Oklahoma Main Street Program

1. Oklahoma Main Street Program Operating Controls Program Manager & Volunteer Training Perry, Oklahoma November 3 - 5, 2009

2. Operating Controls Business owners who do not “control” their company’s operations are at the mercy of market whims, irrational customers and every other yahoo who walks through the front door. You should be in control. Don’t Blame – New road by-passing downtown … Your computer … Discount Center City … Lazy employees Ungrateful customers ... Back stabbing suppliers … or that no-good son-in-law. No Excuses

3. How Do You "Control" Your Business? • Your begin with a plan - • Set a few goals • Adapt to change • Monitor performance • Adapt to change • Communicate success and • Adapt to change

4. Begin With A Plan Formalize the company’s direction over the next 12 months. Plans should be flexible enough to adapt to market changes yet rigid enough to resist passing impulses. http://www.bplans.com 500+ Sample Plans SIMPLE:Is it easy to understand? How readable is it? SPECIFIC: Are its objectives concrete and measurable? Does it include specific actions, dates, responsibilities and budgets? REALISTIC:Are the sales goals, budgets, and milestones realistic? Nothing stifles implementation like unrealistic goals. COMPLETE:Does it include all the necessary elements?

5. B. Ongoing Monthly Expenses Payroll – all employees Payroll taxes Rent / Mortgage Lease payments Advertising Postage & shipping Supplies (office, shop & store) Telephone / fax Utilities / City Professional fees Internet connection Insurance – general, vehicle, liability Insurance - health Loan & credit card payments Inventory Repairs & maintenance Taxes Vehicle / travel Other Business Start-up Costs How Much? A. One-Time Start-up Costs Purchase / down pmt on the business Office furniture, equipment + HVAC Computer – hardware / software / installation Business cards / stationery Decorating remodeling Fixtures, counters, displays + installation Starting inventory Tools, instruments, equipment Utility, telephone deposits Professional fees Licenses & permits Advertising / promotion Signage – outdoor & indoor Lease and security deposits Petty cash Other Business Start-up Costs = A + (B x C) C. Est. # of months to get established Small Business Finance Center http://www.businessknowhow.com/startup/startup.htm

6. Accounting Systems – 1. Software http://quickbooks.intuit.com/ http://www.simplyaccounting.com/productsServices/ http://www.peachtree.com/ http://www.sagebusinessvision.com/ http://office.microsoft.com/en-us/accounting/FX100518171033.aspx And don’t overlook 3. Manual bookkeeping systems 2. Public Accountants But, if you don’t know the difference between mark-ups and margins, you might need to sharpen your management skills

7. 1st - Remember why you’re in business. □ A. Add to the local economy □ B. Build a sustainable enterprise □C. Sell company merchandise / services □ D. Satisfy customers □ E. Expand markets □ F. Reward ownership □ G. Provide jobs for employees X You don’t need many. You were thinking something else? • Net Income • Asset Management • Pricing for Profits

8. 1. Net Income It should be the only reason why you’re in business. For certain, it’s the only thing that will sustain you in business.

9. To choose a realistic income goal for the company … think about the business costs needed to “sustain” the company. Costs Costs Costs Costs Costs Costs Costs • Two Types: • The “direct” costs incurred selling • products & services • 2. The costs needed to “support” the • the business.

10. Direct Business Costs Retail = Cost of merchandise to be sold Cost of sales commissions Cost of any direct labor Cost to move the goods to your store ▲ in inventory value (Beginning – Ending) Support Business Costs Retail = Other Payroll Advertising Utilities Communication Insurance Taxes Space Repairs Donations Supplies Rentals Bank Fees Vehicle Exp. Postage Dues Prof. Fees Furnishings “Other”

11. Direct Business Costs How much for the next 12 months? Retail = Cost of merchandise to be sold Cost of sales commissions Cost of any direct labor Cost to move the goods to your store ▲ in inventory value (Beginning – Ending) Support Business Costs Retail = Other Payroll Advertising Utilities Communication Insurance Taxes Space Repairs Donations Supplies Rentals Bank Fees Vehicle Exp. Postage Dues Prof. Fees Furnishings “Other” Support @ $95,000 Since we’re looking a year out, it’s okay to guess. Make it your best guess.

12. Okay, What's your goal for net income? What’s a fair reward for the owner for the risks taken over the next 12 months? That’s a fair goal. $35,000 Also, what’s a fair mark-up for the products & services you’re planning to sell? 100%

13. math Now a few words about business math. Revenues - Costs = Income Basic Business Equation = Revenues $279,600 less CGoS 139,800 = Gross Profit 139,800 less Operating Costs 95,000 = Operating Income 44,800 +/- “Other Income/Expense 0 =NIBT 44,800 less Income Tax 9,800 = Net Income $35,000 Revenues - Costs = Income $279,600 - $244,600 = $35,000

14. Given the company’s cost estimate and your goals, how much business do you need? Let's Work Backwards. Net Sales __________ less CGoS __________ = Gross Profit __________ less Operating Costs __________ = Operating Income __________ +/- “Other Income/Expense __________ =NIBT __________ less Income Tax __________ = Net Income Format $35,000

15. http://www.okcommerce.gov/mainstreet Company Pro Forma Tool Check out this place.

