understanding finance presentation
DESCRIPTION
Presentation made to Seminar Club attendees in Derby March 2011TRANSCRIPT
Copyright, 2001 © ACTION International Pty Ltd.
Understanding Finance
Certified ActionCOACH Business Coach
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Neale Lewis
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Notes, worksheets & PowerPoint …
Left V’s right brain ...
Use of colours ...
Calling out answers ...
Raising your hand ...
100% participation
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Words
Math
Logic
Process
Short Term
Memory
Art
Music
Creativity
Feelings
Long Term Memory
A Little Bit About Super Learning
To make sure you get the most out of your learning…
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Yeah, Yeah.. I know!
To make sure you get the most out of your learning…
BlindingFlashof the Obvious
ActionCOACH’s definition of aREAL business…
A Commercial, Profitable, Enterprise
That Can Work Without
YOU!
MASSIVE RESULTS
Results
Synergy
Team
Leverage
Niche
Mastery Eliminate Chaos
Predictable Cash Flow
Efficiency
Structure for Growth
A Well Oiled Machine
Owner’s Personal Growth and /or New Businesses
Stab
ility
Cas
hTi
me
Gen
eral
Man
ager
Pas
sive
Inco
me
or
Sal
e of
Bus
.
Commercial
Profitable Enterprise
That Works
Without You …
Six Steps to Massive Results …
Duplication
The Mastery Level …
Taking control of your business …
Money Mastery
Time Mastery
Delivery Mastery
Destination Mastery
Did You Know?Did You Know? That 80% of Businesses Fail in the 1st 5
Years? Mismanagement
Under-capitalised
Poor business plan
Cashflow
Etc., etc., etc., …
• That 80% of the Surviving 20% Fail in the That 80% of the Surviving 20% Fail in the 22ndnd 5 Years? 5 Years?
Understanding The Numbers…Leads to:
Greater confidence in decisions
Better business decisions
Logic-based implications of choices
Greater awareness of abilities
Proper examination of issues
Effective billing, collecting & paying
Improved Cash Flow
Cashflow
Profit vs Cash Flow Profit does not equal cash
– Why?
Debtors
Buying stock
Non-cash items eg depreciation
A sudden high peak in sales can be detrimental to a business with bad cash flow management.
WHY?
0 20 40 60 80 100 120 +
Stock HoldingStock HoldingStock HoldingStock Holding
PAYABLESPAYABLES
Up to 60 Days Up to 60 Days ReceivablesReceivables
Up to 60 Days Up to 60 Days ReceivablesReceivables
Stock ArrivesGoods dispatched
Cash Gap = 90 Cash Gap = 90 DaysDays
Cash Gap = 90 Cash Gap = 90 DaysDays
CASH PAID
CASH RECEIVED
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Mind the Gap… The Cash Gap
Step 1 – Starting point
Step 2 – Have a cash flow forecast
Step 3 – Manage your cash flow by managing debtors
Step 4 - Manage your cash flow by managing your outflows
Profit vs Cash Flow
Ensure that your accounting records are up to date
Prepare and maintain a regular bank reconciliation – preferably weekly
Determine any outstanding commitments that you have made e.g. Ordered new equipment
Put time aside in your diary to work on cash!
Step 1 – Starting Point
Step 2 - Cash Flow Forecast Predicts inflows and outflows on a weekly / monthly
basis
Identify upcoming cash gaps & bottlenecks
Predict effects of cash flow on cash in bank / bank overdraft facility
Basis for discussion with bank if extra funds are needed in the short term
In control of business
Cash Flow Forecast
Inflows = Funds into business
Cash sale
Customer outstanding accounts
Proceeds of a bank loan
Sales of assets
Investment by shareholders
Interest on investments
Outflows = Funds out of business
Goods or services paid in cash
Payment of suppliers (creditors)
Salaries and wages payments
Revenue & Customs
Purchase of assets
Interest on loans
Other operating costs
Beginning cash balance
+ Projected cash inflows / - Projected cash outflows
= Your cash flow bottom line (the ending cash balance)
Cash Flow Forecast
Wk 1 Wk 2 Wk 3 Wk 4 Wk 5Opening 10,000 8,000 7,000 6,000 (2,000)Inflows 1,000 1,000 9,000 Outflows (3,000) (2,000) (1,000) (8,000)Closing 8,000 7,000 6,000 (2,000) 7,000
Target 10,000 10,000 10,000 10,000 10,000
The customer purchase decision & ordering
Credit decisions
Fulfilment, shipping and handling
Invoicing the customer
The collection period
Payment and deposit of funds
Step 3 - Debtors Conversion Period
Terms & ConditionsReview the T&Cs you offer your customers
Validity of quotes Price and payment (increase prices if possible) Delivery Title of goods Return Liability Termination
The Bank of England estimates that only one in two companies agree their payment terms in writing
Credit Decisions Dun and Bradstreet has calculated that more than 90 per cent of
companies grant credit without a reference or credit check.
