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Your Business Finances. On Target Group Coaching. Effective Financial Management. 3 Financial Indicators Profits, Cash Flow, ROI Cost Behavior Profit Improvement Planning More Key Performance Indicators Liquidity, Solvency, Collections, Breakeven Creating a Budget/Profit Plan. - PowerPoint PPT Presentation
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Your Business Finances
On Target Group Coaching
Effective Financial Management 3 Financial Indicators
Profits, Cash Flow, ROI Cost Behavior Profit Improvement Planning More Key Performance Indicators
Liquidity, Solvency, Collections, Breakeven
Creating a Budget/Profit Plan
Best Practices: Finance Accounting system is fully & accurately functioning Controls are in place to ensure accuracy A Realistic Workable Profit Plan (aka Budget) is in
place Financial Monitoring is being used effectively as a
business tool Key Metrics are being used to keep your finger on
the financial pulse of your business Owner reviews Financial Data and Metrics at least
monthly An adequate credit line is in place Company is profitable, solvent and able to finance
its growth and reward stakeholders
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Sound Financial Management is critical if you wish to: Put together a solid business plan Be in the best position to obtain
financing Grow a sustainable business Create a valuable company that you can
later sell or otherwise provide for your exit from the business
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Effective Financial ManagementKey Financial Data For Business Survival
3 Key Financial Indicators Of Your Business’ State Of Health
Business is about making moneyTo do this, it must simultaneously increase
three things: Net profit margin – Operating profit
margin Cash flow Return on investment (ROI)
Indicator 1: Profit Margins Net Profit = What’s left
over after you deduct ALL expenses from the revenue your business generates
Net Profit = Total Income minus Total Expenses
THE bottom line in your business
Indicator of the overall management of the business
Gross Profit = What’s left over after you deduct direct job costs from the revenue your business generates
Gross Profit = Total Income minus Direct Expenses to Produce work
Indicator of the productivity of your production people
Indicator of the accuracy of your estimating and selling
How To Calculate Profit Margins Gross Profit Margin (GP%) is profit
derived from work produced divided by Gross Revenue
Gross Profit Margin = (Gross Profit/Revenue)%
Net Profit Margin (NP%) is after-tax net profit divided by Gross Revenue
Net Profit Margin = (Net Profit/Revenue)%
Improve The Gross Profit Margin by working on the drivers: Production / service delivery processes Material Costs Labor Costs Customer relations Team Skills and Development Pricing & Estimating Selling Skills
Improve the Net Profit Margin by managing: Administrative operating processes Variable Costs Overhead Costs Customer relations Administrative Team Skills and
Development Marketing Activities and Costs
BEST PRACTICE GUIDE : Gross Profit %
Gross Profit Margin = (Gross Profit/Revenue)%
Higher is better – obviously Industry averages are different for
different industriesSet a target based on your budget
BEST PRACTICE GUIDE : Net Operating Profit %**
Net Operating Profit Margin = (Net Operating Profit/Revenue)%
Higher is better 15% is goal (25% BEFORE Owner’s
Compensation) 5% is industry average**Residential and Commercial Contractors under
$10MM** There is a distinction between Net Profit and Net
Operating Profit, which is Profit before taxes, and “other” income & expenses not related to operations of the business including financing costs (interest expense)
The three questions of measurement
Is it Accurate? Is it Acceptable Is it Sustainable?
There will be occasions when money is flowing out faster than it is flowing in
Virtually every business experiences times when there is a cash flow gap
Managing cash flow so as to avoid any critical situation due to lack of cash when it is needed is a major responsibility of a business owner
What Does The Cash Flow Cycle Mean To Your Business Operations?
Businesses can make a profit but have negative cash flow
Failing businesses can have positive cash flow, possibly due to large asset sales or collections from past sales
Business start-ups require large cash outlays to build the asset base = cash flow risk
Cash Flow – More Than Just Profit
Over the longer term, you have to manage your cash flow to fund your business growth
You can grow your business in the short term by ‘borrowing’ credit through late payment of suppliers
Eventually, however, everything evens out and such strategies are not sustainable
With that in mind, projected growth should be managed within known cash flow constraints…and if external funds are required, this needs planning in advance
Cash flow Over The Longer Term
Improve Cash Flow Shorten the Cash Flow Cycle Understand the difference between
Cash Flow and Profit Plan in advance for business growth
and/or downturns
BEST PRACTICE GUIDE : Cash Flow Prepare a Cash Flow Projection Manage Your Spending on a monthly, if
not weekly basis Invoice Promptly Develop a systematized approach to
receivables and collections Obtain a line of credit
Indicator 3: Return On Investment Return On Investment is net profit
expressed as a percentage of the value of the total assets you have tied up in the business
ROI = (Net Profit/Total Assets)%
ROI is a profitability ratio – it is the true measure of the financial productivity of a business
BEST PRACTICE GUIDE : ROI
Return on Investment = (Net Profit/Total Assets)%
Higher is betterShould be at least 10%25% or higher is a goal
Characteristics of Financial Health
High tangible net worth (equity) Consistent profitability High cash flow from operations Cash balances representing 30-45 days of
operating expenses AR representing less than 30 days sales A ratio of current assets to current liabilities
(“current ratio”) in excess of 3:1 A high level of working capital A ratio of liabilities to assets of 1.0 or less (debt
ratio)
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How do we find out where we stand?
