Grow Your Business! Find Ways to Improve Cash Flow and Profits

1. Grow Your Business! Find Ways to Improve Cash Flow and Profits

2. The SCORE Foundation would like to thank for showing their support of America’s small businesses by sponsoring this series. The content provided in the Grow Your Business! materials is intended as a business resource only and does not guarantee a successful outcome when applied to individual business use. To find additional resources on growing your business, visit www.score.org and www.openforum.com

3. A Special Thanks to Our Local Sponsors

4. Classroom Safety – Argosy U Emergency Exits Restrooms Please do not wander around the building! You are HERE

5. Classroom Safety–ComCenter Emergency Exits Restrooms Please do not wander around the building! You are HERE

6. About SCORE • Successful and experienced business owners and executives acting as volunteers • Free ongoing mentoring: • One-on-one • E-mail • Signup on our website – Mentoring Tab • Seminars and workshops • Resources for small business: manasota.score.org Douglas S. Cavanaugh

7. Assessing Your Business If you have not looked at the SCORE Business Needs Assessment, it is in your packet! It will help you assess the current state of your business in 5 key areas: • Management • Marketing • Sales • Finance • Operations Review with your mentor to help you: Decide what additional workshops to attend Develop a customized business improvement plan

8. Workshops - Focused on key business processes Improve performance to Grow Your Business! Customers – Impacted by All Functions in Your Business Marketing Essentials to Attract More Customers Marketing Focus on Customers to Increase Your Sales Sales Customer Service Service Delivery Improve Your Services and Gain Productivity Distribution Purchasing / Manufacturing Finance Find Ways to Improve Cash Flow and Profits Business Owners / Management - responsible for Business Performance

9. Let’s Get Started Briefly tell us about you: • Your name • Your business (30 second “elevator” speech) • Do you already have a SCORE mentor? • What you hope to achieve during and after this workshop Katrina Markoff

10. During this workshop we will discuss: • Importance of financial management to a small business owner • Using Financial Statements • Financial management practices, rules and tools for a small business • Funding: business growth, working capital, and/or assets • Common risks in a small business • Business warning signs and risk management plans Marta E. Maxwell

11. Good Financial Management Practices

12. Good Financial Management Practices Reach YOUR goals by making good decisions • Use commercial business accounting software • Prepare a budget and measure performance • Understand and manage your cash flow • Keep track of profit /loss for your business • Find appropriate funding for operations and growth • Develop a business financial forecast – monthly, for the next 1 or 2 years • Continue to improve measurements and practices • Your accountant may help, but it is YOUR business!

13. Importance of Excellent Bookkeeping • Critical component of company financial management • Organized process of tracking all income and expense transactions • Transaction entries must be current • Basis for all financial management, business decisions, financing, taxes,owner’s draw / salary, and retirement planning.

14. Basic Bookkeeping Steps • Obtain business accounting software Discuss with your accountant: • QuickBooks – Pro (Services) or Premier (Manufacturing) • Peachtree Accounting • Open a separate business checking account • Deposit all sales receipts • Checks / Cash • Credit card sales – direct deposit by clearing house • Write business checks for business expenses • Reconcile your checking account monthly • Obtain a separate business credit card • Pay bill monthly – credit card financing is expensive!

15. Basic Bookkeeping Steps • Pay business expenses first • Track Sales – register tape / invoices • Pay yourself with owner’s draw / salary • Generate and use profit and loss (P&L) and cash flow statements – at least monthly Note: Most small businesses use the CASH method as their tax basis and it shows the current cash status The ACCRUAL method view shows additional “future” information: 1- Sales that have been made, but payment has not been received 2 - Purchases that have been made, but the invoice is not yet paid. Look at BOTH with your software to get the best perspectiveon your financial status 10.

