Business Basics –Plans, Financials, and No-no’s

Baraga County Memorial HospitalJuly 1, 2014

12:00 Noon – 1:00 P.M.

Presented by: Ron Miaso

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You need a business plan if:

• You’re running a business (keeping on track)• You need money (Most require some sort of plan)• Many people are involved (keep everyone on the same page)• You are looking for investors• You are selling a business (business valuation)

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Who Needs a Plan

Entrepreneurs are relentless “do-er’s”BUT

A Business Plan is an essential tool to enable:

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Part One - Business PlanningForcing Hard Thinking

1. Careful Thought2. Clarity of Purpose3. Benchmark to measure progress

• Forces you to think confront and answer questions that might not be raised in “doing”

• Promotes discipline – test the reality of“irrational exuberance”

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1. Careful Thought

At a speech before the American Enterprise Institute in 1996, Mr. Greenspan talked about the stock market and how he feared investor enthusiasm pushed prices to levels that weren’t a true reflection of economic fundamentals.

Former Fed Chairman Alan Greenspan coined “irrational exuberance”

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1. Careful Thought

Test Reality Increased Knowledge

Boost Confidence

Process to assure success

No short cuts! Takes time. Owner prepares.

•Volumes•Competition•Your Product

•Research•Ask Questions

•Better Plan•More Buy In

A business plan defines the venture not only forthe entrepreneur, but also for “significant others”

• The Management Team

• The Funders• Banks• Credit unions• Crowd funders• Grant organizations

• Lawyers and accountants

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2. Clarity of Purpose

• A clear and consistent snapshot of the organization’s objective from the beginning• Provides clarity of purpose• The starting point from which changes can be made

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2. Clarity of Purpose (con’t)

Albert Soady tells us, “If you don’t know where to start, go back to the beginning.”

A business plan helps to avoid the dangerous trapof confusing activity with progress

It is a written benchmark from which to measurehow you’re doing

As goals are achieved, confidence is built and newgoals are identified (or old ones changed)

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3. Benchmark to Measure Progress

Summary – Prospective investors need to be assuredthat the venture has been researched and analyzed

• A well formulated concept that will form the cornerstone of the business

• Size of the market• Take time to research your competition• Who are they?• How good are they?• How can you position yourself to offer

a different product or service?• Who uses their products or services?

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Plan Basics

• Current Business Status / Position• Legal form of operation• When it was formed• Principal owners • Key management staff

• Financials• Projected profit and loss• Balance sheet• Cash flows• Sources and uses of funds

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Plan Basics - Continued

In general, you should:• Keep the plan reasonable in length• Include an Executive Summary• Put together at least two years of projected income and expenses• Estimate sales potential – hard evidence• Include Risks and Opportunities• Involve outside assistance as needed• Plan an elevator pitch and longer oral presentation

from your plan

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Plan Do’s and Don’ts

In general, you should not:• Include all kinds of jargon, keep it plain, simple,

and understandable• Come across as a vague or fuzzy thinker, do not

be looked upon as a “dreamer” instead of “doer”• Be everything to everyone, instead concentrate

on your core strengths• Discuss phantom members of the team

“unnamed people who will join later”

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Plan Do’s and Don’ts

Above all, be able to back up your statements

You’re selling to a tough crowd!

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Plan Do’s and Don’ts

“I don’t think business plans are completely useless,just mostly so.”

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Business Plans - The Dark Side Dharmesh Shah’s Take

Dharmesh is co-founder and CTO of HubSpot. HubSpot provides inbound marketing software that helps businesses attract, engage and delight customers on the web. The company, based in Cambridge, Massachusetts has over 10,000 customers and is a two-time member of the Inc. 500.

1. Business plans are energy depleting exercises2. You should be committed to your business,

not your business plan”“You’re much better off spending time and energy talking to your customers and making the product better”

3. Business plans are written in the waterfall method,and you need to be agile

4. Nobody will read your business plan5. It’s a work of fiction6. Write a blog, not a business plan

The Dark Side (Part II)

Planning is guessing

“When you turn guesses into plans, you enter a danger zone. Plans let the past drive the future.They put blinders on you. ‘This is where we’re goingbecause, well, that’s where we said we were going’.And that’s the problem: Plans are inconsistentwith improvisation.”

“Now this isn’t to say you shouldn't think about the future or contemplate how you might attack upcoming obstacles. That’s a worthwhile exercise. Just don’tFeel you need to write it down or obsess about it.”

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Business Plans – Where is the Truth?

Detailed Business

Plan

Why Waste The Time?

• Long winded narrative• Pie in the sky• Ten year plans• Time consuming

• Understand the financials• Help to develop the “pitch”• Involve key players• Sometimes required

The Financial Statements

•Balance Sheet• Shows assets, liabilities & equity of the company• Current vs. Long Term

•P & L (Income Statement)• Shows the performance of a business over a

period of time (Monthly, Quarterly, Annually)

•Statement of Cash Flows• Danger! Profit is not Cash

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Who Uses Financial Statements?

•Business Owners & Managers

•Lenders

•Investors

•Competitors

•Entrepreneurs

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The Financial Statements

•Balance Sheet

•Profit and Loss

•Statement of Cash Flows

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They are not standalone, they all tie together

Introducing the Balance Sheet

A company’s financial position or health is shown on the balance sheet, also called a statement of financialposition.

Important! - The balance sheet shows the businessesfinancial position on a particular date.