Starts with Financial Statements: Profit & Loss Statement (Income
Statement) Balance Sheet
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Regarding Your Financial Statements… Accuracy is Essential
GIGO Hire Kerry to help you shape up your books
Accrual vs. Cash Basis Accrual Basis – Day to Day operations
Enter Invoices and Bills as they are incurred – not as they are paid
Cash Basis – Paying Tax Enter data on Accrual Basis/Click of a button
will show reports in either format (in QuickBooks)
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Chart of Accounts Tips Good Structure
Sufficient detail to analyze data Use sub accounts where more detail is needed Consider using classes if appropriate
Group Expense accounts appropriately All direct costs in COGS Non Operational Income and Expenses in
“Other Income & Expense” section Group Balance Sheet Liabilities appropriately
Loans that will not be repaid this year in Long Term Liability section
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Profit and Loss StatementIncome
Direct Costs (Cost of Goods Sold)
Gross Profit
Variable Expenses
Overhead Expenses
Net Operating Profit
Other Income & ExpensesNet Profit
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Profit and Loss Statement
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Balance SheetDescription
Cash Checking, Savings, Petty Cash
Accounts Receivable Amounts Due from Customers
Other Current Assets Prepaid Expenses, Amounts due from others
Total Current Assets
Fixed Assets Equipment, Vehicles, Property, Depreciation
Other Assets Startup expenses, Goodwill from purchase, Company deposits, Long term loans made to others
Total Assets
Accounts Payable Amounts owed to Vendors
Credit Cards
Other Current Liabilities Payroll Taxes Payable, Customer Deposits, Short Term Lines of Credit
Total Current Liabilities
Long Term Liabilities Loans, Lines of Credit that will not be paid off in one year
Equity Contributions, withdrawals, Retained Earnings, Net Income
Total Liabilities & Equity Must equal Total Assets to Balance27
Balance Sheet
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Key Performance Indicators
Factors that indicate the current and future performance of a business in areas that are critical to the company's success.
Revenue to Budget Gross Profit Net Profit Break Even Sales Liquidity - Current Ratio Solvency - Debt Ratio Collections (Days Sales Outstanding)
Financial KPIs
BEST PRACTICE GUIDE : Gross Profit % Gross Profit Margin = (Gross Profit/Revenue)% Higher is better Industry Averages Differ Set a budget target to measure
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BEST PRACTICE GUIDE : Net Operating Profit %** Net Operating Profit Margin = (Net Operating Profit/Revenue)% Higher is better 15% is a goal to shoot for (25% BEFORE
Owner’s Compensation)
** There is a distinction between Net Profit and Net Operating Profit, which is Profit before taxes, and “other” income & expenses not related to operations of the business
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BEST PRACTICE GUIDE : Liquidity Ratios
Current Ratio = Current Assets Current Liabilities
Should be a minimum of 1.5 or higher (3.0 or greater is better)
Quick Ratio = Cash + Equivalents Current Liabilities
Should be at least 1.0
Higher is better for both
BEST PRACTICE GUIDE : Debt Ratios
Debt Ratio = Total Liabilities Total Assets
Should be less than 1.0
Debt to Equity Ratio = Long Term Debt Stockholder’s Equity
Should be less than 1.5 or 150%
BEST PRACTICE GUIDE : Days Sales Outstanding (Collections)
Days Sales Outstanding =Accounts Receivable x 365
Annual Revenue (previous 12 months rolling revenue)
Should be 30 days or less
BEST PRACTICE GUIDE : Cash in Bank – Ideal
Cash in Bank = Overhead Expenses* (next month)
Gross Profit MarginPlus: Fixed expenses for months 2 & 3Or – just think 3 months fixed expenses for
a quicker calculation*Include Variable Costs and Overhead Costs
BEST PRACTICE GUIDE : Cash in Bank – Ideal
Cash in Bank = Overhead Expenses* (next month)/Gross Profit
%Plus: Fixed expenses for months 2 & 3
Or – just think 3 months fixed expenses for a quicker calculation
*Include Variable Costs and Overhead Costs
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BEST PRACTICE GUIDE : ROI
Return on Investment = (Net Profit/Total Assets)%
•Higher is better•Should be at least 10%•25% or higher is a goal
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Implementation Steps Review your own financial statements and
chart of accounts Ask me to review if you would like my
perspective If you need help with your QuickBooks, hire
Kerry Next Month: We’ll talk about Profit Planning
and creating a budget Start thinking about your financial goals for
2013