1 Simple Steps for Growing Your Business Financial Management.
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Transcript of 1 Simple Steps for Growing Your Business Financial Management.
1
Simple Steps for
Growing Your Business
Financial Management
• The SCORE Foundation • would like to thank
• for showing their support of America’s small businesses • by sponsoring this series.
• The content provided in the Simple Steps for Growing Your Business materials is intended as a business resource only and does not guarantee a successful outcome when applied to individual business use.
• To find additional resources on growing your business, • visit www.score.org and www.openforum.com
A Special Thanks to Our Local Sponsors
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About SCORE6
Douglas S. Cavanaugh
• Successful and experienced business owners and executives acting as volunteers
• Free mentoring:• One-on-one• E-mail• Signup on our website –
Mentoring Tab
• Seminars and workshops• Resources for small
business: manasota.score.org
Assessing Your Business7
If you have not looked at the SCORE Business Needs Assessment, it is in your packet!It will help you assess the current state of your business in 5 key areas:1.Management2.Marketing3.Sales4.Finance5.OperationsReview with your mentor to help you:
Decide what additional workshops to attend Develop a customized business improvement plan
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Sales
Customer Service
Purchasing / Manufacturing Distribution
Finance
Business Owners / Management - responsible for Business Performance
Marketing
Service Delivery
Customers – Impacted by All Functions in Your Business
Workshops - Business Focus Areas
Marketing Your Business
Growing Your Sales
Managing Operations
Financial Management
Human ResourcesManaging Your Time/
People Resources
During this workshop we will discuss:
• How advisors can help your business
• How to read and use financial statements
• How to measure your company’s financial health
• The basics of cost accounting• Business risk and how to
manage it• How to use cash flow forecasts• Your options for funding growth
9
Marta E. Maxwell
Briefly tell us about you:
• Your name
• Your business
• What you hope to achieve through this workshop
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Let’s Get Started
Katrina Markoff
Your Trusted Advisors11
Your Business
Attorney
Banker
CPASCORE Mentor
Risk Manager / Insurance
Using Financial Statements to Manage
Your Business
12
Important Terms: GAAP & IFRS
GAAP (Generally Accepted Accounting Principles):• The current accounting standard used in
the U.S.
IFRS for SME (International Financial Reporting Standards for Small and Midsized Enterprises):• The international standard for accounting
for small and mid-sized businesses in most other countries
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Doug Zell
Using Financial Statements to Manage Your Business
Important Terms: Bookkeeping Methods
Cash:•Cash basis bookkeepers recognize income and expenses when they are received/paidAccrual:• Accrual basis bookkeepers recognize income and expenses when the product/service is delivered
•Analyze your business with an “accrual view” even if you pay taxes on a cash basis to make sure you understand accounts receivable (AR) and accounts payable (AP)
14
Jennifer Behar
Using Financial Statements to Manage Your Business
Financial Statements
A typical set of financial statements is made up of:•Income Statement (P&L)•Balance Sheet•Statement of Cash Flows
Others that may be important:•Accounts Receivable Aging Summary•Accounts Payable Aging Summary
Your accounting software should be able to create the reports whenever you need them
15
Douglas S. Cavanaugh
Using Financial Statements to Manage Your Business
Income StatementTop section shows revenues• Gross revenues• Adjustments to revenues• Cost of goods sold (COGS)• Adding/subtracting the figures above =
gross profit
Bottom section shows expenses• Logical categories of expenses• Revenues – expenses = net (pre-tax) profit
16Using Financial Statements to Manage Your Business
17
Assets:-Current-Long-term
Liabilities:
-Current-Long-term
Shareholders’ Equity:-Paid in capital
-Retaine
d earning
s
Using Financial Statements to Manage Your Business
Balance Sheet
18
Theresa Alfaro Daytner
Using Financial Statements to Manage Your Business
Income Statement – Revenue / Gross Profit
(statements in your handouts)
Income Statement
Expenses and Net Income
before Taxes
19Using Financial Statements to Manage Your Business
20Using Financial Statements to Manage Your Business
Balance Sheet
21Using Financial Statements to Manage Your Business
Statement of Cash Flow
Understanding and Using Financial Ratios22
Financial Ratios from the Sample Financial Statements
Further discussion of these
ratios later in the
workshop!
