smart financial management - from part 3 of the free webinar series, accelerating your business...

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Accelerating Your Business Growth

Webinar Series

Presented by:

Guest speakers: John Harmon, SCORE Mentor, Fairfield County, CT

Part 3 of 3: Smart Financial Management

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Key Questions • What are the key contributors to my profitability?

• Are my costs in line with my business model?

• How well do my assets contribute to profitability?

• How can I improve my cash flow?

• What are my financial risks and how can I manage them?

• What is the financial value of my business strategy?

• What is my business worth?

• The Tools – an Overviewo Accounting Basicso The Profit and Loss Statemento The Balance Sheeto The Cash Flow Statemento Statement Interactionso Common Problems

• Financial Ratios and their Useso Profitabilityo Liquidityo Efficiency

Agenda

Growth Plan Tools• The Income Statement – a running record of company

business transactions Unit Sales and Revenues Expenses Net Profit

• The Balance Sheet - a snapshot of assets and liabilities Assets – What you own that’s used in the business Liabilities – What you owe Equity or Net Worth – the difference between the two

• Cash Flow Statement – a monthly account of cash coming in and going out A sale is not the same thing as getting paid Positive cash flow means cash remaining for other things Negative cash flow means cash must come from elsewhere Tracks seasonality of cash accumulation

Accounting Basics

• Cash vs. Accrual Accounting

• Recognizing Income and Expenses

• Chart of Accounts

• Incurring an Expense vs. Buying an Asset

• Depreciation and Amortization

Revenues

Unit Sales 4350

Dollars 1,225,867$

Cost of Goods Sold

Materials 123,589$

Labor 476,632$

Shipping and Handling 45,220$

Total 645,441$

Gross Margin

Dollars 580,426$

% 47.3%

Expenses

Salaries and Wages 268,000$

Marketing 5,000$

Sales 90,000$

Travel 5,500$

Facilities 75,000$

Total 443,500$

Operating Profit

Dollars 201,941$

% 16.5%

Interest 58,000

Taxes 50,379

Net Profit

Dollars 93,562

% 7.6%

The Income StatementRevenues• Your customers• Your market segments• Your products and services

Cost of Goods Sold (COS)• Direct, immediate impact on customers• Manage for cost and quality

Gross Margins• The basis for company profitability• 35 – 70%, depending on industry• Determining your break even point

SG&A• Indirect impact on customers• A balance of short and long term needs• Risk Management Association

Net Profit• Indirect impact on customers• Not the only measure of business

success

The Balance Sheet

ASSETS

CURRENT ASSETS

Cash 15,214$

Accounts Receivable 61,679$

Allowance for Bad Debt (4,500)$

Prepaid Expenses 500$

TOTAL CURRENT ASSETS 72,893$

FIXED ASSETS

Computers & Equipment 21,750$

Furniture 6,100$

Other Equipment 3,550$

TOTAL FIXED ASSETS 31,400$

TOTAL ASSETS 104,293$

LIABILITIES & SHAREHOLDERS EQUITY

CURRENT LIABILITIES

Accounts Payable 15,794$

Payroll Tax Accured 3,355$

Current Portion of Long-Term Debt1,741$

TOTAL CURRENT LIABILITIES 20,889$

LONG-TERM LIABILITIES

ABC Bank Loan - Computers 8,759$

TOTAL LONG-TERM LIABILITIES 8,759$

TOTAL LIABILITIES 29,648$

CAPITAL STOCK 1,000$

RETAINED EARNINGS 34,894$

CURRENT YEAR NET INCOME 38,750$

TOTAL NET WORTH 74,645$

TOTAL LIABILITIES AND EQUITY 104,293$

Life of 12 months or less

Equal By DefinitionFixed Assets decline at Depreciation Rate

(What you use in the business)

(What you owe)

(Net Worth )

The Cash Flow Statement

• A key measure of business viability

• A key indicator of credit requirements

• A poor reflector of business operations.

