Introduction To The Financial Fence (Business)

INTRODUCTION TO
THE FINANCIAL FENCE®
© Copyright One Sherpa Pty Ltd 2008

The Financial Fence®
Way of Thinking


• Many people who see The Financial Fence® have thought it is
simply a new technique and way of reporting the numbers.


• It is however a completely different way of thinking about
the numbers which changes the paradigm around how you
and measure its performance.
fund a business


Why use a fence?

1. Fences are made of two parts :
A. Posts that anchor the fence into the ground
at a point AND
B. Rails that carry the fence over a distance.
2. Fences incorporate Milestones (Posts) and
Activity (Rails) in the same analogy.
3. Financial statements have these two parts :
A. “Milestones” - Balance Sheet.
B. “Activity” – Profit & Loss Account & Cash
Flow Statement.
4. Fences provide a boundary and security.

The Standard two rail fence

M M
I I
ACTIVITY
L L
E E
S S
ACTIVITY
T T
O O
N N
E E

THE TWO MILESTONES ON
THE FINANCIAL FENCE ®

Capital Capital

Debt Debt
Funding

Equity Equity

THE THREE ACTIVITIES ON

Infrastructure
Interaction with
Capital Capital
Customers Expenses

Investment in
Business
Debt Debt

Equity Equity

PERFORMANCE MONITORING ON

Infrastructure
Interaction with
Capital Capital
Customers Expenses

Investment in
Business
Debt Debt

Key Performance
Equity Equity
Indicators

SINGLE DIRECTION OF MANY NON
FINANCIAL EXECUTIVES

Infrastructure NET
Interaction with
Customers Expenses PROFIT


DIRECTIONS REQUIRED FOR TRADING

Infrastructure
Interaction with
Capital Capital
Customers Expenses

Investment in
Business
Debt Debt

Key Performance
Equity Equity
Indicators

The Financial Fence® Way of Thinking

WORKING WORKING
CAPITAL CAPITAL

INFRASTRUCTURE NET
CONTRIBUTION
COST
SALES EXPENSES PROFIT
MARGIN
OF INTERACTION

FIXED FIXED
CAPITAL CAPITAL
MOVEMENT MOVEMENT
NET OPERATING NET
IN WORKING IN FIXED
PROFIT CASH FLOW CASHFLOW
CAPITAL CAPITAL
DEBT DEBT

EQUITY EQUITY


The Financial Fence® - Example Company
BALANCE SHEET BALANCE SHEET
“AS AT” “AS AT”

WORKING WORKING
PROFIT & LOSS ACCOUNT
CAPITAL CAPITAL
“FOR THE PERIOD”
$90,000 $230,000
INFRASTRUCTURE NET
CONTRIBUTION
SALES COST
EXPENSES PROFIT
MARGIN
OF INTERACTION
$200,000 $150,000
$350,000
$1,750,000 -$1,400,000
FIXED FIXED
CASH FLOW STATEMENT
CAPITAL CAPITAL
$350,000 $375,000
NET WORKING OPERATING FIXED NET
PROFIT CAPITAL MVT CASH FLOW CAPITAL MVT CASHFLOW
$150,000 -$140,000 $10,000 -$25,000 -$15,000
DEBT DEBT
$175,000 $190,000

EQUITY EQUITY
$265,000 $415,000


WORKING WORKING
CAPITAL CAPITAL
$90,000 $230,000
INFRASTRUCTURE NET
CONTRIBUTION
SALES COST
EXPENSES PROFIT
MARGIN
OF INTERACTION
$200,000 $150,000
$350,000
$1,750,000 -$1,400,000
FIXED FIXED
CASH FLOW STATEMENT
CAPITAL CAPITAL
$350,000 $375,000
$150,000 -$140,000 $10,000 -$25,000 -$15,000
DEBT DEBT
$175,000 Milestone check $190,000

$90,000 + $350,000 = $440,000
EQUITY EQUITY
$175,000 + $265,000 = $440,000
$265,000 $415,000


WORKING WORKING
CAPITAL CAPITAL
$90,000 $230,000
INFRASTRUCTURE NET
CONTRIBUTION
SALES COST
EXPENSES PROFIT
MARGIN
OF INTERACTION
$200,000 $150,000
$350,000
$1,750,000 -$1,400,000
FIXED FIXED
CASH FLOW STATEMENT
CAPITAL CAPITAL
$350,000 $375,000
$150,000 -$140,000 $10,000 -$25,000 -$15,000
DEBT DEBT
$175,000 Top rail check $190,000

