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Your Business Finances. On Target Group Coaching. Effective Financial Management. 3 Financial Indicators Profits, Cash Flow, ROI Cost Behavior Profit Improvement Planning More Key Performance Indicators Liquidity, Solvency, Collections, Breakeven Creating a Budget/Profit Plan.
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Your Business Finances On Target Group Coaching
Effective Financial Management • 3 Financial Indicators • Profits, Cash Flow, ROI • Cost Behavior • Profit Improvement Planning • More Key Performance Indicators • Liquidity, Solvency, Collections, Breakeven • Creating a Budget/Profit Plan
Best Practices: Finance • Accounting system is fully & accurately functioning • Controls are in place to ensure accuracy • A Realistic Workable Profit Plan (aka Budget) is in place • Financial Monitoring is being used effectively as a business tool • Key Metrics are being used to keep your finger on the financial pulse of your business • Owner reviews Financial Data and Metrics at least monthly • An adequate credit line is in place • Company is profitable, solvent and able to finance its growth and reward stakeholders
Sound Financial Management is critical if you wish to: • Put together a solid business plan • Be in the best position to obtain financing • Grow a sustainable business • Create a valuable company that you can later sell or otherwise provide for your exit from the business
Effective Financial Management Key Financial Data For Business Survival
3 Key Financial Indicators Of Your Business’ State Of Health Business is about making money To do this, it must simultaneously increase three things: • Net profit margin – Operating profit margin • Cash flow • Return on investment (ROI)
Net Profit = What’s left over after you deduct ALL expenses from the revenue your business generates Net Profit = Total Income minus Total Expenses THE bottom line in your business Indicator of the overall management of the business Indicator 1: Profit Margins • Gross Profit = What’s left over after you deduct direct job costs from the revenue your business generates Gross Profit = Total Income minus Direct Expenses to Produce work • Indicator of the productivity of your production people • Indicator of the accuracy of your estimating and selling
How To Calculate Profit Margins • Gross Profit Margin (GP%) is profit derived from work produced divided by Gross Revenue • Gross Profit Margin = (Gross Profit/Revenue)% • Net Profit Margin (NP%) is after-tax net profit divided by Gross Revenue • Net Profit Margin = (Net Profit/Revenue)%
Improve The Gross Profit Margin by working on the drivers: • Production / service delivery processes • Material Costs • Labor Costs • Customer relations • Team Skills and Development • Pricing & Estimating • Selling Skills
Improve the Net Profit Margin by managing: • Administrative operating processes • Variable Costs • Overhead Costs • Customer relations • Administrative Team Skills and Development • Marketing Activities and Costs
BEST PRACTICE GUIDE : Gross Profit % Gross Profit Margin = (Gross Profit/Revenue)% • Higher is better – obviously • Industry averages are different for different industries • Set a target based on your budget
BEST PRACTICE GUIDE : Net Operating Profit %** Net Operating Profit Margin = (Net Operating Profit/Revenue)% • Higher is better • 15% is goal (25% BEFORE Owner’s Compensation) • 5% is industry average* *Residential and Commercial Contractors under $10MM ** There is a distinction between Net Profit and Net Operating Profit, which is Profit before taxes, and “other” income & expenses not related to operations of the business including financing costs (interest expense)
The three questions of measurement • Is it Accurate? • Is it Acceptable • Is it Sustainable?