Jan Feb Mar Apr May Jun

Beginning Cash Balance 15,214 - - 1,224 5,244 9,263

Cash Inflows

Income from Sales 37,686 37,686 37,686 37,686 37,686 37,686

Accounts Receivable - 30,149 37,686 37,686 37,686 37,686

Total Cash Inflows 37,686 67,836 75,373 75,373 75,373 75,373

Cash Outflows

Investing Activities

New Fixed Assets Purchases 1,000 1,000 1,000 1,000 1,000 1,000

Inventory Addition to Bal.Sheet - - - - - -

Cost of Sales 27,046 36,062 36,062 36,062 36,062 36,062

Operating Activities

Salaries and Wages 27,898 27,898 27,898 27,898 27,898 27,898

Fixed Business Expenses 6,150 6,150 6,150 6,150 6,150 6,150

Taxes - - 2,796 - - 2,775

Financing Activities

Loan Payments 158 158 158 158 158 158

Line of Credit Interest - 62 86 86 86 86

Line of Credit Repayments - - - - - -

Dividends Paid - - - - - -

Total Cash Outflows 62,252 71,330 74,149 71,353 71,353 74,128

Cash Flow (24,566) (3,494) 1,224 4,020 4,020 1,245

Operating Cash Balance (9,352) (3,494) 1,224 5,244 9,263 10,508

Required Cash Balance

Line of Credit Drawdowns 9,352 3,494 - - - -

Ending Cash Balance - - 1,224 5,244 9,263 10,508

Line of Credit Balance 9,352 12,846 12,846 12,846 12,846 12,846

How do they work together?

Income Statement Balance Sheet Cash Flow Statement

• An accounting of

business transactions:

revenues, expenses,

and earnings

• The assets a

company needs to

run the business and

how it pays for them.

• A Statement of the

cash the business

generates and how.

Cash from sales

Uncollected Sales

Assets that

generate

sales

Cash from

Receivables

Cash for expenses

Expenses

that generate

liabilitiesDebt

Reduction

Common Problems

• Poorly structured chart of accounts.

• Inconsistent categorization of revenues and costs.

• Failure to monitor book keeping entries.

• Insufficient revenue and profitability detail.

• Insufficient tracking of key balance sheet items.

• Insufficient management of cash flow.

Financial Ratios

• Profitability Gross Profit Operating Profit Return on Assets Fixed Asset Turnover

• Liquidity (Debt coverage) Current Ratio Quick Ratio Days of Cash

• Efficiency (Cash Conversion) A/R Turnover A/P Turnover Inventory Turnover

Profitability Ratios• Gross Profit: Revenue less COGS or COS

The first Level of profitability Varies widely from industry to industry Used to calculate Break-Even Point.

• Operating Profit: Earnings before interest and taxes Profits coming from operations Doesn’t include YTD interest payments and taxes Best descriptor of operating capability

• Net Profit: Profit after all expenses deducted May or may not be a meaningful description of business success

• Return on Assets: Net profit ÷ Total assets Represents asset contribution to profitability Varies widely from industry to industry

• Fixed Asset Turnover: Revenues ÷ Total Fixed Assets Fixed asset contribution to revenues Not meaningful for companies with low fixed assets

Profitability Ratios

REVENUE # Revenue % of Rev

Themed Events/Celebrations 15 94,500$ 11%

Plated Events 60 228,000$ 26%Buffets 45 234,000$ 27%

Hors d'Oeuvres 52 124,800$ 14%

Non Profit Events 10 90,000$ 10%

Weddings 4 102,400$ 12%

NET REVENUE 186 873,700

COST OF GOODS SOLD (COGS) COGS %

Themed Events/Celebrations 47,250 50%

Plated Events 136,800 60%

Buffets 133,380 57%

Hors d'Oeuvres TOTAL COS 72,384 58%

Non Profit Events 60,300 67%

Weddings 56,320 55%

Total 506,746 58%

GROSS PROFIT (Margin) 366,954 42.0%

SALES, GENERAL & ADMINISTRATIVE EXPENSES:Fixed Expenses:

Rent 23,820

Telephone, Internet, Utilities 5,430

Repairs and Maintenance 1,674

Equipment Depreciation 5,500

Vehicle leases 6,200

Total 42,624 4.9%

Labor and Benefits Expenses:

Compensation of Owner/Officer 75,000

Salaries and Wages 180,000

Payroll Taxes 20,400

State Unemployment Taxes 5,237

Total 280,637 32.1%

Administrative Expenses:

Office and Computer Supplies 450

Postage and Freight 300

Insurance 497

Professional Fees 1,440

Bank Charges 197

Testing 4,975

License & Fees 575

Advertising & Marketing 5,000

Other 5,937

Total 19,370 2.2%

Total SG&A 342,632 39.2%

SG&A Margin % 39.2%

OPERATING PROFIT (Margin) 24,322 2.8%

DEPRECIATION, INTEREST AND TAXES

Interest Expense 6,960

Depreciation 17,240

Taxes 34

Total 24,234

NET INCOME (Margin) 88 0.0%

Riverhead Parties and Events

Statement of Income (Profit & Loss)

Profitability Ratios

Return On

Assets$88 ÷ $349,303 = .02%

Net Income

Fixed Asset Turnover

$873,700 ÷ 204,260 = 4.2

Revenues

ASSETS:

CURRENT ASSETS:

Cash 15,000$

Accounts Receivable 100,057

Allowance for Bad Debt (5,000)

Inventory 34,986

TOTAL CURRENT ASSETS 145,043

FIXED ASSETS:

Computers 28,000

Furniture 8,000

Other Equipment 65,500

Ovens and Walk In Coolers 40,000

Building renovations 80,000

TOTAL GROSS FIXED ASSETS 221,500

ACCUMULATED DEPRECIATION (17,240)

NET FIXED ASSETS: 204,260

TOTAL ASSETS 349,303

LIABILITIES & STOCKHOLDERS EQUITY:

CURRENT LIABILITIES:

Accounts Payable 20,000

Payroll Tax Accrued 4,200

Current Portion of Long-Term Debt 6,960

TOTAL CURRENT LIABILITIES 31,160

LONG TERM LIABILITIES:

Computers 28,000

Furniture 8,000

ABC Bank Loan - ovens and walk in coolers 40,000

Bank Loan - Renovations 40,000

TOTAL LONG-TERM LIABILITIES 116,000

TOTAL LIABILITIES 147,160

STOCKHOLDERS' EQUITY:

Capital Stock 37,663

Paid-In Capital 100,000

Retained Earnings 64,146

Current Period Net Income 88

TOTAL STOCKHOLDERS' EQUITY 201,897

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY349,303


Statement of Financial Conditon (Balance Sheet)

Liquidity Ratios – Measures of Risk

• Current Ratios (Working Capital) Current Assets ÷ Current Liabilities Measure of company’s ability to pay off debt; 1.5 : 1 considered

adequate BUT … usefulness depends on how fast receivables and inventory can

be converted to cash

• Quick Ratios Cash + A/R ÷ Current Liabilities Applies to companies w/o inventory; 1:1 considered adequate More conservative risk indicator still subject to A/R conversion rate.

• Days of Cash Cash × 365 ÷ Annual Revenues Should cover cash needs for 30 to 60 days Apply the “sleep at night” factor

Liquidity Ratios

Current Ratio 145,043 ÷ 31,160 = 4.6 : 1 Quick Ratio 115,057 ÷ 31,160 = 3.7 : 1

Days of Cash 15,000 × 365 ÷ 873,700 = 6.3 days

Revenues








Computers 28,000

Furniture 8,000












ASSETS:

CURRENT ASSETS:

Cash 15,000$



Inventory 34,986


FIXED ASSETS:

Computers 28,000

Furniture 8,000










Efficiency Ratios (Cash Generation)

• Days Sales Outstanding Average monthly A/R ÷ (Annual Revenue ÷ 365) Measures efficiency at converting A/R to cash < 30 days ideal Implications for customer relations management

• Days Inventory Outstanding Average monthly Inv. ÷ (Cost of Sales × 365) Measures efficiency of converting inventory to cash Implications for satisfying customer demand

• Days Payables Outstanding Average A/P ÷ (Annual Revenue ÷ 365) Implications for supplier relations management

• Cash Conversion Cycle DSO + DIO – DPO Indicator of company ability to manage its capital assets Indicator of company ability to pay its suppliers

Efficiency Ratios

Days Sales Outstanding 100,057 ÷ (873,700 ÷ 365) = 41.8 Days Payables Outstanding 20,000 ÷ (506,434 ÷ 365) = 14

Days Inventory Outstanding 34,986 ÷ (506,434 ÷ 365) = 25.2

Cash Conversion Cycle 41.8 + 25.2 – 14 = 53

COGS DSO DIO DPO

ASSETS:

CURRENT ASSETS:

Cash 15,000$



Inventory 34,986


FIXED ASSETS:

Computers 28,000

Furniture 8,000















Computers 28,000

Furniture 8,000














Cash at Beginning of Period 15,500$

Operating Activities:

Cash Inflows

Sales 873,700

Accounts Receivable (100,057)

Depreciation and Amortization 17,240

Change in Current Assets and Liabilities:

Inventories (34,965)


Total Operating Inflows 775,919 -

Cash Outflows

Cost of Goods Sold 506,434$

Fixed Expenses 42,624$

Labor and Benefits 280,637$

Admininstrative Expenses 19,371$

Total Operating Outflows 849,066$

Investing Activities:

Capital Expenditures 40,000

Cash Used for Investing Activities 40,000

Financing Activities:

Payments of Long Term Debt Principal 17,240

Interest Payments 6,600

Cash Used for Investing Activities 23,840

Net Increase / Decrease in Cash (136,988)

Cash at Beginning of Period 15,500

Cash at End of Period (121,488)


Statement of Cash Flow

The Practical Uses of Financial Ratios• Use your cash flow statement as a leading indicator of financial

strength or weakness

• Pick a few key ratios relevant to your business

• For most small businesses, they key ratios are likely to be• Gross Margins• Net Income• Day Sales Outstanding and Days Inventory Outstanding• Positive Liquidity

• When selling the business other ratios increase in important• Return on Assets• Fixed Asset Turnover• Return on Equity

• There’s more to running a successful business than financials

Q & A


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