LIQUIDITY SALES BORROWING ASSETS

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1 Sample Report prepared for: Sample Retail Inc. 1 Industry: Office Supplies and Stationery Stores Periods: 12 months against the same 12 months from the previous year LIQUIDITY PROFITS & PROFIT MARGIN SALES BORROWING ASSETS LIQUIDITY Generally, what is the company's ability to meet obligations as they come due? Operating Cash Flow Results The company is generating strong cash flow from operations this period, which is positive, especially when coupled with profits on the Income Statement. In the long run, these types of results can help boost overall liquidity conditions on the Balance Sheet, which will be discussed in the next section. Examine the sources of cash on the Cash Flows Statement and try to evaluate whether the sources will be present in future periods, beyond the periods analyzed here. General Liquidity Conditions Even though sales have increased significantly this period, the firm's liquidity position has fallen. This means that total current assets have fallen relative to short-term obligations. Remember that increasing sales can sometimes demand cash resources. The company's lower net margin and profits may also have influenced liquidity conditions to drop. At this time, the company's liquidity position is about average for the industry and as measured by using multiple analytical techniques. The company may want to move its liquidity position higher as sales grow. Firms with strong liquidity typically have a strategic advantage over the competition because they can invest more money in resources to grow the company. The company is doing a good job with its accounts payable days number. Currently, the statistic is low relative to other companies in the industry. Creditors usually examine this number. Also, inventory days and accounts receivable days are about average this period, indicating that the company does not need to make any dramatic changes at this time with regard to liquidity turnover performance. One slight issue: typically, the cash account will be strained if companies are meeting vendor accounts more quickly than the rate at which they turn inventory and collect receivables. Tips For Improvement Here are some possible actions that management might consider if appropriate (these are ideas that might be thought about): Try to establish a sufficient line of credit from the bank. There are methods to determine the amount of short-term credit needed to run the business. Talking with the bank can be helpful in this area. The business should obtain, but not necessarily use, as much financing as possible from the bank. Prepare yearly forecasts that show cash flow levels at various points in time. Consider updating these forecasts on a monthly or even bi-weekly basis. This can help predict/prepare for potential cash shortfalls that may occur in the future. Use a monthly or bi-monthly payroll schedule if possible -- so long as morale will not be adversely affected. This will allow funds to stay in the business longer. Even labor outlays are a form of shortterm financing.

2 Accept multiple forms of payment, such as credit and debit cards, to help cut down on the number of denied payments (bad checks). This helps to ensure that a business is collecting all of the money it is owed.

3 PROFITS & PROFIT MARGIN Are profitability trends favorable in the company? This period, the company saw a strong sales increase of 20.57%. Despite this increase, however, the company's net and gross profit margins have both fallen this period. On the gross margin side, the company's costs of sales have risen relative to sales, causing the gross margin decline. Although gross profit dollars have still risen due to the scope of the sales increase, companies generally do not like to see slides in gross margin because this indicates that they are losing some efficiency in the price/cost of sales dynamic. Additionally, changes in gross profitability can lever even larger changes in net profitability, so decreases here can have far-reaching effects. The company also spent considerably more on operating costs this period, to the point where net profits and net profit margins have fallen, even though gross profit dollars are higher. Higher operating costs are acceptable as the company grows and increases sales, but it is also important to see profits grow as the company invests in these types of costs. Sometimes higher sales can conceal potential future problems, such as weaker controls on operating expenses. Basically, the company's net margins are fairly healthy and are in line with the industry. This is true even though net margins have fallen. If the company can keep increasing sales and find ways to improve net margins even further, it should be quite healthy. In order to earn superior long run returns, the company will want to elevate its margins over time. Tips For Improvement Profit and loss management is all about continually finding ways to change things in the business to improve profits. Mangers might think about the following ideas/hints/tips: Monitor the costs going into the business's office supplies. With more important costs being monitored closely, many businesses forget to look at this smaller cost, and often allow it to be higher than necessary. Examine industry trade journals and other media sources for valuable information. Credible sources can often provide details on managing key elements (such as labor and materials/supplies) more effectively. Enroll the business in the right insurance program at a good cost. Evaluate alternative insurance carriers that may be able to serve the business at a cheaper cost. Meet with insurance agents to determine ways to reduce costs by evaluating coverages and deductibles. Make sure to turn off the lights and air when the business is closed. This can help save on utility expenses.

