Beyond all the passion, the hopes and dreams, the goals, and the motivational placards on Facebook, there is cold, hard money. No business can run without it, no idea will get off the ground if you don’t know how to use it.
So how well do you know your money? Andres Pazmino wants to make sure you understand it, which is why he is giving a free workshop on how to read and understand financial statements on Tuesday, August 26, from 6 to 8 p.m. at the Regional Business Assistance Corporation office, 3111 Quakerbridge Road. Visit www.rbacloan.com.
A credit analyst for RBAC, a private non-profit agency founded in 1981 to help small businesses qualify for financial support, Pazmino grew up in Colombia and moved to the United States when he was 12. While attending Rutgers, he didn’t want to spend his summer with too much down time, so he went to work for his father, William, who is the executive director of the RBAC. The younger Pazmino began in 2008 as a packager of loans. This was when the economy bottomed out, and things were tough for the RBAC, Pazmino says.
But his baptism by fire taught him a lot about economics, and a basic understanding that a lot of newer businesspeople lack a basic understanding of their finances. In 2013 Pazmino earned his bachelor’s in environmental business science from Rutgers and is now a credit analyst at RBAC. He, like his father, also teaches a lot of courses in how to handle money, including a restaurant management course that imparts the fundamental understanding of how to operate a business that has such a rotating need for perishable inventory.
The RBAC itself targets smaller businesspeople and hopefuls, offering microloans and special loan packages that allow borrowers to put down as little as 10 percent on commercial real estate mortgages, as opposed to the 20 to 30 percent down payments required by many banks. All this, Pazmino says, comes with the opportunity for education through the RBAC’s programs, all of which are built to make sure you better manage and keep more of your money.
Reading financial statements is a big intimidator for a lot of entrepreneurs, Pazmino says. Most don’t do well looking at pages of math. But you don’t have to be an accountant of hold a degree in statistics to know how to read and use financial statements, he says. All you need to know are some basics.
Balance sheet. Financial statements start with a balance sheet, which allow business owners to calculate their assets. The simple formula is: Assets = Liability + Equity.
Scared already? Don’t be. You just need to know the terms, Pazmino says. Assets come in two flavors, current and long-term. Current, or liquid, assets are those that already are or can be turned into cash quickly. Long-term assets are those that it might take a year or more to turn into cash, such as real estate or large equipment.
Liabilities are your debts and obligations — insurances, rents, lines of credit, and taxes, for example. These also come in the short-term and long-term varieties.Short-term liabilities are those that can be settled within 12 months; long-term liabilities are those you will have for longer periods, such as a bank loan that you will pay down over 10 years.
Equity is the ownership interest you have in your business. Your total assets minus your liabilities “is what your business owes you,” Pazmino says. “That’s equity. “
Income statement. Chapter 2 of the financial statement is the income statement, which should sound entirely self-explanatory, but often hangs people up, Pazmino says. Essentially, an income statement is where you calculate much of your assets and liabilities. Here you look at your sales, your cost of goods sold (i.e., what you pay for your products vs. what you sell them for), and regular operating expenses, such as rent and utilities.
Many business owners don’t keep track of this equation, Pazmino says. “A lot of people who come in here know they made X amount of dollars, but not really how they got there,” he says. Generally, cost of goods sold should be no more than 30 percent or so, yet a lot of businesses — particularly restaurants — are operating at a COGS ratio of 50 percent.
In other words, you shouldn’t be paying more than 30 percent of the price you sell something for. “If you sell a pencil for $1, you should buy it for 30 cents,” Pazmino says.
Also, expenses such as advertising and promotion throw people. They don’t often realize that the money they spend on these entities eats into their profits. They know they made a specific amount of money in a month, but they can’t figure out why there’s so much less money on hand. It’s because they’re just not keeping track of what’s going out, Pazmino says.
Cash flow. Finally, there’s cash flow — how much money is going in and out, and how it’s getting to and from. This section figures things like net profits, operating activities, depreciations, and investments.
A cash flow statement shows changes over time, not snapshots of absolute dollar amounts at a given moment. This is important because a company needs to not just have enough cash on hand to pay the bills and salaries, but to also know how much cash there is. According to the SEC, while an income statement can tell you whether a company has made a profit, a cash flow statement can tell you whether the company actually generated cash.
If you’re still confused, this is why Pazmino and the RBAC host such programs. The financial statements workshop is just the basics, not an accounting class and not an SBDC-style study of the complete ins and outs. Pazmino doesn’t want to make financial experts out of everyone, he just wants to remove the scowls and take away the weight people feel when they face a financial statement.
Sometimes, Pazmino says, just getting people to understand what they’re looking at is enough to keep them from making the leap into business when they’re not ready to do so. Whether he teaches them some new way to handle their money or saves them from losing their shirts, Pazmino finds it rewarding to enlighten people and take away the stigma of business math.
“People who come in here often don’t have much experience,” he says. “Our goal is to make them a little less confused. We don’t want people to be surprised by their business.”