1 simple steps for growing your business financial management

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Simple Steps for

Growing Your Business

Financial Management

• 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 Simple Steps for Growing 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

http://www.score.org/

http://www.openforum.com/

A Special Thanks to Our Local Sponsors

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About SCORE6

Douglas S. Cavanaugh

• Successful and experienced business owners and executives acting as volunteers

• Free mentoring:• One-on-one• E-mail• Signup on our website –

Mentoring Tab

• Seminars and workshops• Resources for small

business: manasota.score.org

http://www.score.org/

Assessing Your Business7

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:1.Management2.Marketing3.Sales4.Finance5.OperationsReview with your mentor to help you:

Decide what additional workshops to attend Develop a customized business improvement plan

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Sales

Customer Service

Purchasing / Manufacturing Distribution

Finance

Business Owners / Management - responsible for Business Performance

Marketing

Service Delivery

Customers – Impacted by All Functions in Your Business

Workshops - Business Focus Areas

Marketing Your Business

Growing Your Sales

Managing Operations

Financial Management

Human ResourcesManaging Your Time/

People Resources

During this workshop we will discuss:

• How advisors can help your business

• How to read and use financial statements

• How to measure your company’s financial health

• The basics of cost accounting• Business risk and how to

manage it• How to use cash flow forecasts• Your options for funding growth

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Marta E. Maxwell

Briefly tell us about you:

• Your name

• Your business

• What you hope to achieve through this workshop

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Let’s Get Started

Katrina Markoff

Your Trusted Advisors11

Your Business

Attorney

Banker

CPASCORE Mentor

Risk Manager / Insurance

Using Financial Statements to Manage

Your Business

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Important Terms: GAAP & IFRS

GAAP (Generally Accepted Accounting Principles):• The current accounting standard used in

the U.S.

IFRS for SME (International Financial Reporting Standards for Small and Midsized Enterprises):• The international standard for accounting

for small and mid-sized businesses in most other countries

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Doug Zell

Using Financial Statements to Manage Your Business

Important Terms: Bookkeeping Methods

Cash:•Cash basis bookkeepers recognize income and expenses when they are received/paidAccrual:• Accrual basis bookkeepers recognize income and expenses when the product/service is delivered

•Analyze your business with an “accrual view” even if you pay taxes on a cash basis to make sure you understand accounts receivable (AR) and accounts payable (AP)

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Jennifer Behar


Financial Statements

A typical set of financial statements is made up of:•Income Statement (P&L)•Balance Sheet•Statement of Cash Flows

Others that may be important:•Accounts Receivable Aging Summary•Accounts Payable Aging Summary

Your accounting software should be able to create the reports whenever you need them

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Douglas S. Cavanaugh


Income StatementTop section shows revenues• Gross revenues• Adjustments to revenues• Cost of goods sold (COGS)• Adding/subtracting the figures above =

gross profit

Bottom section shows expenses• Logical categories of expenses• Revenues – expenses = net (pre-tax) profit

16Using Financial Statements to Manage Your Business

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Assets:-Current-Long-term

Liabilities:

-Current-Long-term

Shareholders’ Equity:-Paid in capital

-Retaine

d earning

s


Balance Sheet

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Theresa Alfaro Daytner


Income Statement – Revenue / Gross Profit

(statements in your handouts)

Income Statement

Expenses and Net Income

before Taxes



Balance Sheet


Statement of Cash Flow

Understanding and Using Financial Ratios22

Financial Ratios from the Sample Financial Statements

Further discussion of these

ratios later in the

workshop!

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CPA Audited

CPA Reviewed

CPA Compiled

Internally Prepared

Types of Financial Statements

Mos

t Tru

sted

Least

Expensive


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In-House:

Bookkeeper devoted to your business

Quickbooks software is easy to use – inputs / reports

Familiarity with your business

May have additional expertise

May handle other tasks

Outsourcing:

May cost less? Software allows

easy data transfer for your reports

Technology enables secure sharing of sensitive data

May gain access to multiple skill sets

Pros of In-House Bookkeeping vs. Outsourcing


Internally Prepared

•Financial statements prepared by company management for operating business

•Should be prepared at least monthly

•Easier to prepare timely reports


CPA Compiled Financial Statements

An annual compilation of a company’s financial accounts prepared by a CPA or an accountant.

Business financial statements that are assembled from the records, materials and information of the business. These statements contain no independent assurance as to content or compliance with GAAP.

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Rupa Bihani Shah


CPA Reviewed Financial Statements

Business financial statements that are reviewed by independent accountants through inquiries of management and performance of analytical procedures on financials to provide limited assurance that no material modifications are necessary to conform to GAAP.

The accountant does not express an opinion on reviewed statements.


CPA Audited Financial Statements

Business financial statements that have been examined by independent certified accountants to determine if they present fairly financial position, results of operations, and cash flows in conformity with GAAP.

Statistically valid sampling of the information to verify the data.


List how you use financial statements today.Income StatementBalance Sheet Cash Flow Analysis

Who prepares and reviews your financial statements?