4 INDUSTRY SCORECARD Financial Indicator Current Period Industry Range Distance from Industry Current Ratio to % = Total Current Assets / Total Current Liabilities Explanation: Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible. Quick Ratio to % = (Cash + Accounts Receivable) / Total Current Liabilities Explanation: This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator (current liabilities). Inventory Days Days to Days 0.00% = (Inventory / COGS) * 365 Explanation: This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric. Accounts Receivable Days Days to Days 0.00% = (Accounts Receivable / Sales) * 365 Explanation: This number reflects the average length of time between credit sales and payment receipts. It is crucial to maintaining positive liquidity. Accounts Payable Days 5.82 Days to Days % = (Accounts Payable / COGS) * 365 Explanation: This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Gross Profit Margin 41.29% 25.00% to 37.00% % = Gross Profit / Sales Explanation: This number indicates the percentage of sales revenue that is paid out in direct costs (costs of sales). It is an important statistic that can be used in business planning because it indicates how many cents of gross profit can be generated by future sales. Net Profit Margin 3.98% 1.00% to 4.00% 0.00% = Adjusted Net Profit before Taxes / Sales Explanation: This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures how many cents of profit the company is generating for every dollar it sells. Track it carefully against industry competitors. This is a very important number in preparing forecasts. Interest Coverage Ratio to % = EBITDA / Interest Expense Explanation: This ratio measures a company's ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality. Debt-to-Equity Ratio to % = Total Liabilities / Total Equity Explanation: This Balance Sheet leverage ratio indicates the composition of a company s total capitalization -- the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a lower ratio to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial leverage.

5 ANALYTICAL PROCEDURE WORKSHEET Income Statement Data 12/31/ /31/1998 % Change Sales (Income) $1,988,969 $2,398,016 21% Cost of Sales (COGS) $1,062,096 $1,407,890 33% COGS B $500,000 $500,000 0% COGS A $562,096 $907,890 62% Gross Profit $926,873 $990,126 7% Gross Profit Margin 46.60% 41.29% -11% Depreciation $15,150 $17,150 13% Amortization $0 $0 0% Interest Expense $24,713 $29,358 19% Overhead or S,G,&A Expense $794,473 $853,411 7% Payroll / Wages / Salary $0 $0 0% Rent $0 $0 0% Advertising $0 $0 0% Payroll $479,827 $487,985 2% SG&A $314,646 $365,426 16% Other Operating Income $12,500 $5,300-58% Other Operating Expenses $354 $0-100% Net Profit before Taxes $104,683 $95,507-9% Adjusted Net Profit before Taxes $104,683 $95,507-9% Net Profit Margin 5.26% 3.98% -24% EBITDA $144,546 $142,015-2% Other Income $0 $0 0% Other Expenses $0 $0 0% Taxes Paid $20,900 $13,100-37% Net Income $83,783 $82,407-2% Balance Sheet Data Cash (Bank Funds) $25,098 $65, % Accounts Receivable $221,089 $189,873-14% Inventory $235,876 $185,638-21% Other Current Assets $25,467 $32,219 27% Total Current Assets $507,530 $473,296-7% Gross Fixed Assets $379,343 $576,040 52% Fixtures $10,350 $10,350 0% Vehicles $25,428 $25,428 0% Equipment $135,533 $182,230 34% Leasehold Improvements $8,032 $8,032 0% Bldgs $100,000 $100,000 0% Land $100,000 $250, % Accumulated Depreciation $154,629 $166,799 8% Net Fixed Assets $224,714 $409,241 82% Gross Intangible Assets $0 $0 0% Accumulated Amortization $0 $0 0% Net Intangible Assets $0 $0 0%

6 Other Assets $856 $856 0% Total Assets $733,100 $883,393 21% Accounts Payable $24,378 $22,467-8% Other Current Liabilities $23,134 $23,240 0% Current Portion of Long Term Debt $139,742 $157,182 12% Total Current Liabilities $187,254 $202,889 8% Notes Payable / Senior Debt $195,307 $305,307 56% Notes Payable / Subordinated Debt $0 $0 0% Other Long Term Liabilities $0 $0 0% Long Term Liabilities $195,307 $305,307 56% Total Liabilities $382,561 $508,196 33% Preferred Stock $0 $0 0% Common Stock $0 $0 0% Additional Paid-in Capital $45,000 $64,980 44% Other Stock / Equity $0 $0 0% Ending Retained Earnings $305,539 $310,217 2% Total Equity $350,539 $375,197 7% Z-Score % ** PLEASE NOTE. This is an abbreviated version of the report. The actual client report would contain information on each of the five sections - Liquidity, Profits & Profit Margin, Sales, Borrowing, and Assets.