23
CPA Audited
CPA Reviewed
CPA Compiled
Internally Prepared
Types of Financial Statements
Mos
t Tru
sted
Least
Expensive
Using Financial Statements to Manage Your Business
24
In-House:
Bookkeeper devoted to your business
Quickbooks software is easy to use – inputs / reports
Familiarity with your business
May have additional expertise
May handle other tasks
Outsourcing:
May cost less? Software allows
easy data transfer for your reports
Technology enables secure sharing of sensitive data
May gain access to multiple skill sets
Pros of In-House Bookkeeping vs. Outsourcing
Using Financial Statements to Manage Your Business
Internally Prepared
•Financial statements prepared by company management for operating business
•Should be prepared at least monthly
•Easier to prepare timely reports
25Using Financial Statements to Manage Your Business
CPA Compiled Financial Statements
An annual compilation of a company’s financial accounts prepared by a CPA or an accountant.
Business financial statements that are assembled from the records, materials and information of the business. These statements contain no independent assurance as to content or compliance with GAAP.
26
Rupa Bihani Shah
Using Financial Statements to Manage Your Business
CPA Reviewed Financial Statements
Business financial statements that are reviewed by independent accountants through inquiries of management and performance of analytical procedures on financials to provide limited assurance that no material modifications are necessary to conform to GAAP.
The accountant does not express an opinion on reviewed statements.
27Using Financial Statements to Manage Your Business
CPA Audited Financial Statements
Business financial statements that have been examined by independent certified accountants to determine if they present fairly financial position, results of operations, and cash flows in conformity with GAAP.
Statistically valid sampling of the information to verify the data.
28Using Financial Statements to Manage Your Business
List how you use financial statements today.Income StatementBalance Sheet Cash Flow Analysis
Who prepares and reviews your financial statements?
Then we will discuss current and potential future uses
29
Exercise 1 – Using Financial Statements
5 minutes to fill in your current uses10 minutes to discuss future uses
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Exercise 1 – Using Financial Statements
Understanding and Using
Financial Ratios
31
Understanding and Using Financial Ratios
Financial Ratios
•Liquidity
•Profitability
•Leverage
•Efficiency
•Debt Service
32
Can be compared to RMA (Risk Management Association) average ratios
Available for business types by NAICS code (North American Industry Classification System)
Talk to your SCORE mentor to obtain the RMA data for your business type!
Understanding and Using Financial Ratios
Liquidity Ratios
Used to measure the quality and adequacy of current assets to meet current obligations as they come due
• Current ratio• Quick ratio• Days of cash
33
Surendra N. Kumar
Understanding and Using Financial Ratios
Liquidity Ratios: Current Ratio
Indicates the extent to which current assets are available to satisfy current liabilities
• Stated as values such as 2.5 to 1.0 or simply 2.5
34
Current Assets
Current Liabiliti es
Current Rati o
Understanding and Using Financial Ratios
Liquidity Ratios: Quick Ratio
Indicates the extent to which more liquid assets are available to satisfy current liabilities
• Stated as values such as 1.5 to 1.0 or simply 1.5
35
Cash and A/R
Current Liabiliti es
QuickRati o
Understanding and Using Financial Ratios
Liquidity Ratios: Days of Cash
Indicates the number of days revenue held in cash
• Days of cash = safety cash• Every business will require a different level of
safety cash• Cash equivalents include money market
holdings, short-term liquid investments, marketable securities and government bonds and bills
36
Cash and Cash
EquivalentsRevenues
Days of Cash360
Understanding and Using Financial Ratios
Profitability Ratios
Used to measure performance of a company and how well its assets are being used to generate revenues
• Gross profit margin• Pre-tax profit margin• Return on assets• Return on equity
37
Elizabeth Feichter
Understanding and Using Financial Ratios
Profitability Ratios: Gross Profit Margin
The percentage of money left after sales when cost of goods sold (COGS) is subtracted
38
Formula:
Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit Margin
Example:
Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) = Gross Profit ($4,000)Gross Profit Margin = Gross Profit ($4000) / Gross Sales ($10,000) = 40%
Understanding and Using Financial Ratios
Profitability Ratios: Return on Assets
The profit generated by the total assets employed by a company
What it means: Higher ratio reflects a more effective employment of company assets
39
Net Earnings
