Foundation for success using financial management- Chase Morrison
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Foundation for success using financial management- Chase Morrison



Chase Morrison a partner in B2B CFO talks about building a foundation for success using financial management.

Chase Morrison a partner in B2B CFO talks about building a foundation for success using financial management.



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Foundation for success using financial management- Chase Morrison Presentation Transcript

  • 1. How to Build a Foundation for Success Using Financial Management Valley Economic Development Center & Resource Planning Solutions | 2012 Chase Morrison, Inc |
  • 2. What should you expect to learn?• How to establish processes that will provide you with a foundation for business growth• Methods for better understanding the factors that impact your business performance• Ways to improve your ability to foresee opportunities and issues as well as react to them sooner• Gain an understanding of benchmarks and how they can help your business• How you can acquire business intelligence from your accounting data | 2012 Chase Morrison, Inc |
  • 3. Agenda• Use Excel to create a P&L, Balance Sheet and Cash Flow plan based on QuickBooks data• Review some important performance metrics• Review the performance management cycle• Define critical success factors (CSF) explore how to create them• Look at how Key Performance Indicators support CSFs• Review a sample set of KPIs• Define dashboards and describe the relationship between KPIs and dashboards• Learn how to create dashboard• Define benchmarks and why are they important• Summarize keys to foundation for success | 2012 Chase Morrison, Inc |
  • 4. Reasons why is planning important• Need a yardstick to measure progress• Need feedback to either validate or refute critical assumptions• Helps to identify deviations that should be addressed• Provides intelligence on future opportunities and threats• Sets long-term strategic priorities• Provides basis to communicate and align objectives across the business | 2012 Chase Morrison, Inc |
  • 5. Step #1 – Build a Profit & Loss (P&L) Plan • Start with prior year actual results • Revenue planning is most critical • Detail level is discretionary • Example at right is pulled from Quickbooks • Used escalation factors to produce monthly budget | 2012 Chase Morrison, Inc |
  • 6. Profit & Loss Plan (Excel Workbook)Key objective is validation of your business model, as in “Income is > Expense” Net Sales Cost of Goods ●●● ●●● Variable Expense ●●● Fixed Expenses ●●● Net Income Prior-Year Results 2012 Budget By Escalation from QB Month Factors | 2012 Chase Morrison, Inc |
  • 7. Step #2 – Build a Balance Sheet Plan • Start with prior year actual • Cash basis vs. accrual accounting • Balance sheet plan is a bit more complex • Significant items are A/R, inventory, fixed assets. • Use efficiency factors to forecast A/R, inventory and Accts Payable. • Fixed assets require analysis of new purchases & depreciation | 2012 Chase Morrison, Inc |
  • 8. Balance Sheet PlanSummary of what a company owns and what it owes ●●● Assets (This is what the company owns) ●●● Liabilities (This is what the company owes to vendors, creditor & employees) Equity (This is what is owned by stakeholders, ●●● investors and owners.) Prior-Year Results 2012 Budget By from QB Month | 2012 Chase Morrison, Inc |
  • 9. Step #3 – Statement of Cash Flow • Calculated using both the P&L and balance sheet. • There is no budget vs. actual CF report in QB. • Cash Flow is: + AssetsPriorPeriod – AssetsCurrentPeriod + LiabilitiesCurrentPeriod – LiabilitiesPriorPeriod + EquityCurrentPeriod – EquityPriorPeriod + Net Income or (Loss) - Depreciation = Cash Flow | 2012 Chase Morrison, Inc |
  • 10. Cash Flow Plan ●●● Operating CF ●●● Investing CF Financing CF Change in CF position for year ●●● Metrics used to generate balance sheet • Days Sales Receivables – Measure of days of AR outstanding (70 days as of YE) • Days Inventory On Hand (OH) – Days of inventory outstanding (196 days as of YE) • Days Payable Outstanding – Days of Accounts Payable outstanding (99 days as of YE) • Note improvement as year progresses (DSR 70 to 66, DIOH 196 to 180) | 2012 Chase Morrison, Inc |
  • 11. Helpful Ratios & Tests For MaintainingOptimum PerformanceP&L Return on Sales % Net Profit / Sales Gross Margin % Gross Profit / SalesBalance Sheet Days Sales Outstanding AR / Avg Daily Sales Days Inventory Outstanding Inventory / Average CO Cash Cycle DIOH + DSO Return on Assets % Net Profit / Total Assets Return on Equity % Net Profit / Equity Debt To Equity Debt /EquityOperating CF OCF is positive If not, need to understand why OCF > Net Profit If not, need to understand why unable to convert NP to cash OCF > Fixed Asset Investment Shows ability to fund fixed assets internally | 2012 Chase Morrison, Inc |