16. Preparing a Budget A budget is a tool that helps you: • Plan for the future – usually monthly for the next year • Forecast and then track your actual financial transactions • Adjust activities when needed • Marketing to attract more customers to increase sales • Reducing costs • Consider the impacts of expansion • Estimate profitability

17. Primary Elements of a Budget Your accounting software will provide detailed accounts for each category

18. SCORE Budgeting / Forecast Template • You may use a simple format like the last slide • SCORE also offers a comprehensive spreadsheet template for developing your budget or business financial forecast • Download: http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

19. Exercise 1 How Do You Budget for Your Business? • Discussion: • Do you currently prepare an annual budget? • Do you track your results compared to budget monthly? • How does this help with your business decisions / forward plans? • 5minutes

20. Understand and Manage Cash Flow What is cash flow? • Moving cash in or out of a business including sales revenue receipts and expense transactions • Balance of cash received less the amount of cash paid out over a period of time • Cash flow can be positive or negativeduring the period

21. Cash Flow Analysis • Generate Cash Flow reports at least monthly with your accounting software • Compare your Actual business performance to your Budget in all categories • Where were the gaps? • What impact did business performance have on Cash Flow? • What needs to change to increase positive cash flow? • Prepare a Cash Flow projection to help adjust performance when needed • Helps you manage your cash so you can pay your bills on a timely basis and keep the doors of your business open

22. Projecting / Estimating Future Cash Flow Prepare a financial statement using assumptions to forecast for a future time period: • Use your Budget estimates and adjust assumptions based on current information • Current company cash flowing in and out • Future cash flow during a specific time period • Project whether cash receipts (in flows) will be sufficient to cover projected cash disbursements (out flows).

23. Projecting / Estimating Future Cash Flow How can a cash flow projection help? • Set sales and expense goals • Plan equipment purchases for replacement or expansion • Determine cash needed to purchase inventory for seasonal cycles Why do I need a Cash Flow projection? • Track liquidity when accrual accounting masks cash realities • Help you determine the need for financing • Show lenders your ability to plan and repay financing (Frequently required with loan applications) • Predict cash shortage period(s) that may require adjustments

24. Cash Flow Projection Example Sources of Cash Operating Uses of Cash Non-Operating Uses of Cash

25. Possible Ways to Increase Cash Flow • Increase the number of items sold • Increase the price • Reduce expenses • Change the timing of expenses • Obtain sources of cash other than sales (e.g., line of credit) • Reduce or change timing of Owner’s Draw • Buy inventory from vendor at lower price • Obtain credit from vendor(s) • Establish policy to get paid sooner by customers

26. Exercise 2 How Do You Manage Cash Flow? • Discussion: • How many of you have had cash flow problems? • What were the causes? • What did you do? • Did it work? • 5minutes

27. Cash Flow Projection - Worksheet The SCORE Cash Flow Projection spreadsheet can be used to estimate weekly cash flow. Download at: http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

28. Profit and Loss Statement (P&L) • Measures revenues andexpenses over a periodof time • Tracks profitability: is the business making a profiton what it sells? • Shows how successfully the buying and selling process has been managed • Measures the ability of your business to grow, repay debt service and support you

29. Profit and Loss Statement (P&L) Top section of the P&L shows Revenue • Gross revenue • (Plus or minus) Adjustments to revenue • (Minus) Cost of goods sold (COGS) • = Gross Profit Bottom section of the P&L shows Expenses • Logical categories of expenses, including overheads Revenue minus Expenses = Net (pre-tax) Profit or Loss

30. Profit and Loss Statement (P&L) Example P&L - Revenue / Gross Profit Theresa Alfaro Daytner (statements in your handouts)

31. Profit and Loss Statement (P&L) Example P&L Expenses Net Income before Taxes

32. Net Profit is a GOAL! Net profit pays for: • Loan principal repayment • Future income taxes • Owner’s Salary (LLC [S Corp] / Corporation) • Owners / Shareholders Dividends • Owners Draw (sole proprietor / partnership) • Future expansion and equipment

33. Understanding and Using Financial Ratios

34. Understanding and Using Financial Ratios Can be compared to RMA (Risk Management Association) average ratios Available for business types by NAICS code (North American Industry Classification System) Talk to your SCORE mentor to obtain the RMA data for your business type Financial Ratios • Liquidity • Profitability • Leverage • Efficiency • Debt Service Your mentor can help you determine what ratios are appropriate for your business

35. Liquidity Ratios Used to measure the quality and adequacy of current assets to meet current obligations as they come due • Current ratio – overall liquidity • Current Assets / Current Liabilities • Quick ratio – short term liquidity • (Cash + AR) / Current Liabilities • Days of cash • (Cash x 360) / Sales Surendra N. Kumar