TotalAssets
Return on Assets
Understanding and Using Financial Ratios
Profitability Ratios: Return on Equity (ROE)
The profit generated by the net assets employed
ROE is an important financial ratio applying to small business owners and a good measure of performance by management
40
Net Earnings
Total Net Worth
Return on Equity
Understanding and Using Financial Ratios
Profitability Ratios: Pre-Tax profit margin
Taxes vary by location, so pre-tax profit margin is a good ratio to look at and use for comparisons
41
Earnings Before Taxes
Total Sales
Pre-Tax Profi t
Margin
Understanding and Using Financial Ratios
Leverage Ratios
Key measurements in determining a company’s vulnerability to business downturns as well as its capacity for credit and internal capital needs
• Debt to Equity
42
Andrew Dunn
Understanding and Using Financial Ratios
Leverage Ratios: Debt to Equity
Indicates how well a business is leveraging its debt against the capital invested by its owners
If liabilities exceed net worth, creditors have a greater stake than the shareholders
43
Total Liabiliti es
Total Net Worth
Debt to Equity
Understanding and Using Financial Ratios
Efficiency Ratio
Measurements of the effectiveness of using current assets and managing current liabilities
• Days of accounts receivable (A/R)• Days of inventory• Days of accounts payable (A/P)
44
Marta E. Maxwell
Understanding and Using Financial Ratios
Efficiency Ratios: Days A/R Outstanding
Indicates the number of days to collect a period’s worth of accounts receivable
Though industries vary, if you can keep your A/R collection cycle close to the net terms of sale days, you have an efficient collection process – typical may be 30 days
45
Net A/R
Days in Period
Days A/R Outstanding
Credit Sales
Understanding and Using Financial Ratios
Efficiency Ratios: Days of Inventory
Indicates the average number of days it takes to turn over your inventory during the year
46
Inventory Value
Cost of Sales
Days of Inventory360
Understanding and Using Financial Ratios
Efficiency Ratios: Days of A/P
Indicates the number of days of trade and service payables your company is owing
If your vendor offers net 30 terms with a 2% prompt payment discount (within 10 days), taking the discount when you can may be important
47
Net A/P
Days in Period
Days A/P Outstanding
Credit Sales
Understanding and Using Financial Ratios
Efficiency Ratios: Debt Service Ratios used by Banks
EBIT (I) = EBIT / interest and EBIT (CM) - EBIT / current maturitiesFixed charge coverages on businesses needing permanent working capital
(Debt Service payment coverage from traditional cash flow: = Earnings after taxes / current
maturities)
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EBIT Interest and
Debt Service Rati os
EBIT Current Maturiti esB o t h i n d i c a t e
Understanding and Using Financial Ratios
Class Discussion: Ratios•Which ratios are most valuable in improving cash flow?•Should seasonal/cyclical businesses vary days of cash?•What are risks of not turning A/R fast enough?•Debt to equity ratio•How to calculate gross profit margin•Markup vs. margin
15 minutes
49
Cost Accounting
50
Cost Accounting
Financial vs. Cost Accounting
51
Financial Accounting:
Complies with standards such as GAAP or IFRSBalance Sheet and Income StatementStatement of Cash Flows Complete picture of company’s overall financial health at a point in time or over a period of timeUsed by stakeholders to evaluate company
Cost Accounting:
Used to compute internal costs and profits on individual jobs or productsBreak-even analysis Financial ratio benchmarkUsed to make management decisions on a daily basisUsed by management to make sure operations are profitable
Cost Accounting
Break-even Analysis
•Valuable for all businesses•Breakeven - when total costs (fixed + variable) = total revenue•Important calculation if you have high fixed costs and variable sales•Most important for manufacturers and other businesses that have significant investments in equipment•Businesses with Project based revenues will want to evaluate each project
52
Paul Cernuto
Cost Accounting
Break-even Analysis Terms
•Annual or Unit sales revenue: revenue from selling your product or service•Annual or Unit variable cost: cost of goods sold (COGS)•Annual fixed cost: total of all business overhead costs anticipated on an annual basis•Contribution margin: amount of money in annual or unit sales revenue that exceeds annual or unit variable costs
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Cost Accounting54
Formula:
When Fixed + Variable Costs =
Total Revenue (during the year)
Break-even Sales=
Fixed Cost (annual) ÷ Contribution Margin (fraction)
Example:
$60,000 ÷ .30
Annual Break-Even Sales = $200,000Monthly = $16,666
Annual Units = 2000
Break-even Analysis: How many sales do you need to make, at what price,
at what costs and in what time period to be profitable?