Then we will discuss current and potential future uses

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Exercise 1 – Using Financial Statements

5 minutes to fill in your current uses10 minutes to discuss future uses

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Exercise 1 – Using Financial Statements

Understanding and Using

Financial Ratios

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Understanding and Using Financial Ratios

Financial Ratios

•Liquidity

•Profitability

•Leverage

•Efficiency

•Debt Service

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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!


Liquidity Ratios

Used to measure the quality and adequacy of current assets to meet current obligations as they come due

• Current ratio• Quick ratio• Days of cash

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Surendra N. Kumar


Liquidity Ratios: Current Ratio

Indicates the extent to which current assets are available to satisfy current liabilities

• Stated as values such as 2.5 to 1.0 or simply 2.5

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Current Assets

Current Liabiliti es

Current Rati o


Liquidity Ratios: Quick Ratio

Indicates the extent to which more liquid assets are available to satisfy current liabilities

• Stated as values such as 1.5 to 1.0 or simply 1.5

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Cash and A/R

Current Liabiliti es

QuickRati o


Liquidity Ratios: Days of Cash

Indicates the number of days revenue held in cash

• Days of cash = safety cash• Every business will require a different level of

safety cash• Cash equivalents include money market

holdings, short-term liquid investments, marketable securities and government bonds and bills

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Cash and Cash

EquivalentsRevenues

Days of Cash360


Profitability Ratios

Used to measure performance of a company and how well its assets are being used to generate revenues

• Gross profit margin• Pre-tax profit margin• Return on assets• Return on equity

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Elizabeth Feichter


Profitability Ratios: Gross Profit Margin

The percentage of money left after sales when cost of goods sold (COGS) is subtracted

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Formula:

Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit Margin

Example:

Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) = Gross Profit ($4,000)Gross Profit Margin = Gross Profit ($4000) / Gross Sales ($10,000) = 40%


Profitability Ratios: Return on Assets

The profit generated by the total assets employed by a company

What it means: Higher ratio reflects a more effective employment of company assets

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Net Earnings

TotalAssets

Return on Assets


Profitability Ratios: Return on Equity (ROE)

The profit generated by the net assets employed

ROE is an important financial ratio applying to small business owners and a good measure of performance by management

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Net Earnings

Total Net Worth

Return on Equity


Profitability Ratios: Pre-Tax profit margin

Taxes vary by location, so pre-tax profit margin is a good ratio to look at and use for comparisons

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Earnings Before Taxes

Total Sales

Pre-Tax Profi t

Margin


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

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Andrew Dunn


Leverage Ratios: Debt to Equity

Indicates how well a business is leveraging its debt against the capital invested by its owners

If liabilities exceed net worth, creditors have a greater stake than the shareholders

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Total Liabiliti es

Total Net Worth

Debt to Equity


Efficiency Ratio

Measurements of the effectiveness of using current assets and managing current liabilities

• Days of accounts receivable (A/R)• Days of inventory• Days of accounts payable (A/P)

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Marta E. Maxwell


Efficiency Ratios: Days A/R Outstanding

Indicates the number of days to collect a period’s worth of accounts receivable

Though industries vary, if you can keep your A/R collection cycle close to the net terms of sale days, you have an efficient collection process – typical may be 30 days

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Net A/R

Days in Period

Days A/R Outstanding

Credit Sales


Efficiency Ratios: Days of Inventory

Indicates the average number of days it takes to turn over your inventory during the year

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Inventory Value

Cost of Sales

Days of Inventory360


Efficiency Ratios: Days of A/P

Indicates the number of days of trade and service payables your company is owing

If your vendor offers net 30 terms with a 2% prompt payment discount (within 10 days), taking the discount when you can may be important

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Net A/P

Days in Period

Days A/P Outstanding

Credit Sales


Efficiency Ratios: Debt Service Ratios used by Banks

EBIT (I) = EBIT / interest and EBIT (CM) - EBIT / current maturitiesFixed charge coverages on businesses needing permanent working capital

(Debt Service payment coverage from traditional cash flow: = Earnings after taxes / current

maturities)

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EBIT Interest and

Debt Service Rati os

EBIT Current Maturiti esB o t h i n d i c a t e


Class Discussion: Ratios•Which ratios are most valuable in improving cash flow?•Should seasonal/cyclical businesses vary days of cash?•What are risks of not turning A/R fast enough?•Debt to equity ratio•How to calculate gross profit margin•Markup vs. margin

15 minutes

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Cost Accounting

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Cost Accounting

Financial vs. Cost Accounting

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Financial Accounting:

Complies with standards such as GAAP or IFRSBalance Sheet and Income StatementStatement of Cash Flows Complete picture of company’s overall financial health at a point in time or over a period of timeUsed by stakeholders to evaluate company

Cost Accounting:

Used to compute internal costs and profits on individual jobs or productsBreak-even analysis Financial ratio benchmarkUsed to make management decisions on a daily basisUsed by management to make sure operations are profitable