What Does The Cash Flow Cycle Mean To Your Business Operations? • There will be occasions when money is flowing out faster than it is flowing in • Virtually every business experiences times when there is a cash flow gap • Managing cash flow so as to avoid any critical situation due to lack of cash when it is needed is a major responsibility of a business owner
Cash Flow – More Than Just Profit • Businesses can make a profit but have negative cash flow • Failing businesses can have positive cash flow, possibly due to large asset sales or collections from past sales • Business start-ups require large cash outlays to build the asset base = cash flow risk
Cash flow Over The Longer Term • Over the longer term, you have to manage your cash flow to fund your business growth • You can grow your business in the short term by ‘borrowing’ credit through late payment of suppliers • Eventually, however, everything evens out and such strategies are not sustainable • With that in mind, projected growth should be managed within known cash flow constraints…and if external funds are required, this needs planning in advance
Improve Cash Flow • Shorten the Cash Flow Cycle • Understand the difference between Cash Flow and Profit • Plan in advance for business growth and/or downturns
BEST PRACTICE GUIDE : Cash Flow • Prepare a Cash Flow Projection • Manage Your Spending on a monthly, if not weekly basis • Invoice Promptly • Develop a systematized approach to receivables and collections • Obtain a line of credit
Indicator 3: Return On Investment • Return On Investment is net profit expressed as a percentage of the value of the total assets you have tied up in the business ROI = (Net Profit/Total Assets)% • ROI is a profitability ratio – it is the true measure of the financial productivity of a business
BEST PRACTICE GUIDE : ROI Return on Investment = (Net Profit/Total Assets)% • Higher is better • Should be at least 10% • 25% or higher is a goal
Characteristics of Financial Health • High tangible net worth (equity) • Consistent profitability • High cash flow from operations • Cash balances representing 30-45 days of operating expenses • AR representing less than 30 days sales • A ratio of current assets to current liabilities (“current ratio”) in excess of 3:1 • A high level of working capital • A ratio of liabilities to assets of 1.0 or less (debt ratio)
How do we find out where we stand? • Starts with Financial Statements: • Profit & Loss Statement (Income Statement) • Balance Sheet
Regarding Your Financial Statements… • Accuracy is Essential • GIGO • Hire Kerry to help you shape up your books • Accrual vs. Cash Basis • Accrual Basis – Day to Day operations • Enter Invoices and Bills as they are incurred – not as they are paid • Cash Basis – Paying Tax • Enter data on Accrual Basis/Click of a button will show reports in either format (in QuickBooks)
Chart of Accounts Tips • Good Structure • Sufficient detail to analyze data • Use sub accounts where more detail is needed • Consider using classes if appropriate • Group Expense accounts appropriately • All direct costs in COGS • Non Operational Income and Expenses in “Other Income & Expense” section • Group Balance Sheet Liabilities appropriately • Loans that will not be repaid this year in Long Term Liability section
Key Performance Indicators Factors that indicate the current and future performance of a business in areas that are critical to the company's success.
Financial KPIs • Revenue to Budget • Gross Profit • Net Profit • Break Even Sales • Liquidity - Current Ratio • Solvency - Debt Ratio • Collections (Days Sales Outstanding)
BEST PRACTICE GUIDE : Gross Profit % • Gross Profit Margin = • (Gross Profit/Revenue)% • Higher is better • Industry Averages Differ • Set a budget target to measure 31
BEST PRACTICE GUIDE : Net Operating Profit %** • Net Operating Profit Margin = • (Net Operating Profit/Revenue)% • Higher is better • 15% is a goal to shoot for (25% BEFORE Owner’s Compensation) ** There is a distinction between Net Profit and Net Operating Profit, which is Profit before taxes, and “other” income & expenses not related to operations of the business 32
BEST PRACTICE GUIDE : Liquidity Ratios Current Ratio = Current Assets Current Liabilities Should be a minimum of 1.5 or higher (3.0 or greater is better) Quick Ratio = Cash + Equivalents Current Liabilities Should be at least 1.0 Higher is better for both
BEST PRACTICE GUIDE : Debt Ratios Debt Ratio = Total Liabilities Total Assets Should be less than 1.0 Debt to Equity Ratio = Long Term Debt Stockholder’s Equity Should be less than 1.5 or 150%
BEST PRACTICE GUIDE : Days Sales Outstanding (Collections) Days Sales Outstanding = Accounts Receivable x 365 Annual Revenue (previous 12 months rolling revenue) • Should be 30 days or less
BEST PRACTICE GUIDE : Cash in Bank – Ideal Cash in Bank = Overhead Expenses* (next month) Gross Profit Margin Plus: Fixed expenses for months 2 & 3 Or – just think 3 months fixed expenses for a quicker calculation *Include Variable Costs and Overhead Costs
BEST PRACTICE GUIDE : Cash in Bank – Ideal Cash in Bank = Overhead Expenses* (next month)/Gross Profit % Plus: Fixed expenses for months 2 & 3 Or – just think 3 months fixed expenses for a quicker calculation *Include Variable Costs and Overhead Costs
BEST PRACTICE GUIDE : ROI Return on Investment = (Net Profit/Total Assets)% • Higher is better • Should be at least 10% • 25% or higher is a goal
Implementation Steps • Review your own financial statements and chart of accounts • Ask me to review if you would like my perspective • If you need help with your QuickBooks, hire Kerry • Next Month: We’ll talk about Profit Planning and creating a budget • Start thinking about your financial goals for 2013