  • 12. The Performance Management Cycle Establish Establish Plan Critical Success & Assumptions Factors Gain New Identify Key Insight & React Performance To Changes Indicators Measure Create Performance Dashboards | 2012 Chase Morrison, Inc |
  • 13. Critical Success Factors• CSF = What things absolutely need to be accomplished for a business to succeed• Questions that you can use to get at your CSFs: – My business is better than my competitors because… – My customers always say that they like it when… – If I stopped ______________ my customers would start to go elsewhere – Our products are highly sought after because… – Because of our __________ customers perceive us to be ______________. – We need to achieve _____________ to establish the necessary __________ resources from ___________. | 2012 Chase Morrison, Inc |
  • 14. CSFs for Example Company• Service levels need to improve 25% over prior year – Maintain order responsiveness• Customer Service response lead times need to decrease 10% – Be attentive to customer complaints and order issues• Internally fund all cash requirements for 2012, including those relating to new product launch – Do not incur additional debt in 2012• Managing CSFs requires measuring and managing their associated key performance indicators. | 2012 Chase Morrison, Inc |
  • 15. Key Performance Indicators (KPI)• KPIs are used measure CSF performance and ensure we are on target• KPIs should tell you what corrective action is required, if any.• KPIs are typically not financial• Tie performance responsibility to a specific group or person• Measured regularly• Are typically the source for dashboard measures. | 2012 Chase Morrison, Inc |
  • 16. KPIs for Example Company• Service levels need to improve 25% over prior year – KPI #1: Backorders cannot exceed $7.5K (‘11 Avg=$10K)• Customer Service response times need to decrease 10% – KPI #2: Average call waiting time reduced from 180 seconds to 160 seconds• Internally fund cash flow requirements relating to new product: – KPI #3: Accounts Receivable needs to go from 70 days to 66 by year end 2012 – KPI #4: Inventory days on hand have to drop from 196 days to 180 days – Gross Margin needs to increase 1% over prior year (from 41% to 42%) KPI #5: Reduce scrap cost 25% KPI #6: Reduce direct labor hours 5% | 2012 Chase Morrison, Inc |
  • 17. Creating Dashboards• Use Excel charting capability to create dashboards• This example leverages a six panel layout• Display includes prior year as column and current year trend as line.• Each graph uses two Y axes because of the column-line combination• Plan and actual data are input in space to left of graphs• Month cell at A2 for month number | 2012 Chase Morrison, Inc |
  • 18. Feb, Mar, Apr trendUsing A KPI Graph (Backorders) calls out for attention. Legend helpsTarget set a identify75% of PY Favorable vs($7.5K) Unfavorable trends Looks as though Feb,Note prior-year Mar, Apr issue wasaverage for resolved in Mayperspective | 2012 Chase Morrison, Inc |
  • 19. Six-Panel Dashboard • Summarizes KPIs primary KPIs that drive CSFs • Updating is function of business importance • Significantly more impactful when linked to compensation • Provides insight on current as well as future performance | 2012 Chase Morrison, Inc |
  • 20. Benchmarking• Is a process of comparing ones business processes and performance metrics to industry bests and/or best practices from other industries.• Differences between one’s own processes and the target’s, highlights areas for improvement• Relevant performance metrics include balance sheet metrics (e.g. DSO, DIOH, etc.), profitability metrics (GM %, ROA, etc.).• Can also compare resources used to perform a function, such as Finance (as in % revenue dedicated function).• Benchmarking against targets in other industries can also provide valuable insight.• Objective is to identify weaknesses and then adapt best practices to one’s own business. | 2012 Chase Morrison, Inc |
  • 21. Benchmarking Example | 2012 Chase Morrison, Inc |
  • 22. Keys to foundation for success 1. Establish plans for your P&L, balance sheet and cash flow 2. Regularly generate and review plan vs. actual results 3. Identify performance deviations and determine root cause of variance 4. Keep an eye on important ratios (ROA, GM %, etc.) 5. Utilize CSFs and KPIs to identify root causes of variances to plan and ensure business is “on track” 6. Take action to correct unfavorable trends 7. Implement simple dashboards to help identify trends and stimulate review of threats and opportunities 8. Find and utilize relevant benchmarks and adapt best practices 9. Create close linkages between financial reporting and financial planning | 2012 Chase Morrison, Inc |