Annual Fixed Costs = $60,000Unit Sales Revenue = $100Unit Contribution Margin = $30Contribution margin (fraction) = .30
Cost Accounting55
Break-even – A View of the Analysis Sales revenue over time for our example.
Breakeven - when total costs (fixed + variable) = total revenue
$20,000 sales or 200 units
Note: May be additional “Semi Fixed Costs” influenced by volume but not associated per unit (example - commission tiers, temporary labor, office supplies)
Simple Breakeven Analysis
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Units Sold (x100)
Rev
enue
($)
Revenue Fixed Cost Fixed + Variable
Cost Accounting
General and Administrative Expenses
Expenses that support the company’s operations, but are not directly related to sales or COGS
• Management and Office personnel payroll• Portion of utility expenses attributable to office costs• Telephone, Internet, computers used to run business but not part of COGS• Insurance
56
Managing Risk
57
Managing Risk
Types of Risk:
• Risk mitigated by insurance (property, general liability, auto, worker’s compensation and perhaps business interruption)
• Risk that partner or widow(er) will be left with business debt (key man life insurance)
• Risk of not being paid by a foreign customer (business credit insurance)
• Product risk due to product failure , misuse or defects that create liabilities
58
David, Laureen & Dan Barber
Using Cash Flow Forecasts
59
Using Cash Flow Forecasts
Cash Flow Forecasting
Very important all the time:•Making Payroll on time•Paying Taxes•Paying Vendors and all other obligations•Minimizing use of expensive credit lines
Other special circumstances:•When company is growing rapidly or business experiences a decline
Using a13-week cash flow forecast is an effective way to manage tight cash flow during challenging times.
60
Using Cash Flow Forecasts
Cash Flow Forecasting Cash Balance tab
Accounts Receivable tab
AccountsPayable tab
Download at: http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
61
Funding For Strategic Growth
62
Funding Sources
• SBA Microloans – up to $50,000• SBA Express Loans – up to $350,000• SBA 7 (a) Loans – up to $5 million• SBA 504 Loans – up to $4 million
Buildings/Land/Capital Improvements • USDA B&I (Business and Industry) loans• CDC (Certified Development Corporation)
for local community development• Community Development Financial
Institutions (CDFI)• Small Business Investment Companies
(SBICs)
63
Funding Sources64
• Bank / Credit Union / S&L – Term Loans, Line of Credit, Revolving Credit
• Finance Companies – Asset based loans• Insurance Companies – Commercial mortgages• Leasing Companies – Any assets not intended for
resale• Seller financing – negotiated variations• Franchisor support – Term loans for acquisition• Angel Investors• Personal loans
– Home equity– Credit card– Peer to Peer (P2P) loans
Chapter may have more local information!
Financing in the current business environment
65
• What experience have you had in the past three years to obtain financing?
Successes and Turndowns?Factors that helped / hurt?
• How can you improve your management of assets and liabilities to improve cash flow?
• What can you do to improve your chance of a successful load application?
15 minutes to discuss
Funding – Other SCORE resources
For most commercial loans, a business plan with an accompanying financial forecast is required.
The SCORE workshop, Building Your Business Plan will help guide your plan developmentA financial forecasting spreadsheet is available for download: http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
Comprehensive 3 year financially planning toolTo learn how to use the forecasting tool, talk to your mentor or attend Simple Steps for Starting Your Business - Workshop 4 – Financial Projections
66
Review
67
Review
• Accurate financial statements are critical to the success of your company.
• Learning how to read an income statement, balance sheet and cash flow statement and spotting trends will help you manage your business more effectively.
• Financial ratios help you analyze certain aspects of your operations so you can make adjustments to become more profitable.
68
Next Steps
• Set up your company’s cash flow forecast using the instructions provided for the Excel spreadsheet – download at:http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
• Calculate some or all of the financial benchmarks we have discussed that are important to your business
• Ask your mentor to get the RMA ratios for your business type
• Review the With Your Mentor handout for topics to discuss with your mentor
Don’t have a SCORE Mentor? Connect with one today!
• SCORE has over 13,000 successful and experienced executives with small business know-how that want to help you
• Visit manasota.score.org for more information
Help Us, Help You
Please fill out the workshop evaluation form
Your feedback is important to help us improve our programs!
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