How to make more money - part 1 - circa 1996


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Chaim Yudkowsky, CPA, CITP, CGMA - Byte of Success

Part 1 of a three part series focused on helping small and midsized business become more profitable.

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How to make more money - part 1 - circa 1996

  1. 1. How to MakeHow to Make More MoneyMore Money Part 1Part 1 presented bypresented by Chaim Yudkowsky, CPAChaim Yudkowsky, CPA Grabush, Newman & Co., P.A.Grabush, Newman & Co., P.A. 410-296-6300
  2. 2. Six qualities of successfulSix qualities of successful businessesbusinesses What are they?
  3. 3. 1997 Resolutions?1997 Resolutions? Cash Flow Plan
  4. 4. CASH FLOWCASH FLOW What is it?
  5. 5. ““Business can survive withoutBusiness can survive without profit, but cannot remainprofit, but cannot remain viable without cash flow.”viable without cash flow.” -Chaim Yudkowsky, October 1993
  6. 6. What is Cash Flow?What is Cash Flow? The cash coming into the business vs. The cash going out of the business
  7. 7. What is Adequate Cash Flow?What is Adequate Cash Flow? Adequate cash flow means there is sufficient funds available from the operations of the business or from loans to meet the current obligations of the business
  8. 8. Consequences of InadequateConsequences of Inadequate Cash FlowCash Flow Loss of trade discounts Dissatisfied suppliers Inadequate inventory levels Lost sales opportunities Poor banking relations Lost expansion opportunities Loss of operating control Bankruptcy
  9. 9. Types of businesses that haveTypes of businesses that have the greatest challengethe greatest challenge planningplanning cash flow...
  10. 10. Businesses that sell on creditBusinesses that sell on credit Must incur costs while serving or selling to the customer and wait until a later date to collect.
  11. 11. Businesses that sell a productBusinesses that sell a product Must buy the product in advance of selling it to the customer. May have to carry a sizable inventory, purchased in advance of the sale.
  12. 12. Businesses that sell a productBusinesses that sell a product on crediton credit Have to purchase the product in advance of selling it to the customer. May have to carry a sizable inventory purchased in advance of the sale. Have to wait after the sale to collect from the customer.
  13. 13. Businesses that manufactureBusinesses that manufacture a producta product Have to make the product prior to making it available for sale. Must finance the manufacturing cycle. Must purchase and finance raw material and WIP Must pay labor immediately Must pay manufacturing overhead Must carry finished goods inventory.
  14. 14. Businesses that manufactureBusinesses that manufacture a product and sell on credita product and sell on credit Have to make a product prior to making it available for sale. Must usually carry a finished goods inventory. Have to wait to collect from the customer.
  15. 15. Seasonal and cyclicalSeasonal and cyclical businessesbusinesses Increasing sales require build in inventory prior to the sale (which must be financed). Increasing sales cause growth in receivables after the sale (which must be financed). Positive cash flow when sales decline. Must be careful with positive cash flow as a result of a decline in business.
  16. 16. Growing businessesGrowing businesses Same as seasonal or cyclical business except no positive cash flow when sales decline. Sales growth and the demands on cash flow can easily exceed the ability of profits to finance it. Much of cash flow is usually committed to term loan payments to finance equipment needed to support the growth.
  17. 17. New businessesNew businesses Since all sales represent growth, new businesses have the same problems as growing businesses. The company’s plan must provide for adequate capital and working capital financing from the beginning. New businesses usually get one shot at structuring their financial needs.
  18. 18. Importance of ProfitImportance of Profit Small businesses must be profitable. Most small and medium size businesses are undercapitalized. Little room for error. Profit is usually the only source for new equity capital. Must have adequate capital to be able to borrow.
  19. 19. ...Sun Tsu, about 600 B.C.
  20. 20. TranslationTranslation
  21. 21. Foretelling TriumphForetelling Triumph Those who triumph, compute at their headquarters a great number of factors prior to a challenge. Those who are defeated compute at their headquarters a small number of factors prior to a challenge.
  22. 22. Much computation brings triumph. Little computation brings defeat. How much more so with no computation at all! By observing only this, I can see triumph or defeat.
  23. 23. Developing YourDeveloping Your Cash Management PlanCash Management Plan
  24. 24. What Is a Cash ManagementWhat Is a Cash Management Plan?Plan? How much cash will I need? When will I need it? Where will I get it? Typically, to the business owner,Typically, to the business owner, cash management means knowingcash management means knowing in advance:in advance:
  25. 25. How many of you have your next 12 months’ cash plan in operation? How many of you know when you are going to run out of cash, or when your cash balances will drop to their lowest levels? How many of you know how long your present cash resources will last? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
  26. 26. Managing YourManaging Your Operating ExpensesOperating Expenses (To budget or not . . .(To budget or not . . . That is the question!)That is the question!)
