Copyright, 2001 © ACTION International Pty Ltd.

Understanding Finance

Certified ActionCOACH Business Coach

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We are part of the global ActionCOACH teamWe are the World’s No 1 Business Coaching TeamOperating in 28 countries with more than 1200 coaching offices world-wideWe currently coach 1-on-1 over 20,000 business owners across the world

Neale Lewis

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Notes, worksheets & PowerPoint …

Left V’s right brain ...

Use of colours ...

Calling out answers ...

Raising your hand ...

100% participation

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Words

Math

Logic

Process

Short Term

Memory

Art

Music

Creativity

Feelings

Long Term Memory

A Little Bit About Super Learning

To make sure you get the most out of your learning…

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Yeah, Yeah.. I know!

To make sure you get the most out of your learning…

BlindingFlashof the Obvious

ActionCOACH’s definition of aREAL business…

A Commercial, Profitable, Enterprise

That Can Work Without

YOU!

MASSIVE RESULTS

Results

Synergy

Team

Leverage

Niche

Mastery Eliminate Chaos

Predictable Cash Flow

Efficiency

Structure for Growth

A Well Oiled Machine

Owner’s Personal Growth and /or New Businesses

Stab

ility

Cas

hTi

me

Gen

eral

Man

ager

Pas

sive

Inco

me

or

Sal

e of

Bus

.

Commercial

Profitable Enterprise

That Works

Without You …

Six Steps to Massive Results …

Duplication

The Mastery Level …

Taking control of your business …

Money Mastery

Time Mastery

Delivery Mastery

Destination Mastery

Did You Know?Did You Know? That 80% of Businesses Fail in the 1st 5

Years? Mismanagement

Under-capitalised

Poor business plan

Cashflow

Etc., etc., etc., …

• That 80% of the Surviving 20% Fail in the That 80% of the Surviving 20% Fail in the 22ndnd 5 Years? 5 Years?

Understanding The Numbers…Leads to:

Greater confidence in decisions

Better business decisions

Logic-based implications of choices

Greater awareness of abilities

Proper examination of issues

Effective billing, collecting & paying

Improved Cash Flow

Cashflow

Profit vs Cash Flow Profit does not equal cash

– Why?

Debtors

Buying stock

Non-cash items eg depreciation

A sudden high peak in sales can be detrimental to a business with bad cash flow management.

WHY?

0 20 40 60 80 100 120 +

Stock HoldingStock HoldingStock HoldingStock Holding

PAYABLESPAYABLES

Up to 60 Days Up to 60 Days ReceivablesReceivables

Up to 60 Days Up to 60 Days ReceivablesReceivables

Stock ArrivesGoods dispatched

Cash Gap = 90 Cash Gap = 90 DaysDays

Cash Gap = 90 Cash Gap = 90 DaysDays

CASH PAID

CASH RECEIVED

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Mind the Gap… The Cash Gap

Step 1 – Starting point

Step 2 – Have a cash flow forecast

Step 3 – Manage your cash flow by managing debtors

Step 4 - Manage your cash flow by managing your outflows

Profit vs Cash Flow

Ensure that your accounting records are up to date

Prepare and maintain a regular bank reconciliation – preferably weekly

Determine any outstanding commitments that you have made e.g. Ordered new equipment

Put time aside in your diary to work on cash!

Step 1 – Starting Point

Step 2 - Cash Flow Forecast Predicts inflows and outflows on a weekly / monthly

basis

Identify upcoming cash gaps & bottlenecks

Predict effects of cash flow on cash in bank / bank overdraft facility

Basis for discussion with bank if extra funds are needed in the short term

In control of business

Cash Flow Forecast

Inflows = Funds into business

Cash sale

Customer outstanding accounts

Proceeds of a bank loan

Sales of assets

Investment by shareholders

Interest on investments

Outflows = Funds out of business

Goods or services paid in cash

Payment of suppliers (creditors)

Salaries and wages payments

Revenue & Customs

Purchase of assets

Interest on loans

Other operating costs

Beginning cash balance

+ Projected cash inflows / - Projected cash outflows

= Your cash flow bottom line (the ending cash balance)

Cash Flow Forecast

Wk 1 Wk 2 Wk 3 Wk 4 Wk 5Opening 10,000 8,000 7,000 6,000 (2,000)Inflows 1,000 1,000 9,000 Outflows (3,000) (2,000) (1,000) (8,000)Closing 8,000 7,000 6,000 (2,000) 7,000

Target 10,000 10,000 10,000 10,000 10,000

The customer purchase decision & ordering

Credit decisions

Fulfilment, shipping and handling

Invoicing the customer

The collection period

Payment and deposit of funds

Step 3 - Debtors Conversion Period

Terms & ConditionsReview the T&Cs you offer your customers

Validity of quotes Price and payment (increase prices if possible) Delivery Title of goods Return Liability Termination

The Bank of England estimates that only one in two companies agree their payment terms in writing

Credit Decisions Dun and Bradstreet has calculated that more than 90 per cent of

companies grant credit without a reference or credit check.