The balance sheet relationship is:

Assets = Liabilities + Owners Equity

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Introducing the Balance SheetThe Five Basic Account Groups

1. Assets – economic resources that will benefit thebusiness in the future

2. Liabilities – a debt to the business3. Owner’s Equity – the owner’s claim to the assets

of the business4. Revenues – the increase in owner’s equity created

by delivering goods and services to customers5. Expenses – use up assets or create liabilities and

decrease owner’s equity

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Things You Own

Things You Owe

What’s Left Over!

Introducing the Income Statement

•The income statement shows the performance of a business over a period of time•Other names are profit and loss statement (P&L)or statement of operations

The basic formula is

Revenues – Expenses = Income

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Introducing the Income Statement

The income statement format looks like this:

Sales less cost of goods soldGross Profit less operating expenses (salaries, utilities, insurance, depreciation, freight, etc.)Operating Income (Earnings Before Income Taxes) less income taxesNet Income

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Introducing the Cash FlowStatement

•The cash flow statement only deals with cash activity

•It should be used as a planning tool to determine when and if additional cash is needed, if expansions areaffordable, and “can we pay the bills?

•It may be a little more difficult to understand

•It should be used as a management tool

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Purpose of the Cash FlowStatement

•Shows the relationship between net incomeand changes in the cash balance

•Assists future cash projections

•Shows the owner / manager how cash is generated

•Ultimately will show if a company can pay bills, interest, dividends, etc.

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Starting Point

Are Cash andProfit Different?

Definitely!

•Cash flow is the money that goes in and out of a company’s operations, financing and investing

•Profit is what remains from sales after all the firmsexpenses are subtracted (cash and non cash alike)

•Cash flow is more important to a small business

•Companies can make a profit but not be able to paytheir bills and stay in business

•Not recognizing this difference is one of thebiggest mistakes a small business can make – Where is the Money?

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Example 1 – Where isThe Cash???

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Example 1 – Where isThe Cash???

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Example 2 – Where isThe Profit???

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Depreciation – a non cash expense

Tying the knotand closing

the loop

Add Back

Cash Out – Principal Amount

Tying the knotand closing

the loop

Prepaid lump sum

Critical Performance FactorsFinancial Ratios

Ways to let accounting informationdrive decision making criteria:

Critical Performance FactorsOr

Financial Ratios

Ratios provide a statistical profile of a businessin comparison to similar businesses

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Critical Performance FactorsCurrent Ratio

Current RatioUsed to test the short term debt paying ability of a company. Current assets and current liabilities are those which will be available or due within twelve months.

Does your business have enough current assets to meet your current debts? What is the margin of safety?

Current Ratio = Total Current Assets / Total Current Liabilities

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Critical Performance FactorsCurrent Ratio

General rule is that ratio should be around 2.0

Why? Because liabilities are probably all good, but not all receivables may be collected and inventory may get old and not be saleable, shrinkage, damaged, etc.

If the ratio was less than 1.0, ability to pay shortTerm debts would be in doubt.

Creditors like larger numbers, but there are other considerations.

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Critical Performance FactorsCurrent Ratio

Example

Current Ratio = Current Assets / Current Liabilities

= $26,000 / $15,000 = 1.73

Question (True or False): Should this business be OK?

Analysis: Company should be in no danger ofnot being able to pay it’s short term debts.

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Critical Performance FactorsAverage Collection Period

Average Collection PeriodIs also called Days Sales Uncollected

This measures how quickly you can turnAccounts Receivable into cash

Days = Accounts Receivable / Sales * 365

Goal is to have this not exceed credit terms by 1 1/3.

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Critical Performance FactorsAverage Collection Period

Example

Days = Accounts Receivable / Sales * 365

= $5,000 / $50,000 * 365 = 36.5 days

Goal is to have this not exceed credit terms by 1 1/3.

So if credit is normally 30 days, this is good.

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Critical Performance FactorsAverage Collection Period

Warning – watch for distribution of aging A/R. Things could be worse than you think.

30 Days 60 Days 90 Days 120 Days

$Trouble!

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Eight Common Tax MistakesSmall Businesses Make

1. Not paying your quarterly taxes2. Not keeping track of all your expenses3. Not taking the Home Office deduction4. Mixing equipment & supplies5. Not sending 1099’s6. Over deducting your gifts7. Choosing the wrong legal entity8. Mixing personal and business

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1099 EmployeesA few of these facts suggest Independent Contractor

1. Set own working hours2. Work part time3. Work for more than one firm4. Realize a profit or loss from the activities5. Perform work somewhere other than on

an employers premises6. Work without frequent oversight

- IRS Revenue ruling 87-41 (20 factors – 3 Categories)

- Form SS-8However!

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Includes the contractors ability to:

•Never (ever) let the person who writes the checks reconcile the bank account. That’s like giving them keys to the vault.

•Have a copy of your bank account sent to the owner directly, preferably at home, and review all checks and payments. Make marks and ??? ticks – show them you are really looking. Make notes like

What? Pls Explain? Who wanted this? Let’s talk about this one – I don’t understand!

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•Watch your checks. The #1 way people get ripped off because office managers pay their personal bill with a company check – or a company credit card.

• Ultimate - Separate duties for every transaction into three separate people: approval (owner/manager), record keeping (bookkeeper) and reconciliation (accountant).

•Watch for unusual items in COGS – the dumping ground for much that’s bad!

Internal Controls(Con’t) DeltaProAdvisor.com

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•Consider outsource of payroll and make sure the payroll provider requires an owner signature on any payroll changes.

•Warning - if the bookkeeper insists on doing payroll themselves. Or never wants vacation time off. May be more than dedication!

Internal Controls(Con’t)

Thank You!!!Any Questions?