Understanding Your Financial Performance

Understanding Your Financial Performance

By Mike Mallaro

CFO, The VGM Group

Steps To Understanding Financial Performance

1. Benchmark Past Results

2. Plan Your Future Success

3. Manage Your Liquidity

4. Understand Your Profitability

Benchmark Past Results

Identify Key Performance IndicatorsUp to 10 key driversMeasure in Comparable Units

Compute Your Historical Results Compare to Peer Data Make Decision on Action Plan

Key Performance Indicators

Profitability Sales Asset Management Cash Flow & Liquidity


ProfitabilityProfitability Revenue per EmployeeRevenue per Employee Gross Margin PercentageGross Margin Percentage Net Profit PercentageNet Profit Percentage Operating Expenses as a Operating Expenses as a

percentage of revenuespercentage of revenues Operating IncomeOperating Income Net IncomeNet Income

SalesSales Percentage increase in Percentage increase in

salessales Comparable unit sales Comparable unit sales

increaseincrease


Asset ManagementAsset Management Days Sales Days Sales

Outstanding (DSO)Outstanding (DSO) BilledBilled UnbilledUnbilled

Inventory TurnoverInventory Turnover

Cash Flow & LiquidityCash Flow & Liquidity Availability of Cash Availability of Cash Cash Flow from Cash Flow from

OperationsOperations Working CapitalWorking Capital Cash BalanceCash Balance

Measure in Comparable Units

Use These . . . DSO Revenue per employee Expenses as a % of

sales Days Sales held in

Inventory

Instead of These . . . Ageing Percentages FTEs Percentage change in

expenses Inventory balance

Computing Historical Results

DSO Gross Margin Percentage Net Profit (Margin) Percentage Revenue per Employee Availability of Cash

DSO

Accounts Receivable Divided by

Ave Sales per Day Equals

Days Sales Outstanding --------------Sales for a period Divided by Number of days in the Period Equals

Ave Sales per Day

DSO - continued

Revenues Days Ave Sales/Day

Annual $2,000,000 360 $5,555

Quarterly $575,000 90 $6,388

Example – Ave Sales per Day

Example – DSO calculation

Receivables Ave Sales/day DSO

Annual $470,000 $5,555 85 days

Quarterly $470,000 $6,388 74 days

Gross Margin Percentage

Revenues Minus

Cost of Goods Sold Equals

Gross Margin Dollars --------------Gross Margin Dollars Divided by Revenues Equals

Gross Margin Percentage

Gross margin Percentage – cont’

Revenues $2,000,000

Cost of Goods Sold $850,000

Gross margin dollars $1,150,000

Gross Margin Percentage 57.5%

Example

Net Profit (Margin) Percentage

Revenues Minus

Cost of Goods Sold & Expenses Equals

Income Before Taxes --------------Income Before Taxes Divided by Revenues Equals



Revenues $2,000,000

Cost of Goods Sold $850,000

Gross margin dollars $1,150,000

Operating Expenses $1,000,000

Pre-Tax Profit $150,000

Net Profit (Margin) % 7.5%

Example

Revenue per Employee

Revenue Divided by

Ave Number of Full-Time Employees Equals

Revenue per Employee --------------For Full-Time Employees Consider

Full-Time & Fractional for Part-Time

Revenue per Employee

Beginning Ending Average

Full-time 8 10 9¾ time 2 2 2½ time 6 8 7Total 17 20 18.5

FTEs

9

1.5

3.5

14

Revenues Ave FTEs Revenue/Employee

$2,000,000 14 $142,857

Available Cash

Cash and Deposits Plus

Existing Lines of Credit Less

Existing Borrowings on Lines of Credit Equals

Available Cash

Benchmarking Example - DSO

85 83

50

60

70

80

90

YOU AAH

DSO You vs. AA Homecare Survey


7881

8583

60

70

80

90

2001 2002 2003 AAH

DSO Results in a different light?

You over time vs. AA Homecare Survey


7881

85 83

60

50

75

40

50

60

70

80

90

01 02 03 AAHLin AprAHP

DSO Full Picture You over time vs.

AA Homecare Survey and Industry Leaders

Determine Plan of Action

Use Benchmarking to shine the light on areas of the business

Where the results show signs of possible trouble, dig deeper and devote attention

Plan for Success

Those who fail to plan are planning to fail

Plan for Success

Establish Goals Develop Action Steps

Needed to Reach Goals Build Financial Plans

(Pro-forma statements)

Establish Goals

Be specific and measurable

Exercise your right to dream – The goal should be substantial enough that, if achieved, it really matters

Identify Action Steps Necessary to Achieve Goal

Build a catalog of actions needed to achieve larger goal.

