashion, what goes into them. Under-standing how these statements are created is important for your preparation of the business plan. To generate projected financial statements you must adjust portions of your existing financials to reflect changes your business plan envisions. Performing these calculations, however, also requires figuring depreciation and amortization and estimating accounts receivable and working capital changes — tasks best left to accountants. For a more detailed discussion of financial statements, see How To Use Financial Statements, also published by Commercial Carrier University.

Don’t try to complete the selected financial information section yourself — especially the projections — unless you are an accountant or you are using a top-quality business planning software package. The stakes are too high; a major error in the presentation of your actual or projected financials could doom your loan request — and that could sink your entire business plan.

Example of a P & L Statement
STATEMENTS OF EARNINGS

		Years Ended December 31	1997	1998	1999
		Operating Revenue
		Freight revenue	$6,750,000	$7,250,000	$7,423,500
		Contract carrier	645,000	675,000	698,000
		Mileage lease charges	127,500	145,000	154,300
		Sales of fuel, parts, and labor	48,500	75,300	87,500
		Vehicle rental income	15,800	17,900	19,700
		Total Operating Revenue	7,586,800	8,163,200	8,383,500
		Operating Expenses	7,227,500	7,675,300	7,823,500
		Operating Income	359,300	487,900	559,500
		Other Income (Expenses):
		Other income	65,000	45,000	59,800
		Interest Expense	(49,000)	(53,000)	(74,000)
		Total Other Income  (Expenses)-net	16,000	(8,000)	(14,200)
		Earnings Before Income Taxes	375,300	479,900	545,300
		Income Taxes	(150,120)	(191,960)	(218,120)
		NET EARNINGS	$225,180	$287,940	$327,180

P&L statement
The P&L measures your company’s revenues and expenses for a given period of time — month, quarter or year — and subtracts the latter from the former to establish the net profit or loss.

Although revenues minus expenses is the broad definition of net profit or loss, the P&L shows this equation in more detail.

• Variable (operating) expenses include driver pay and payroll taxes, per diem, fuel and fuel taxes and tires — factors that vary depending on your traffic volume. Subtracting those expenses from revenues gives you the gross profit margin.
• Overhead or fixed expenses are those you incur regardless of traffic volume. These expenses include items such as salaries for managers and office staff, owner compensation, rent and utilities. Gross profit margin minus overhead is your operating income.
• Non-operating income or expenses are items that are unrelated to the company’s operation and reflect primarily financial or investing activities. Revenue received from investments and interest paid on loan notes or factoring charges paid on accounts receivables fall into this category. Operating income adjusted by these non-operating income or expense items equals pre-tax income.
• Finally, subtract your income taxes to obtain net income.
  

SCU TRUCKING CO.
BALANCE SHEETS

		December 31	1997	1998	1999
		ASSETS
		Current Assets
		Cash and cash equivalents	$245,000	$210,000	$263,500
		Trade accounts receivables, net of allowance for doubtful accounts of $-0-	925,000	885,300	967,000
		Receivables from related parties	25,000	22,000	65,000
		Inventories	6,000	18,000	25,000
		Prepaid expenses and other	25,000	27,000	35,000
		Total Current Assets	1,226,000	1,162,300	1,355,500
		Property and Equipment (Fixed Assets)
		Transportation vehicles	1,145,000	1,367,000	1,475,000
		Transportation vehicles - capital leases	275,000	275,000	475,000
		Other vehicles and equipment	235,000	235,000	235,000
		Leasehold improvements	215,000	215,000	215,000
			1,870,000	275,000	475,000
		Less: Accumulated depreciation and amortization	(675,000)	(875,000)	(1,025,000)
		Total Property and Equipment	1,195,000	1,217,000	1,375,000
		Other Assets
		Cash value of life insurance	25,000	38,000	47,000
		Deposits	12,000	12,000	45,000
		Other	7,500	7,500	7,500
		Total Other Assets	44,500	57,500	99,500
		TOTAL ASSETS	2,465,500	2,436,800	2,830,000
		LIABILITIES
		Current Liabilities
		Trade accounts payable	189,5000	227,000	245,000
		Accrued expenses and other liabilities	95,000	86,000	103,000
		Current portion of long-term debt	125,000	132,000	175,000
		Total Current Liabilities	409,500	445,000	523,000
		Long-Term Debt, Net of Current Portion	625,000	617,000	725,000
		Total Liabilities	1,034,500	1,062,000	1,248,000
		Commitments
		STOCKHOLDERS' EQUITY
		Common Stock	125,000	125,000	200,000
		Retained Earnings	1,306,000	1,249,800	1,382,000
		Total Stockholders' Equity	1,431,000	1,374,800	1,582,000
		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	2,465,500	2,436,800	2,830,000

Balance sheet
The balance sheet measures the company’s financial position for an instant in time, usually the end of the fiscal year. It shows total company assets and how those assets are divided among equity and liabilities. By definition, assets equal equity plus liabilities.

