1 / 33

Real-World Finance 101 for Small Business

Real-World Finance 101 for Small Business. A few basics and a few things you probably didn’t know. Agenda. Performance analysis Accounting vs. Finance Accounting cycle Roles Software Chart of accounts Accrual accounting Management cycle Financial management.

thimba
Download Presentation

Real-World Finance 101 for Small Business

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Real-World Finance 101for Small Business A few basics and a few things you probably didn’t know

  2. Agenda • Performance analysis • Accounting vs. Finance • Accounting cycle • Roles • Software • Chart of accounts • Accrual accounting • Management cycle • Financial management

  3. What are your numbers telling you about your biz? • Too fast when margins are shrinking • Too slow when not keeping pace with markets • Fat when there is no leverage • Vulnerable when revenues are erratic

  4. Trends to Watch Unhealthy Healthy Revenue Revenue $ $ Expense Expense Time  Time  Revenue Revenue $ $ Expense Expense Time  Time  Revenue $ Expense Time 

  5. Trends to Watch Unhealthy Healthy Industry Benchmark Revenue $ $ Revenue Industry Benchmark Time  Time 

  6. Trends to Watch Unhealthy Healthy Revenue Revenue $ $ Cash Cash Time  Time  Revenue Revenue $ $ Cash Cash Time  Time 

  7. Trends to Watch Unhealthy Healthy Revenue Revenue COGS COGS $ $ $ Overheads Overheads Time  Time  Revenue $ COGS Overheads Time 

  8. Trends to Watch Unhealthy Healthy Revenue Revenue $ $ Time  Time 

  9. Benchmarks What we see financially is that… • Business owners don’t know when they are off track • Opportunities go unnoticed • Markets fluctuate – its hard to ride a wave when you aren’t looking

  10. Accounting vs. Finance Accounting Finance Looks forward Plan driven Models / scenarios Internal plus external data Management cycles • Looks back • Tax driven • Transactions • Internal data • Cycles – mo/qtr/yr Finance is about combining accounting information with business intelligence

  11. Accounting Cycle • Daily posting • Monthly closing • Reconciliations (balance against bank statements) • Adjustments (accruals and • Reporting • Annual closing

  12. Role of Bookkeeper • Posting • Reconciliation • Billing • Basic financial reporting Principle of “Separation of Duties” One person should not manage the books and handle receipts and deposits

  13. Accounting Software Selection Checklist: • Is it easy to use & get help? • Does it interface with my operations management system? • Association or peer network preferences • Cost of systems & ops • Is there a hosted version? Regional leaders: US and Canada: QuickBooks Pro Microsoft Dynamics Europe Sage Peachtree MAS India Tally Australia and Pacific Rim MYOB Zero

  14. Chart of Accounts & LOBs Chart of Accounts: The naming convention for grouping accounting activity. Lines of Business (LOB): are the tributaries to group the sources of revenue and expenses. Example: • Products • Services • Special projects Achieve a balance between: • Minimal detail for easier management • Granular enough for visibility on financial performance by LOB. Where is your revenue coming from? Where is your profit coming from?

  15. Chart of Accounts Two categories of accounts: • Balance Sheet accountsRunning totals; account balances as of the end of a reporting period. • Income Statement accountsPeriod activity totals; total amount of activity during a reporting period.

  16. Chart of Accounts Balance Sheet Assets Current assets Cash/checking Accounts receivable Inventory Long-term assets Furniture/equipment Organization costs Liabilities Short-term liabilities Credit cards Accounts payable Long-term liabilities Long-term loans Equity Capital stock Retained earnings Assets = Liabilities + Equity

  17. Chart of Accounts Income Statement(a.k.a., P&L; profit & loss) Sales Cost of goods sold (COGS) Product costs Service costs Gross Profit (Gross Margin% = gross profit/sales) Expenses (a.k.a., SG&A, sales, general and admin) Salaries Benefits Incentives / bonuses Rent Legal Operating Income Other Income Net Income Profit% = net income/sales

  18. Principle of Revenue and Expense Recognition (GAAP) • Revenue received before it is earned should be booked as a prepaid asset and not recognized as income until it has been earned. • Expenses owed but not paid should be recorded as expenses in the period incurred regardless of when they are paid

  19. Accrual Accounting • Accrual-Basis Accounting: revenues and expenses that have been received and paid in cash plus revenues and expenses that have been earned and incurred • Accounts payable or receivable, depreciation • Cash-Basis Accounting: revenues and expenses that have been received and paid in cash • Cash payments and receipts

  20. Accrual Accounting Your choices: • Accrual Basis • Cash Basis • Combination Most small businesses choose “combination” • Pay taxes based on “Cash Basis” • Management reporting based on “Accrued Revenue” and “Cash-based Expenses” • Financial analysis based on Full Accruals

  21. Adjustments • Depreciation and amortization • Recognizing expense in the period where you use it. Can impact analysis if not reflected. • Accrued earnings • e.g. Multi-month projects • Accrued expenses • e.g. prepaid software license, contractor payments

  22. Balance Sheet doesn’t reveal the market value of a business If you were looking to buy or sell a business, assets and liabilities don’t tell the story. Value is driven by trends, future potential, market comparables, ability to generate “free cash”. Income Statement (P&L) does not reveal where your business is headed Trend analysis tells the bigger story Performance analysis tells the detailed story Maybe you didn’t know…

  23. Financial Management • Business planning • Goal setting • Budgeting • Progress analysis • Communications to management team • Goals • Actual performance • Collaboration on needed improvements • Monthly, quarterly and annual cycles

  24. Financial Management Resources • Professional association standards or recommendations • Integrated systems (financial and operations) • Financial dashboard (“business intelligence”) • Business advisor / consultant • Board of directors or advisory board

  25. Performance Analysis Ratios Trends Goals Benchmarks

  26. Performance Analysis Combined Business Analysis: growth, profitability Line of Business (LOB) Analysis: growth, profitability Services Growth GM Profitability Product Sales Growth GM Profitability Other Growth GM Profitability

  27. KPIs (key performance indicators) • Ties operating data to financial data • Example– product sales and service • Revenue or Expense per employee • Quick Ratio (Current Assets/ Liabilities) • Support calls per sale • etc.

  28. The Process • Need to do it every month • Don’t let it take too much time (30 min monthly management) • Use analyzed data to find “the big 3 priorities” • Share with your team – get everyone on the same page

  29. Getting your Team on the Same Page

  30. How do you know when you’ve “got it?” Checklist for success: • Taxes submitted on time (not too much, not too little) • Goals are set & tracked • Routine monitoring • BI shared with team • Course-corrections • Tools to monitor

  31. Long Term Goals • Sustainability • Long-term growth • Market position • Owner’s return on investment (ROI) • Equity value • Liquidity event (sell, acquire, investment) • A good night’s sleep

  32. Don’t live on an island!

  33. Free Financial Health Check Your Company, Inc. https://healthcheck.corelytics.com/pub/sign_up.aspx

More Related