36. Profitability Ratios Used to measure performance of a company and how well its assets are being used to generate revenues • Gross profit margin • (Sales minus Cost of Good Sold) / Sales • Pre-tax profit margin • EBT / Sales • Return on equity • EAT / Equity • Compare to historical & Industry Elizabeth Feichter

37. Leverage Ratios Key measurements in determining a company’s vulnerability to business downturns as well as its capacity for credit and internal capital needs • Debt to Equity - Leverage • Liabilities / Equity • Compare to historical, or industry averages and trends to assess your risks Andrew Dunn

38. Efficiency Ratios Measurements of the effectiveness of managing current assets and current liabilities • Days of accounts receivable (A/R) • 360 /(Sales/Accounts Receivable) • Days of inventory • 360 /(Cost of Goods Sold/Inventory) • Days of accounts payable (A/P) • 360 /(Cost of Goods Sold/Accounts Payable) • Compare to terms, historical andindustry Marta E. Maxwell

39. Efficiency Ratios: Debt Service Ratios used by Banks Fixed Charge coverage and debt service coverage ratios used to measure borrowing ability • Earnings before Interest and Taxes (EBIT) / Interest Generally 2.5 is the minimum credit standard • Earnings Before Taxes / Current Maturities Debt Service payment coverage from traditional cash flow: = Earnings after taxes / current maturities

40. Breakeven Analysis • Valuable for all businesses so you know how much you need to sell to cover your total costs! • Breakeven when total costs (fixed + variable) = total revenue • Breakeven = Fixed Cost/Gross Profit Margin • Important calculation if you have high fixed costs and variable sales Paul Cernuto

41. Breakeven Chart Breakeven - A View of the Analysis Sales revenue over time for our example. Breakeven - when total costs (fixed + variable) = total revenue $20,000 sales or 200 units Note: May be additional “Semi Fixed Costs” influenced by volume but not associated per unit (example - commission tiers, temporary labor, office supplies)

42. Funding Business Growth

43. Financing Growth – Part of Your Plan! Sales growth may require: Increased inventory More employees Larger space Increased receivables Consider financial impacts of funding growth • Many companies in growth mode run short of $$ and fail • Make sure you are adequately funded! • Potential Source of funding • Internal • Bank / Lender • Customer • Vendor terms • Crowd Funding

44. Financing - Equity vs. Debt • Debt Financing – a loan or line of credit that comes with a repayment schedule and an interest rate. • Upside: Don’t have to give up equity • Downside: Must pay interest and may require personal collateral such as home • Equity Financing – funds received from private or "institutional" investors in exchange for an equity ownership stake • Upside: No loan payments to make • Downside: You have new shareholders that may want a larger role in managing the business (think “Shark Tank” TV show)

45. Business Financing • Working Capital • Bank line of credit –borrow repeatedly up to a certain amount Repay and re-borrow as required • Extended Vendor payment terms – gives you more time to sell product and get paid and pay vendors • Equipment / Fixed Assets Financing • Bank / Credit Union • Collateral for a long term loan may be the assets you purchase • SBA 504 Fixed Asset loans through financial institutions • Commercial mortgage if you plan to buy, build or enlarge a building

46. Managing Risk

47. Types of Risk • Internal Risks • Occur within the company • May or may not be controllable by the company • The company must respond to mitigate the risk • External Risks • Caused by events outside the company • The company cannot control the events • The company must respond to mitigate the risk

48. Internal –Human Risks • Death • Owner / Key person • Employee • Illness • Short term • Long term • Indefinite • Employee Injuries • Critical Employee(s) leave

49. Internal –Human Risks • Theft and fraud • Product and inventory theft • Time sheet fraud • Accounting and cash fraud • Low morale, dissatisfaction • Failure to perform • Sabotage of systems,equipment or customers

50. Internal –Equipment Risks • Equipment breakdowns • New equipment integration • Inadequate maintenance • Worn older equipment • Damage to property / vehicles • Failure cause by misuse • Physical plant repairs • Servicing lines or utilities • Routine maintenance