Action steps are interdependent Assign individual responsibility Hold individuals accountable

Build a Pro-Forma Financial Statement

Start with 2 years of historical results Lay out columns for each of next 3 years Draft amounts for years 1-2-3 using history and general

assumptions Fill in goals for year 3, which is presumably better than

initial draft Work backwards to determine what is necessary on

individual line items to achieve goal Work multiple iterations until you get to the optimal path

to achievement of goal

Financial Pro-Forma – Goals View

2001 2002 2003 2004 2005Oxygen 280 335Rehab 310 315Total Revenue

590 650

Equipment 180 195Payroll 280 310Occupancy 65 70Marketing 25 40Net Income 40 35 100

Financial Pro-Forma – Next Round

2001 2002 2003 2004 2005Oxygen 280 335 600Rehab 310 315 400Total Revenue

590 650 1,000

Equipment 180 195 290Payroll 280 310 425Occupancy 65 70 100Marketing 25 40 95Net Income 40 35 100

Financial Pro-Forma – Final Round

2001 2002 2003 2004 2005Oxygen 280 335 400 500 600Rehab 310 315 340 375 400Total Revenue

590 650 740 875 1,000

Equipment 180 195 225 260 290Payroll 280 310 320 360 425Occupancy 65 70 80 90 100Marketing 25 40 60 120 95Net Income 40 35 55 45 100

Business Planning

Match operational objectives to numbers

Be aggressive, but reasonable Use it as a roadmap The process is as important as the

end product Always keep plan out three years

Liquidity

Available cash is the most important KPI for liquidity

Liquidity = Financial Flexibility

Liquidity Choices

CPA View – Make lowest cost choices (i.e. do not borrow if you have the money!)

Experienced View – Trade away current income for the financial flexibility of better liquidity.

When Would Extra Liquidity Help?

Loss of major referral source Health problem removes owner from the business Ugly divorce Medicare messes up Medicare changes the rules Medicare conducts an unfair audit Flood, fire, tornado, hurricane, earthquake, etc Severe bad publicity Competitor price war

Paths to Optimal Liquidity

Decrease receivable DSO Finance equipment purchases so that

payments are matched to receipt of revenues Lease rather than own Increase the size of credit lines Seek dating from suppliers Increase inventory turns

Understand Your Profitability

The Power of The Incremental Dollar Expense Management Segment Performance

The Power of the Incremental Sales Dollar

The most profitable sales in your business are incremental

sales

The Power of Incremental Sales

Existing P&LSales $600Cost of sales $300Personnel $160Occupancy $50Marketing $30Pre-tax income $60% of sales 10%

Impact of Additional Referral Source

Existing Incremental Sales $600 $30Cost of sales $300 $15Personnel $160Occupancy $50Marketing $30 ___Pre-tax income $60 $15% of sales 10% 50%

Additional Referral Source at a Discount

Existing Incremental @ 20% discount

Sales $600 $24Cost of sales $300 $15Personnel $160Occupancy $50Marketing $30 ___Pre-tax income $60 $9% of sales 10% 37.5%

Before & After

Existing Incremental AfterSales $600 $24 $624 +4%Cost of sales $300 $15 $315Personnel $160 $160Occupancy $50 $50Marketing $30 ___ $30Pre-tax income $60 $9 $69 +15%% of sales 10% 11%

What this means to you . . .

Look at net profit margin, not just gross profit margin

Consider the lifetime value of the customer

The incremental sales dollar is virtually always your most profitable sales dollar.

Expense Management

“People are your most important asset.”

People-related costs are by far the largest controllable expense in an HME business

People Everything else

Expense Management

Having the appropriate headcount is the single most important thing you can do to responsibly manage your expenses.

Revenue per FTE is the key performance indicator to utilize.

Drive to the targeted revenue per employee.

Segment performance

Drill down to profitability by

segment.

0

5

10

15

20

25

30

35

PROFIT

Segment Analysis

Consider some of these segmentations:

Respiratory vs. HME vs. Rehab

Medicare vs. Medicaid vs. Private Insurance

Referral Source A vs. Referral Source B

Branch A vs. Branch B

Conclusion

1. Analyze Existing Performance


3. Leverage Your Assets


Understanding Your Financial Performance

By Mike Mallaro

CFO, The VGM Group

Understanding Your Financial Performance

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