IOMAS REPORT ON FINANCIAL ANALYSIS, PLANNING & REPORTING

MARCH 2001

community in GAAP standards. For each filing, companies need to use different accounting. But with XBRL, a company has all the information in one manner so it can cut and paste electronically and use only the relevant pieces of the information for each of those reports. XBRL doesnt cause the company to report information it doesnt intend toyou remain in control of whats reported. Where XBRL Stands At this stage of development, weve completed our first specification for commercial and industrial companies to provide them with the tags or elements to convert their information into XBRL, reports de la Fe. Its available for whoever wants to use it. The consortium is expanding that specification for financial services companies such as banks, investment companies, and mutual fund companies. All the 30-plus companies that are members of the consortium are committed to using the XBRL functionality. These are companies such as Dow Jones & Company, Inc., Fidelity Investments, First Call, Inc., Oracle Corporation, Reuters Group LP, and Standard & Poors. What to Do Now 1. Learn more. Find out more about XBRL and how it could help your company. The XBRL Web site (www.xbrl.org) will be useful. 2. Talk to users. Try to find out from users of your financial reports (analysts, investors, and so on) whether they would like to use the XBRL format. 3. Get involved. Consider getting their companies involved in the industry sector XBRL taxonomy development efforts. That is, the company should get involved with developing the agreed-upon vocabulary for its industry sector. 4. Contact IT. Touch base with your IT department or financial systems manager to find out when XBRL will be available from your software vendor. 5. Plan. Begin planning how to implement enhancements to your existing reporting process to leverage XBRL and the Web.

Company in Trouble:

New CFO Uses Ratio Analysis & Cash Budget to Relieve Profit Squeeze
If you are about to walk into a troubled company, take heart. Its a well-worn path with many success stories indicating it can be a wise career move. With that as a background, weve started a new feature that will offer guidance on a case-by-case basis for handling a variety of situations. Acme Company has recently been operating on a put-out-the-fire mentality without a great deal of formal financial planning. The CEO feels that the companys financial picture could be improved, so he brought in a new CFO in January 2001. The CFO took a look at the 2000 financial statements (see Exhibits 1, 2, and 3) and asked the financial analyst to calculate several key financial ratios and compare them with industry standards. As you can see in Exhibit 4, the ratios reveal
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Exhibit 1. Acme Company Income Statement FYE December 31, 2000

Actual 2000 $1,200,000 900,000 300,000 84,000 30,000 60,000 174,000 126,000 39,600 86,400 25,920 60,480

Sales Cost of Goods Sold Gross Profit Operating Expenses Variable Cash Oper. Exp. Fixed Cash Oper. Exp. Depreciation Total Operating Expenses Net Income Before Interest and Taxes Interest Net Income Before Taxes Taxes Net Income

IOMAS REPORT ON FINANCIAL ANALYSIS, PLANNING & REPORTING

MARCH 2001

Company in Trouble:

New CFO Uses Ratio Analysis & Cash Budget to Relieve Profit Squeeze
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that will bring in $75,000 (original cost of $140,000 and accumulated depreciation of $65,000). Funds can also come from operations. As for the rest of the funds, additional shortterm loans would be too expensive, as would factoring of accounts receivable or an inventory loan. Therefore, the CFO hopes that the existing cash ($10,000) plus cash from operations can tide the company over until March, when a longterm loan will replace the short-term note.
Exhibit 3. Acme Company Sources and Uses of Funds December 31, 1999 to December 31, 2000
Sources of Funds Funds from Operations Net Income $60,480 Depreciation 60,000 Decrease in Cash Increase in A/P Short-Term Notes Increase in Accrued Exp. Total Sources Uses of Funds Dividends Paid Purchase Plant & Equip. Increase in A/R Total Uses

some problems with liquidity, leverage, and coverage. The deteriorating financial condition of the company can be traced to a major purchase of fixed assets ($280,000) in 2000. These purchases were financed mostly with a short-term bank note. This led to relatively high interest charges and a substantial increase in depreciation expense. This, in turn, contributed to the companys troubles with its profitability ratios. Financial Strategy Based on the analysis, the CFO concludes that immediate attention should be given to the shortterm note. The recovery plan is twofold: pay off $194,000 of the short-term note thats due in March 2001 and build up the cash balance to $40,000. Part of the needed funds can come from a planned sale of fixed assets later in January
Exhibit 2. Acme Company Comparative Balance Sheets December 31, 1999-2000
December 31, 1999 Assets Cash Accounts Receivable Inventory Total Current Assets Plant & Equipment Less: Accumulated Depreciation Total Fixed Assets Total Assets Liabilities and Net Worth Accounts Payable Short-Term Notes Accrued Expenses Total Current Liabilities Long-term Debt Common Stock ($10 par) Capital Surplus Total Liabilities & Net Worth $50,000 100,000 150,000

120,480 40,000 2,000 174,000 4,000 340,480 40,480 280,000 20,000 340,480

December 31, 2000 $10,000 120,000 150,000

300,000 1,200,000 (500,000) 700,000 1,000,000 40,000 50,000 20,000 110,000 200,000 200,000 490,000 1,000,000 42,000 224,000 24,000 1,480,000 560,000