  27. 27. BUDGET DEFINITION:BUDGET DEFINITION: An orderly system of living beyond your means A schedule of systematically going into debt An attempt to live below your earnings A method of worrying about what you spend before as well as afterwards A method of saying no to somebody’s request to spend money before they’ve even asked for it A quantitative expression of a plan of action and an aid to the authorization and control of transactions
  28. 28. If you have an advertising budget ofIf you have an advertising budget of $25,000 for the year and suddenly, in the$25,000 for the year and suddenly, in the 10th month of your year, you’ve spent10th month of your year, you’ve spent your budget allowance, will you stopyour budget allowance, will you stop advertising?advertising? Answer: “NO”
  29. 29. So what good are budgets?So what good are budgets? Does a budget provide information about what will happen to your business? Does a budget help you make decisions...or just feel guilty about them? Does a budget help you make more money and ease your stress?
  30. 30. Don’t budgetDon’t budget anymore!anymore! Plan!
  31. 31. The “Know-Where-Your-GoingThe “Know-Where-Your-Going Financial Plan”Financial Plan” How much cash you will need When you will need it Where you will get it Remember, effective cash managementRemember, effective cash management means knowing in advancemeans knowing in advance
  32. 32. We must always knowWe must always know the answer to thethe answer to the question:question: ““Where am I going and whenWhere am I going and when will I get there?”will I get there?”
  33. 33. Benefits of PlanningBenefits of Planning Planning letsPlanning lets you knowyou know where youwhere you are goingare going and whatand what obstaclesobstacles you mayyou may encounter onencounter on your way.your way.
  34. 34. Planning Forces a Pro-Active,Planning Forces a Pro-Active, Not Reactive, Mind-SetNot Reactive, Mind-Set The plan will make your actual financial information significantly more meaningful “The numbers” can be compared to what you have actually set out to achieve . . . The best way to know how you are doing is to know how you want to do
  35. 35. When you take a trip,When you take a trip, you plan an plan an itinerary. When you take a financial trip,When you take a financial trip, how about the financialhow about the financial itinerary?itinerary?
  36. 36. The Primary Elements of YourThe Primary Elements of Your PlanPlan The Profit and Loss Plan – Shows anticipated operations (income and expenses) over the next 12 months or longer The Cash Flow Plan – Takes information from P&L plan, converts it into cash flow, answers basic questions of “Where will my cash go?” “How much will go there?” and “How long will my cash last?” Forecasted Balance Sheets – The forecasted balance sheet is the only way to determine if the projected P&L and Cash Flow plans are reasonable.
  37. 37. Getting StartedGetting Started Keep it SIMPLE! Don’t get too ambitious Just GET GOING!
  38. 38. Two Basic Ways ofTwo Basic Ways of Developing YourDeveloping Your Cash Management PlanCash Management Plan Using historical data Developing the numbers one at a time (getting behind the numbers)
  39. 39. Historical DataHistorical Data Easiest to develop History is a good predictor of the future Expenses remain relatively constant Management not fully aware what makes a business expense History is not a good predictor of the future Outside economic forces make past obsolete Lacks accountability STRENGTHSSTRENGTHS WEAKNESSESWEAKNESSES
  40. 40. Getting Behind the NumbersGetting Behind the Numbers More accurate Pinpoints accountability More time consuming to develop STRENGTHSSTRENGTHS WEAKNESSESWEAKNESSES
  41. 41. Using History to Develop YourUsing History to Develop Your PlanPlan Use historical percentages in the current plan If an item has been running at 5%, use 5% Sales = $100,000; Auto runs at 5% therefore use $5,000 in the plan Simple Easy to use A great way to get started
  42. 42. Getting Behind the NumbersGetting Behind the Numbers Auto expense @ 5% = $5,000 What’s the magic of 5%? We need to shift thinking Why not 3%, 4.5% or 6%? Is there a better way to MANAGE this expense?
  43. 43. Example: Auto at 5% isExample: Auto at 5% is $5,000$5,000 How many autos do we support? Who’s? How are they paid for? Credit cards, submit mileage, pay gasoline bills direct, etc. etc. Do we have a consistent policy for all? What about an allowance? Is there any way to reduce this expense?
  44. 44. Example: Auto at 5% isExample: Auto at 5% is $5,000 cont.$5,000 cont. 3 autos supported Average cost = $125 per month Bill, Sally and Ellen use them 3 x’s 125 = 375 x 12 = $4,500 Possible reduction $500 or 10%
  45. 45. How to Get StartedHow to Get Started Use history to develop your first plan After several months of comparing plan vs. actual decide on a single expense item to begin with Begin the process reviewing one expense per month Estimated time each month ..... about 1 hour Remember: 1:1, Reduce expense by $1 = 1 $ of additional profit and cash flow
  46. 46. Be able to locate differences between what you thought would happen and what actually did happen Avoid being a crisis manager Confine your management activities to the exceptions—items significantly different from the plan On a monthly basis, compare theOn a monthly basis, compare the operations of your company withoperations of your company with the financial plan. You will:the financial plan. You will:
  47. 47. What If the Financial Plan IsWhat If the Financial Plan Is Wrong?Wrong? CHANGE IT
  48. 48. A financial plan is a livingA financial plan is a living document that changes asdocument that changes as conditions change.conditions change. Change the plan...Change the plan... After you have reviewed particular items for a number of months and taken corrective action but are still consistently over or under plan Only after you have exhausted all other remedies to bring your actual expenses or income in line with original estimates