Credit checks and reference for new customers Speak to referees Periodic credit checks for existing customers Consider small orders first Ensure credit terms are very clear Credit = debtors + orders in the system Grade customers – A to D
Fulfillment & Shipping Must have an order fulfilment process
Must supply within specification
Must meet agreed timescale for delivery of goods and services
Ensure all documents and labels are correct
Look for a WOW factor – delight the customer
Invoicing Invoice to be brief, clear and include following info
Customer name and address
Description of goods or services sold to the customer
Delivery date
Payment terms and due date
Date the invoice was prepared
Price, VAT and total amount payable
To whom payable
Customer order number or payment authorisation
Invoice must be accurate Send within 24 hours of chargeable event Send by first class post or email
Collection Period Prepare a collection procedure Keep the credit period as short as possible Contact the customer’s accounts to check invoice has
been received and is OK Chase a few days before its due Don’t feel guilty about collecting your money! Send out monthly statements Take additional action when 7 days overdue Use phone calls and chaser letters Look out for changes in behaviour
Collection When do your invoices go out? Can this be speeded up? Do statements go out following the last day of month? Are the terms of sale clear and shown on invoices? What is the actual average length of credit you are giving –
or your customers are taking? Do you have a collection procedure timetable? Are you politely firm but insistent in your collection routine? Do you review the aged debtor list at the end of each
month?
Be Tight on Credit ControlHave a clearly defined procedure, which is FIRM, FAIR and FRIENDLY
+ 2 days: Call 180% of overdues will be settled due to oversight or the fact you have rung.
+9 days: Call 2
Go over what was agreed in Call 1 and what they promised to do.
+ 16 days: Call 3
Either at +16 days or 2 days after they have promised to do something.
Put them on Stop Supply if necessary
Go over what was said at the previous call and what they promised to do.
Visit the customer, talk to the person responsible and look out for changes in behaviour.
+ 23 days: Letter
Outline the previous contacts and the failure of commitments made on previous dates.
Stress they are already on Stop Supply
State that the case may be handed to a debt collection agency.
Payment and Funds Check to ensure funds been received by the bank Check to ensure funds have cleared Ask customers to pay electronically Collect amounts due using a direct debit system Discounts for early or up front payments The Late Payment of Commercial Debts (Interest) Act 1998
-The Government has introduced legislation to give businesses a statutory right to claim interest if another business pays its bills late
Terms & Conditions Renegotiate T&Cs with your suppliers Extend payment terms where possible
Cash Outflow - Creditors Prepare an aged accounts payable schedule
Will provide a good estimate of outflow and enable you to plan
Will highlight creeping cash flow problems
Prepare a list of other creditors e.g. VAT
PAYE
Corporation Tax
Cash Outflow - Forecast Create 4 headings for expenses
Cost of goods sold
Asset purchases
Operating expenses e.g. Payroll and payroll taxes Repairs and renewals Post and stationary Travel Rent and Rates Heating and lights
Debt payments
Note some vary with sales others are fixed
Cash Outflow Review all costs and set targets for cost
reductions – say 10%
Identify alternative suppliers
Check utility bills on price comparisons sites
Calculate stock days and reduce stock levels
Reduce stock of stationary etc.
Postpone major asset purchase
Cash Outflow
How Your Bank Can Help Manage your relationship with your bank
Speak to them early and be totally honest
Consider using debtor financing / factoring
Look at extending loan repayment period
Look at government backed loans
Cash Outflow - Summary Cash flow must be managed – it is as important as
any other part of your business.
Prepare and maintain a forecast
Ensure that the accounting records are properly maintained
Prepare a regular reconciliation between the bank balance and the accounts
Do not ignore the cash position and take action early
If mismanaged it is very unforgiving and could ruin you.
Managing it well brings its own rewards!
Margins
Margin Mastery
Sales (Revenues)-
Variable Costs (COGS)=
Gross Profit (Gross Margin)-
Fixed Costs (Overhead)=
Net Profit
Cost What do we mean by cost?
– The amount of expenditure incurred on a specified thing or activity
– The definition depends on the purpose for which the cost is to be used. Its needs to be quantified by nature and limitation.
Cost of wages can mean:– Cost of wages for a year
– Cost of wages for a factory
– Cost of wages for one week
– Cost of wages included in the cost of making 1000 widgets
Variable Cost What is a variable cost?
A cost which tends to follow ( in the short term) the level of activity.
So what? Understanding the nature of a cost facilitates financial planning,
control procedures, performance comparisons and variability.
Examples of variable costs Goods bought for sale Raw materials Productive wages
Variable Cost Variable v’s Semi-variable
Goods for sale = Variable cost as the quantity we use varies directly to the quantity sold
Labour = Semi-variable as the cost of labour, other than
overtime, does not vary directly with volume
Fixed Cost What is a fixed cost?
A cost which does not follow ( in the short term) the level of activity.