16. 2. Asset Management Assets = What the business owns. Two Classes: Current = Fixed = Cash, Accounts Receivable & Inventory Building, Property & Equipment (Vehicles) What’s the most important current asset? CASH!

17. Managing Short Term Cash Needs Not all bills are due the 1st of the month … Most accounting reports are about history … Every organization needs to understand their “flow” of money … What’s the short-term cash demand on your business … Upon how many “sources” of cash can your company draw … You need to know these things.

18. http://www.okcommerce.gov/mainstreet Cash Management Tool Check out this place.

19. Cash Flow

20. 3. Pricing For Profits

21. Decisions It’s management’s responsibility to establish company pricing objectives. How will I set prices? What should pricing accomplish? What about “loss-leaders”? What about sales promotions? Is it time for an increase? What about discounts? What about discounts?

22. What’s the “trick” in establishing company prices? To have the customers pay all company costs, reward the owner, and retain a few $ for contingencies. Me! If they don't, who does? The Owner!

23. Establishing Price: Many businesses begin product pricing with cost … What other factors impact pricing decisions? Competition Market Demand Business Image Profit Goals Market Share Cost ?

24. Sport Coat: Example: Direct Costs Materials $52.05 Labor $74.00 $ 2.00 Freight-in $128.05 Total

25. Many businesses start the pricing process by applying a “mark-up” to the product’s direct costs. $281.99 For example - Company: Ajax Tailors Product: Sport coat Direct cost: $128.05 Mark-up @ 120% Product price = $281.71 If the trick is for price to cover all costs! We have to know the cost structure of the business.

26. Ajax Tailors Pricing Rationale: Performance: Monthly average last 6 Months & planned performance for next 12 months. The business needs $16,100 in gross profit each month to pay “overhead” expenses, debt service, taxes, provide a fair return to ownership and keep some $ in the company. Monthly Average Revenue: $ 27,600 Cost of Sales: 11,500 Gross Profit: $16,100 Overhead: $ 8,200 Other: 900 Oper. Income $ 7,000 Taxes $ 1,850 Income $ 5,150 41.7% 58.3% The Sport Coat mark-up of 120% yields a gross profit rate of 54.5% - short of the “planned” rate of 58.3%. 25.4% 18.7% What are your options?

27. What’s the difference between “Mark-up” and “Margin”? Direct cost: $128.05 Mark-up @ 120% Product price = $281.71 Gross Profit = $153.66 Mark-up = Gross Profit / Cost 153.66 / 128.05 = 120% Margin = Gross Profit / Price 153.66 / 281.71 = 54.5% 1. Converting Mark-ups to Margins = 1+ 1.20 =2.20 = 1 / 2.20 = 0.4545 = 1- 0.4545 = 54.5% 2. Converting Margins to mark-ups = 1-.545 = .454 = 1 /.454 = 2.20 = 2.20 - 1= 120%

28. When things don’t go as planned … and they won’t … keep the focus on profit. That’s why your in business. The goal... the volume of gross profit dollars that pays all of the other business costs. That's why you're in business!

29. When companies experience an unexpected decline in business, the temptation many times is to lower prices to stimulate sales. Before making any adjustments in price, answer these questions. 1. Is the decline short or long term? 2. Is the decline industry wide? 3. What are competitors doing? 4. What are vendors doing? 5. What’s the level of stock? 6. Is demand still healthy? 7. What are non-price options? 8. What’s the company’s financial position? 9. Are there untapped markets? 10. How much “sale” business do you need to hold gross profit levels? Caution!

30. http://www.okcommerce.gov/mainstreet How Price Changes Impact Profit Check out this place. Relate pricing to profits

31. Financial reports are great and it’s important to review them on a regular basis. But remember, they’re “history”. Control the company’s operations by planning ahead – just a little. Plan your reward (Net Income), the company’s assets (Cash Flows) and price company products & services for profits. Net Income Cash Flow Prices If you don’t plan for them, they probably won’t happen!

32. Other Business Controls ... Paper Trails Inventory Control Break-Even Analysis Z-Score* Succession Plan Job Descriptions Engaged Employees Customer Access Open-mindedness to change Attitude & Grit Do you use any of these controls? *Z-Score – the sum of 5 ratios that predict bankruptcy Oper. Income / Total Assets Sales / Total Assets Working Capital / Total Assets Equity / Debt Retained Earnings / Total Assets 1.81 or below 

33. Need Help Starting A Business? http://www.inc.com/guides/start_biz/ 10 Sources http://www.entrepreneur.com/bizstartups/index.html http://www.sba.gov/smallbusinessplanner/index.html http://www.irs.gov/businesses/small/article/0,,id=99336,00.html http://smallbiz.att.com/OSB/Tips-Tools/Starting-Up.Page http://www.allbusiness.com/business-planning-structures/starting-a-business/3470974-1.html http://www.business.gov/start/start-a-business.html http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P01_0000 http://www.myownbusiness.org/ http://sbinformation.about.com/od/bizopportunities/a/startup101.htm

34. Any Questions? Thank You!