$265,000 + $150,000 = $415,000
EQUITY EQUITY
$265,000 $415,000


WORKING WORKING
CAPITAL CAPITAL
$90,000 $230,000
INFRASTRUCTURE NET
CONTRIBUTION
SALES COST
EXPENSES PROFIT
MARGIN
OF INTERACTION
$200,000 $150,000
$350,000
$1,750,000 -$1,400,000
FIXED FIXED
CASH FLOW STATEMENT
CAPITAL CAPITAL
$350,000 $375,000
$150,000 -$140,000 $10,000 -$25,000 -$15,000
DEBT DEBT
$175,000 Bottom rail check $190,000

$175,000 - - $15,000 = $190,000
EQUITY EQUITY
$265,000 $415,000

PERFORMANCE MEASUREMENT
Let’s look at a couple of our
measurements

RETURN ON SALES


Return on Sales
BALANCE SHEET
Sales Return “AS AT”

WORKING WORKING
CAPITAL CAPITAL

INFRASTRUCTURE NET
CONTRIBUTION
COST
MARGIN
OF INTERACTION

FIXED CASH FLOW STATEMENT FIXED
CAPITAL CAPITAL
MOVEMENT MOVEMENT
NET OPERATING NET
IN WORKING IN FIXED
CAPITAL CAPITAL
DEBT DEBT

DEFINITION
NET PROFIT divided by SALES
EQUITY EQUITY



$150,000/$1,750,000*100=8.6%

INFRASTRUCTURE NET
CONTRIBUTION
SALES COST
EXPENSES PROFIT
MARGIN
OF INTERACTION
$200,000 $150,000
$350,000
$1,750,000 -$1,400,000

ACTIVITY OF BUSINESS
PROFIT TO SALES 8.6%


RETURN ON CAPITAL


The Financial Fence® Primary measure
BALANCE SHEET
Return Capital “AS AT”

WORKING WORKING
CAPITAL CAPITAL

INFRASTRUCTURE NET
CONTRIBUTION
COST
MARGIN
OF INTERACTION

FIXED CASH FLOW STATEMENT FIXED
CAPITAL CAPITAL
MOVEMENT MOVEMENT
NET OPERATING NET
IN WORKING IN FIXED
CAPITAL CAPITAL
DEBT DEBT

DEFINITION
NET PROFIT divided by TOTAL CAPITAL
EQUITY EQUITY


$150,000/($230,000+ $375,000)*100=24.8%

WORKING WORKING
CAPITAL CAPITAL
$90,000 $230,000
INFRASTRUCTURE NET
CONTRIBUTION
SALES COST
EXPENSES PROFIT
MARGIN
OF INTERACTION
$200,000 $150,000
$350,000
$1,750,000 -$1,400,000
FIXED FIXED
CASH FLOW STATEMENT
CAPITAL CAPITAL
$350,000 $375,000
$150,000 -$140,000 $10,000 -$25,000 -$15,000
DEBT DEBT
$175,000 $190,000
KEY TOP LEVEL MEASURE
RETURN ON CAPITAL 24.8%
EQUITY EQUITY
$265,000 $415,000

High level review

EXAMPLE
COMPANY
RETURN ON SALES 8.6%
RETURN ON CAPITAL 24.8%


•Which measure sounds best?

8.6%
or
24.8%



•Which measure encourages
the business owner to keep
going?

•Which measure helps the
business owner appreciate the
real value of what he or she is
doing?



RETURN ON Return Capital
CAPITAL BECAUSE WORKING

OFTEN IT’S BIGGER CAPITAL

NET
PROFIT

FIXED
CAPITAL

BUT also a far more powerful measure
for the business


Today we can only touch the tip of the iceberg

Today’s
presentation

The depth
of our
business


How to get started
• The most effective way we have found
is by taking the ‘live’ information from
a business and ‘putting it on the fence’
• This allows you to see first hand how it
gives a completely different perspective
on your business and its performance
• Until you take this step, your journey is educational but
theoretical.
• Until you see your own information on the fence it is
impossible to have a business experience with the fence.

The Advantages To You……
• Understand the financial outcome of
interacting with your customers A
D
V
• Make sure you get your fair ‘share of the A
N
pie’ by not being squeezed by both T
customers and suppliers A
G
E
• Reduce your business risk as a result of S

improved decision making
• Maximize the cash in your pocket
• Allows you to spend less time working in your business

Some Typical Real Benefits ……
• Peace of mind that your business is
a great investment
• More discretionary time to spend
with your family / friends /
personal interests
• Having the freedom to make decisions and not feel
squeezed by everyone
• Don’t feel like you’re always the last in line to get paid
• Having the freedom to do the enjoyable parts of your
business © Copyright One Sherpa Pty Ltd 2008

Introduction To The Financial Fence (Business)

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