Cost Accounting

Break-even Analysis

•Valuable for all businesses•Breakeven - when total costs (fixed + variable) = total revenue•Important calculation if you have high fixed costs and variable sales•Most important for manufacturers and other businesses that have significant investments in equipment•Businesses with Project based revenues will want to evaluate each project

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Paul Cernuto

Cost Accounting

Break-even Analysis Terms

•Annual or Unit sales revenue: revenue from selling your product or service•Annual or Unit variable cost: cost of goods sold (COGS)•Annual fixed cost: total of all business overhead costs anticipated on an annual basis•Contribution margin: amount of money in annual or unit sales revenue that exceeds annual or unit variable costs

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Cost Accounting54

Formula:

When Fixed + Variable Costs =

Total Revenue (during the year)

Break-even Sales=

Fixed Cost (annual) ÷ Contribution Margin (fraction)

Example:

$60,000 ÷ .30

Annual Break-Even Sales = $200,000Monthly = $16,666

Annual Units = 2000

Break-even Analysis: How many sales do you need to make, at what price,

at what costs and in what time period to be profitable?

Annual Fixed Costs = $60,000Unit Sales Revenue = $100Unit Contribution Margin = $30Contribution margin (fraction) = .30

Cost Accounting55

Break-even – 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)

Simple Breakeven Analysis

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

Units Sold (x100)

Rev

enue

($)

Revenue Fixed Cost Fixed + Variable

Cost Accounting

General and Administrative Expenses

Expenses that support the company’s operations, but are not directly related to sales or COGS

• Management and Office personnel payroll• Portion of utility expenses attributable to office costs• Telephone, Internet, computers used to run business but not part of COGS• Insurance

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Managing Risk

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Managing Risk

Types of Risk:

• Risk mitigated by insurance (property, general liability, auto, worker’s compensation and perhaps business interruption)

• Risk that partner or widow(er) will be left with business debt (key man life insurance)

• Risk of not being paid by a foreign customer (business credit insurance)

• Product risk due to product failure , misuse or defects that create liabilities

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David, Laureen & Dan Barber

Using Cash Flow Forecasts

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Cash Flow Forecasting

Very important all the time:•Making Payroll on time•Paying Taxes•Paying Vendors and all other obligations•Minimizing use of expensive credit lines

Other special circumstances:•When company is growing rapidly or business experiences a decline

Using a13-week cash flow forecast is an effective way to manage tight cash flow during challenging times.

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Cash Flow Forecasting Cash Balance tab

Accounts Receivable tab

AccountsPayable tab

Download at: http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

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Funding For Strategic Growth

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Funding Sources

• SBA Microloans – up to $50,000• SBA Express Loans – up to $350,000• SBA 7 (a) Loans – up to $5 million• SBA 504 Loans – up to $4 million

Buildings/Land/Capital Improvements • USDA B&I (Business and Industry) loans• CDC (Certified Development Corporation)

for local community development• Community Development Financial

Institutions (CDFI)• Small Business Investment Companies

(SBICs)

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Funding Sources64

• Bank / Credit Union / S&L – Term Loans, Line of Credit, Revolving Credit

• Finance Companies – Asset based loans• Insurance Companies – Commercial mortgages• Leasing Companies – Any assets not intended for

resale• Seller financing – negotiated variations• Franchisor support – Term loans for acquisition• Angel Investors• Personal loans

– Home equity– Credit card– Peer to Peer (P2P) loans

Chapter may have more local information!

Financing in the current business environment

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• What experience have you had in the past three years to obtain financing?

Successes and Turndowns?Factors that helped / hurt?

• How can you improve your management of assets and liabilities to improve cash flow?

• What can you do to improve your chance of a successful load application?

15 minutes to discuss

Funding – Other SCORE resources

For most commercial loans, a business plan with an accompanying financial forecast is required.

The SCORE workshop, Building Your Business Plan will help guide your plan developmentA financial forecasting spreadsheet is available for download: http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

Comprehensive 3 year financially planning toolTo learn how to use the forecasting tool, talk to your mentor or attend Simple Steps for Starting Your Business - Workshop 4 – Financial Projections

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Review

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Review

• Accurate financial statements are critical to the success of your company.

• Learning how to read an income statement, balance sheet and cash flow statement and spotting trends will help you manage your business more effectively.

• Financial ratios help you analyze certain aspects of your operations so you can make adjustments to become more profitable.

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Next Steps

• Set up your company’s cash flow forecast using the instructions provided for the Excel spreadsheet – download at:http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

• Calculate some or all of the financial benchmarks we have discussed that are important to your business

• Ask your mentor to get the RMA ratios for your business type

• Review the With Your Mentor handout for topics to discuss with your mentor

Don’t have a SCORE Mentor? Connect with one today!

• SCORE has over 13,000 successful and experienced executives with small business know-how that want to help you

• Visit manasota.score.org for more information

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Please fill out the workshop evaluation form

Your feedback is important to help us improve our programs!

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1 simple steps for growing your business financial management

Documents

business slide

business materials

business resource

individual business

experienced business

maxwell slide

financial statements

started katrina markoff