Examples of fixed costs
Rates
Administrative salary
Rent
($1,000,000)
($500,000)
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Revenue
Fixed Costs
Total Expenses
Net Profit
Variable Costs
Getting to Break Even
Calculating Your Breakeven
Break-Even = Revenue needed to break even
FC = Fixed costs
GM% = Gross margin %
Gross Margin % = Gross margin/revenue
Gross Margin = Revenue – variable costs
Break Even = FC
GM%
Alan’s Hotdog Stand 1,600 people per day pass stand; 1 of 4 buy Ave customer buys 2 hot dogs @ £1 each Cost of hot dogs - £0.25 each Customer buys 1x/day Fixed costs - £36K Alan’s salary; £12K dep’n Business days – 250 Purchase stand £60,000
Calculating Alan’s Breakeven
Gross Margin = Sales – Variable costs
Sales = 1600 leads * 25% conversion
= 400 * 2 items * £1 per dog
= £800 * 250 days
= £200,000 per annum
Variable cost = 200,000 items * £0.25 = £50,000
Break Even = FC
GM%
Calculating Alan’s Breakeven Gross Margin = Sales – Variable costs
=£200,000 - £50,000
= £150,000
Gross Margin % = 150,000/200,000
= 75%
Fixed Cost = Salary £36,000 + dep’n £12,000= £48,000
therefore
Calculating Alan’s breakeven
Annual Break-Even = £48,000/0.75
= £64,000
Monthly BE = £5333.33
Daily BE (on 250) = £256
Break Even = FC
GM%
?Do you know your break even point on a daily, weekly and monthly level?
Do you know how many jobs you need to do each day, week and month to break even?
Do you know how many transactions you need to do each day, week and month to reach your targets?
Do you know what your gross and net margins are in percent?
IncreasingMargins
Increasing Revenuesand/or
Reducing Costs
Discounting v Increasing Prices
60 60 60
4030
50
0
20
40
60
80
100
120
Base 10% Discount 10% Increase
Profit
Variable/Direct Costs
40% gross margin10% price change = 25% profit change
Discounting v Increasing Prices
80 80 80
2010
30
0
20
40
60
80
100
120
Base 10% Discount 10% Increase
Profit
Variable/Direct Costs
20% gross margin10% price change = 50% profit change!
Don’t Discount – Add Value! Added value with soft £ cost Package offers
Low margin products with high margin products Slow moving products with quick moving products
Bonus offers: Buy one get one free (BOGOF), ”spend £50 and get £5 off your next purchase”
Time limited offers and discounts If you do offer discounts
Relate them to early bird payments or
shorter credit terms to safeguard your
own cashflow
Bumping Up Your Margins Cross sell: sell more of the high margin products
Set team incentives on margins, make sure your sales team are Margin Managers
Create package deals to bump up the average value sale as well as your margins
Sell high margin add-ons (warranties etc) with your existing product/service range
Golden Rules For SmartCost Cutting Audit costs and set a target to reduce ALL costs by
10% Be creative, think outside the box and challenge your team to
get involved – individual accountability!
Identify key cost drivers Have a budget – and stick to it! ”What you measure you can manage”. Make sure you
have reporting in place to track your costs Know your ”Killer KPIs”, what ratios are important to
your business and how often are you tracking them
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Build yourself a Business DashboardBuild yourself a Business Dashboard
Golden Rules For SmartCost Cutting Negotiate with your existing suppliers to bring costs
down Look for alternative suppliers Review your utility suppliers Make more efficient use of materials and so on. Give time in lieu instead of paying overtime Speak to your accountant regularly and keep
yourself updated on new initiatives relating to VAT, tax, government guaranteed loans etc.
Tips On Negotiation Prepare and do your research Obtain at least three quotes from competing
suppliers. Identify your preferred supplier and ask for a further
discount – do not accept the first price. Plan your exit and your walk away price Look for a win : win strategy
Some things to consider…Some things to consider… Your books are up to date (including your budget)
Everything is entered into your accounting software and reconciled
each month
You look at your P&L on a MONTHLY basisYou need to be reviewing your P&L on a monthly basis
You have your Accountant or Bookkeeper check your
numbers
It’s a good idea to have your numbers checked & Verified
Use an Accountancy software package: Sage Line 50 / Quickbooks
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Tips for a tough economy: Tips for a tough economy:
CashflowCashflow Pay by Standing Order
Introduce new payment terms
Stagger Payments
Allow Customer to Pay up front Embrace PayPal as another option
to make payment very easy
Introduce early Settlement Discounts
Ensure that you have Prompt Billing
Systems in place to chase down Debtors
Debtors
Pay suppliers later
Keep Cashflow forecasts up to date
Understand the company’s cashflow position and cashflow forecast
Reduce overheads in the business
Dump “D” Clients
Run a credit check on all new clients
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ActionCOACH events SeminarCLUB Team 13th May
GrowthCLUB 90 day planning 12th April
ActionCLUB Group Coaching Launch 6th June
Bespoke Training Days: Sales Training
Time Management
Team Building Days
Customer Service
1-2-1 Mentoring
Books and DVDS
Action To Take Away
Know your numbers … all the time
Mind the cash gap
Hold yourself accountable
Set goals
Put time aside