Credit checks and reference for new customers Speak to referees Periodic credit checks for existing customers Consider small orders first Ensure credit terms are very clear Credit = debtors + orders in the system Grade customers – A to D

Fulfillment & Shipping Must have an order fulfilment process

Must supply within specification

Must meet agreed timescale for delivery of goods and services

Ensure all documents and labels are correct

Look for a WOW factor – delight the customer

Invoicing Invoice to be brief, clear and include following info

Customer name and address

Description of goods or services sold to the customer

Delivery date

Payment terms and due date

Date the invoice was prepared

Price, VAT and total amount payable

To whom payable

Customer order number or payment authorisation

Invoice must be accurate Send within 24 hours of chargeable event Send by first class post or email

Collection Period Prepare a collection procedure Keep the credit period as short as possible Contact the customer’s accounts to check invoice has

been received and is OK Chase a few days before its due Don’t feel guilty about collecting your money! Send out monthly statements Take additional action when 7 days overdue Use phone calls and chaser letters Look out for changes in behaviour

Collection When do your invoices go out? Can this be speeded up? Do statements go out following the last day of month? Are the terms of sale clear and shown on invoices? What is the actual average length of credit you are giving –

or your customers are taking? Do you have a collection procedure timetable? Are you politely firm but insistent in your collection routine? Do you review the aged debtor list at the end of each

month?

Be Tight on Credit ControlHave a clearly defined procedure, which is FIRM, FAIR and FRIENDLY

+ 2 days: Call 180% of overdues will be settled due to oversight or the fact you have rung.

+9 days: Call 2

Go over what was agreed in Call 1 and what they promised to do.

+ 16 days: Call 3

Either at +16 days or 2 days after they have promised to do something.

Put them on Stop Supply if necessary

Go over what was said at the previous call and what they promised to do.

Visit the customer, talk to the person responsible and look out for changes in behaviour.

+ 23 days: Letter

Outline the previous contacts and the failure of commitments made on previous dates.

Stress they are already on Stop Supply

State that the case may be handed to a debt collection agency.

Payment and Funds Check to ensure funds been received by the bank Check to ensure funds have cleared Ask customers to pay electronically Collect amounts due using a direct debit system Discounts for early or up front payments The Late Payment of Commercial Debts (Interest) Act 1998

-The Government has introduced legislation to give businesses a statutory right to claim interest if another business pays its bills late

Terms & Conditions Renegotiate T&Cs with your suppliers Extend payment terms where possible

Cash Outflow - Creditors Prepare an aged accounts payable schedule

Will provide a good estimate of outflow and enable you to plan

Will highlight creeping cash flow problems

Prepare a list of other creditors e.g. VAT

PAYE

Corporation Tax

Cash Outflow - Forecast Create 4 headings for expenses

Cost of goods sold

Asset purchases

Operating expenses e.g. Payroll and payroll taxes Repairs and renewals Post and stationary Travel Rent and Rates Heating and lights

Debt payments

Note some vary with sales others are fixed

Cash Outflow Review all costs and set targets for cost

reductions – say 10%

Identify alternative suppliers

Check utility bills on price comparisons sites

Calculate stock days and reduce stock levels

Reduce stock of stationary etc.

Postpone major asset purchase

Cash Outflow

How Your Bank Can Help Manage your relationship with your bank

Speak to them early and be totally honest

Consider using debtor financing / factoring

Look at extending loan repayment period

Look at government backed loans

Cash Outflow - Summary Cash flow must be managed – it is as important as

any other part of your business.

Prepare and maintain a forecast

Ensure that the accounting records are properly maintained

Prepare a regular reconciliation between the bank balance and the accounts

Do not ignore the cash position and take action early

If mismanaged it is very unforgiving and could ruin you.

Managing it well brings its own rewards!

Margins

Margin Mastery

Sales (Revenues)-

Variable Costs (COGS)=

Gross Profit (Gross Margin)-

Fixed Costs (Overhead)=

Net Profit

Cost What do we mean by cost?

– The amount of expenditure incurred on a specified thing or activity

– The definition depends on the purpose for which the cost is to be used. Its needs to be quantified by nature and limitation.

Cost of wages can mean:– Cost of wages for a year

– Cost of wages for a factory

– Cost of wages for one week

– Cost of wages included in the cost of making 1000 widgets

Variable Cost What is a variable cost?

A cost which tends to follow ( in the short term) the level of activity.

So what? Understanding the nature of a cost facilitates financial planning,

control procedures, performance comparisons and variability.

Examples of variable costs Goods bought for sale Raw materials Productive wages

Variable Cost Variable v’s Semi-variable

Goods for sale = Variable cost as the quantity we use varies directly to the quantity sold

Labour = Semi-variable as the cost of labour, other than

overtime, does not vary directly with volume

Fixed Cost What is a fixed cost?

A cost which does not follow ( in the short term) the level of activity.