In a sense, the balance sheet reflects a false economy. Asset values are based not on what you would get for them in the real world but on what accounting rules say they are worth. Since bankers have no choice but to use them to make decisions, however, it remains the only commonly accepted presentation of your company’s financial scorecard.

To obtain total assets, add current assets, fixed assets and other assets.

• Current assets are those generally within a year of being turned into cash and include cash, short-term investments, accounts receivable, driver advances and deposits.
• Fixed assets are generally those that you will carry on the books for more than one year and that you will benefit from in future years. Examples include power units, trailers, office equipment, buildings, shop equipment and real estate.
• Other assets are basically assets that don’t fall into the other two categories.

Assets balance with the sum of liabilities and equity. Total liabilities include current liabilities, long-term liabilities and other liabilities.

• Current liabilities are those that you will pay in the next 12 months and include short-term bank notes and lines of credit; accounts payable; payroll taxes and excise taxes due; and payroll and driver settlements due.
• Long-term liabilities are debts you expect to pay 12 months or more beyond the date of the balance sheet. These could include bonds or bank or equipment financing debt maturities scheduled more than a year away.
• Other liabilities may include loans and special debts not classified elsewhere, such as loans from shareholders.
• Equity is the amount owed to a company’s owners (except for sums classified as debt to shareholders). Included in the calculation of equity would be investments by the owners plus or minus retained earnings.

SCU TRUCKING CO.
STATEMENT OF CASH FLOWS

		Years Ended December 31	1997	1998	1999
		Cash Flows from Operating Activities:
		Net Earnings	$225,180	$287,940	$327,180
		Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization	200,000	200,000	150,000
		Gain on sale of property and equipment	-	-	-
		(Increase) decrease in:
		Trade accounts receivable	(25,000)	39,700	(81,700)
		Receivables from related parties	(5,000)	3,000	(43,000)
		Inventories	(10,000)	(12,000)	(7,000)
		Prepaid expenses and other	(5,000)	(2,000)	(8,000)
		Other assets	-	-	-
		Increase (decrease) in:
		Trade accounts payable	25,000	37,500	18,000
		Accrued expenses and other	2,000	(9,000)	17,000
		Net Cash Provided BY Operating Activities	407,180	545,140	372,480
		Cash Flows from Investing Activities:
		Proceeds from sale of property and equipment	-	-	-
		Purchase of property and equipment	(125,000)	-	-
		Proceeds (payments) of deposits	-	-	(33,000)
		Payments for increase in cash value of life insurance	(5,000)	(13,000)	(9,000)
		Net Cash Used by Investing Activities	(130,000)	(13,000)	(42,000)
		Cash Flows from investing activities:
		Proceeds from long-term debt	-	-	-
		Principal payments on long-term debt	(178,000)	(27,000)	(157,000)
		Dividends Paid	(29,180)	(540,140)	(194,980)
		Purchase of treasury stock	-	-	-
		Proceeds from issuance of common stock	-	-	75,000
		Net Cash Used by Financing Activities	(207,180)	(567,140)	(276,980)
		Net Increase in Cash	70,000	35,000	53,5000
		Cash and Cash Equivalents, Beginning of Year	175,000	245,000	210,000
		Cash and Cash Equivalents, End of Year	$245,000	$210,000	$263,500
		Supplemental Schedule of Noncash Investing and Financial Activities:
		Issuance of Debt to Acquire Property & Equipment	$ -	$222,000	$ -

Cash flow statement
The cash flow statement measures the company’s sources and uses of cash for a period of time — usually the same period as your P&L. It always shows whether cash was generated or consumed by operations, investments and financing activities during the period.

• Cash flows from (to) operating activities show whether your day-to-day activities during a given period generated or consumed cash. The cash flow statement usually determines cash flows to or from operating activities by adding to or subtracting from net income any changes in current assets and current liabilities during the period. This is an indirect method but it achieves the same number you would arrive at if you recorded every dollar that came in or went out due to operations.
• Cash flows from (to) investing activities show cash invested in the purchase of or received from the sale of power units, trailers and other equipment, as well as stocks, bonds and other securities. This total also would include cash spent on the purchase of — and, rarely, cash received from the sale of — “other assets.”
• Cash flows from (to) financing activities show cash used to pay debts or dividends or cash received from new loan proceeds or owner investment.