280,000

920,000 1,200,000

290,000 200,000 200,000 510,000 1,200,000

IOMAS REPORT ON FINANCIAL ANALYSIS, PLANNING & REPORTING

MARCH 2001

The CFO asks the analyst to figure out how much of a long-term loan will be needed, given all of the other incoming cash flows. Making the Strategy Work To determine the amount of the long-term loan, the analyst needs to prepare a cash budget for the first quarter of 2001. To do this, he or she needs to gather some information, such as:
q sales for November and December of 2000 were $100,000 and $150,000, respectively;

sale (with negligible bad debt);

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Exhibit 4. Acme Company Financial Ratio Analysis December 31, 2000

Acme Liquidity: Current ratio Quick (acid test) ratio Average collection period Inventory turnover Total asset turnover Fixed asset turnover Leverage: Debt ratio Times interest earned Profitability: Gross profit margin Net profit margin Return on total assets Return on net worth 0.97 0.45 60 days 6 1 1.3 41.00% 3.23 25.00% 5.04% 5.04% 8.51% Industry Standard 3.5 1.5 60 days 5 1 1.43 45.00% 4.1 25.00% 8.00% 8.00% 14.55%

projected sales for the first three months of 2001 are $90,000 for each month; April sales are projected to be $100,000;
q q traditionally, sales have been 60% credit and 40% cash;

half of credit sales are collected one month after the sale and the rest two months after the
q

Exhibit 5. Acme Company Cash Budget and Analysis of Required Borrowing 1Q01 ($000s)
Cash Budget January Cash Receipts Sales $90 Cash Sales (40%) 36 Collections* 1st mo. (50% cr. sales) 45 2nd mo. (50% cr. sales) 30 Total Cash from Sales 111 Sale of Fixed Assets 75 Total Cash Receipts 186 Cash Disbursements Purchases** (75% of next months sales) 67.50 Payments on Purchases (2-mo. lag) 112.50 Variable Cash Oper. Exp. (7% of sales) 6.30 Fixed Cash Oper. Exp. 2.50 Interest (ST Notes, 12% per annum) Repayment of ST Notes Total Cash Disbursements 121.30 Net Monthly Change 64.70 Cash Position Analysis: Beginning Cash Balance 10.00 Net Monthly Change 64.70 Borrowing Needed Ending Cash Balance 74.70 * Sales for November and December are $100 and $150, respectively. ** Sales for April estimated at $100. February $90 36 27 45 108 108 67.50 67.50 6.30 2.50 76.30 31.70 74.70 31.70 106.40 March $90 36 27 27 90 90 75.00 67.50 6.30 2.50 6.72 194.00 277.02 (187.02) 106.40 (187.02) 120.62 40.00

IOMAS REPORT ON FINANCIAL ANALYSIS, PLANNING & REPORTING

MARCH 2001

Company in Trouble:

Performance Measurement:

New CFO Uses Ratio Analysis & Cash Budget to Relieve Profit Squeeze
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RMA Financial Ratios Benchmark DSO, Debt, Liquidity & Profitability

One of the most fundamental tools to gauge corporate financial performance is ratio analysis. The oldest and most respected source of industry financial ratios is Annual Statement Studies complied by Risk Management Associates (formerly Robert Morris Associates), a nonprofit association for commercial bank lenders. The 2000-2001 edition contains income statement and balance sheet data and financial ratios for industries representing over 600 SIC codes. The data is based on fiscal year financial statements dated between April 1, 1999 and March 31, 2000. The accompanying sidebar contains the most widely used ratios for a sampling of industries. How Theyre Calculated Often, ratios are referred to with slightly different names depending on the source. Therefore, here are RMAs ratios and how theyre calculated. This will help you develop consistent ratios to determine how your company is performing compared to its counterparts. Current ratio: Current assets divided by current liabilities gives a rough idea of a companys ability to meet its current obligations. The higher the ratio, the greater the cushion. Quick ratio: Also called the acid-test, this is cash and equivalents plus trade receivables divided by current liabilities. This is a more conservative measure of liquidity, and a value of less than one implies a dependency on inventory or other short-term assets to satisfy current obligations. Sales/Receivables: Net sales divided by trade
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purchases are 75% of sales and are made one month in advance, with payment following in 60 days;
q q variable cash operating expenses (including selling costs, wages, advertising, and miscellaneous cash expenses) are 7% of sales and are paid in the month incurred;

fixed cash operating expenses are roughly $2,500 a month and are paid in the same month;
q

taxes are paid quarterly (April for the quarter ended in March, and so on) based on estimated earnings for the quarter;
q

interest expense for the notes payable is 12% and is payable quarterly in March and June;
q

interest on the outstanding long-term debt is at a rate of 6.06% and is paid semiannually in June and December; and
q

the new term loan is expected to carry a 9.5% rate of interest, with interest payable semi-annually beginning in September, and the entire principal amount due in five years.
q

With this data, the analyst can complete the cash budget and determine how much long-term debt is needed to carry out the financial plan. Results of the Cash Analysis Based on the cash plan (See Exhibit 5), Acme needs to borrow $120,620 in March in order to pay off $194,000 in short-term notes and maintain a cash balance of $40,000. At this point, a cash budget for the following quarter will be helpful, as would pro forma income statement and balance sheet for the first half of the year.
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