Examples of fixed costs

Rates

Administrative salary

Rent

($1,000,000)

($500,000)

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

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Revenue

Fixed Costs

Total Expenses

Net Profit

Variable Costs

Getting to Break Even

Calculating Your Breakeven

Break-Even = Revenue needed to break even

FC = Fixed costs

GM% = Gross margin %

Gross Margin % = Gross margin/revenue

Gross Margin = Revenue – variable costs

Break Even = FC

GM%

Alan’s Hotdog Stand 1,600 people per day pass stand; 1 of 4 buy Ave customer buys 2 hot dogs @ £1 each Cost of hot dogs - £0.25 each Customer buys 1x/day Fixed costs - £36K Alan’s salary; £12K dep’n Business days – 250 Purchase stand £60,000

Calculating Alan’s Breakeven

Gross Margin = Sales – Variable costs

Sales = 1600 leads * 25% conversion

= 400 * 2 items * £1 per dog

= £800 * 250 days

= £200,000 per annum

Variable cost = 200,000 items * £0.25 = £50,000

Break Even = FC

GM%

Calculating Alan’s Breakeven Gross Margin = Sales – Variable costs

=£200,000 - £50,000

= £150,000

Gross Margin % = 150,000/200,000

= 75%

Fixed Cost = Salary £36,000 + dep’n £12,000= £48,000

therefore

Calculating Alan’s breakeven

Annual Break-Even = £48,000/0.75

= £64,000

Monthly BE = £5333.33

Daily BE (on 250) = £256

Break Even = FC

GM%

?Do you know your break even point on a daily, weekly and monthly level?

Do you know how many jobs you need to do each day, week and month to break even?

Do you know how many transactions you need to do each day, week and month to reach your targets?

Do you know what your gross and net margins are in percent?

IncreasingMargins

Increasing Revenuesand/or

Reducing Costs

Discounting v Increasing Prices

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80

100

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Base 10% Discount 10% Increase

Profit

Variable/Direct Costs

40% gross margin10% price change = 25% profit change

Discounting v Increasing Prices

80 80 80

2010

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0

20

40

60

80

100

120

Base 10% Discount 10% Increase

Profit

Variable/Direct Costs

20% gross margin10% price change = 50% profit change!

Don’t Discount – Add Value! Added value with soft £ cost Package offers

Low margin products with high margin products Slow moving products with quick moving products

Bonus offers: Buy one get one free (BOGOF), ”spend £50 and get £5 off your next purchase”

Time limited offers and discounts If you do offer discounts

Relate them to early bird payments or

shorter credit terms to safeguard your

own cashflow

Bumping Up Your Margins Cross sell: sell more of the high margin products

Set team incentives on margins, make sure your sales team are Margin Managers

Create package deals to bump up the average value sale as well as your margins

Sell high margin add-ons (warranties etc) with your existing product/service range

Golden Rules For SmartCost Cutting Audit costs and set a target to reduce ALL costs by

10% Be creative, think outside the box and challenge your team to

get involved – individual accountability!

Identify key cost drivers Have a budget – and stick to it! ”What you measure you can manage”. Make sure you

have reporting in place to track your costs Know your ”Killer KPIs”, what ratios are important to

your business and how often are you tracking them

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Build yourself a Business DashboardBuild yourself a Business Dashboard

Golden Rules For SmartCost Cutting Negotiate with your existing suppliers to bring costs

down Look for alternative suppliers Review your utility suppliers Make more efficient use of materials and so on. Give time in lieu instead of paying overtime Speak to your accountant regularly and keep

yourself updated on new initiatives relating to VAT, tax, government guaranteed loans etc.

Tips On Negotiation Prepare and do your research Obtain at least three quotes from competing

suppliers. Identify your preferred supplier and ask for a further

discount – do not accept the first price. Plan your exit and your walk away price Look for a win : win strategy

Some things to consider…Some things to consider… Your books are up to date (including your budget)

Everything is entered into your accounting software and reconciled

each month

You look at your P&L on a MONTHLY basisYou need to be reviewing your P&L on a monthly basis

You have your Accountant or Bookkeeper check your

numbers

It’s a good idea to have your numbers checked & Verified

Use an Accountancy software package: Sage Line 50 / Quickbooks

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Tips for a tough economy: Tips for a tough economy:

CashflowCashflow Pay by Standing Order

Introduce new payment terms

Stagger Payments

Allow Customer to Pay up front Embrace PayPal as another option

to make payment very easy

Introduce early Settlement Discounts

Ensure that you have Prompt Billing

Systems in place to chase down Debtors

Debtors

Pay suppliers later

Keep Cashflow forecasts up to date

Understand the company’s cashflow position and cashflow forecast

Reduce overheads in the business

Dump “D” Clients

Run a credit check on all new clients

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ActionCOACH events SeminarCLUB Team 13th May

GrowthCLUB 90 day planning 12th April

ActionCLUB Group Coaching Launch 6th June

Bespoke Training Days: Sales Training

Time Management

Team Building Days

Customer Service

1-2-1 Mentoring

Books and DVDS

Action To Take Away

Know your numbers … all the time

Mind the cash gap

Hold yourself accountable

Set goals

Put time aside