Financial Tools for Social Enterprise (Enp Evening Presentation)
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Financial Tools for Social Enterprise (Enp Evening Presentation)

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Enterprising Non-Profits hosts learning events for social enterprises (i.e., businesses owned by non-profit organizations)....

Enterprising Non-Profits hosts learning events for social enterprises (i.e., businesses owned by non-profit organizations).

This PowerPoint presentation is of the slides used at an event on March 16, 2011, on Financial Tools presented by Rebecca Pearson (Vancity Capital) and Emily Beam (Street Youth Job Action).

For information on Enterprising Non-Profits, check out www.enterprisingprofits.ca

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  • 1. Financial Tools The following slide presentation was presented at an Enterprising Non-Profits ( enp ) sponsored learning event in Vancouver for Social Enterprises on March 16, 2011, by Emily Beam (General Manager, Street Youth Job Action) and Rebecca Pearson (Investment Manager, Vancity Community Capital). Enp thanks Emily and Rebecca for their presentation. For more information on enp , go to www.enterprisingnonprofits.ca
  • 2. Financial Tools Enp Evening #3 Wednesday, March 16th, 2011
  • 3. AGENDA
    • Introductions
    • Making Financial Statements Useful (Emily)
    • Questions
    • How to Talk to Your Bank (Rebecca)
    • More Questions
  • 4. Financial Statements – Balance Sheet
    • Assets
    • Current Assets
    • - cash $ 6,000
    • - accounts receivable $ 1,000
    • - inventory $ 20,000
    • Long term Assets
    • - leasehold
    • improvements $ 20,000
    • - equipment $ 10,000
    • Total Assets $ 57,000 =
    • Liabilities and Equity
    • Current Liabilities
    • - line of credit $ 20,000
    • - accounts payable $ 5,000
    • Long Term Liabilities
    • - equipment loan $ 5,000
    • Equity
    • - retained earnings $27,000
    • Total Liabilities $30,000
    • + Equity $27,000
  • 5. Financial Statements – Income Statement
    • Revenues $150,000
    • - Variable Costs $ 75,000
    • = Gross Margin $ 75,000
    • - Fixed Costs $100,000
    • = Net Business Income ($ 25,000)
    • + Grants/Donations $ 35,000
    • = Net Income $ 10,000
  • 6. Financial Statements – Cashflow
    • Operating activities - converts the items reported on the income statement from the accrual basis of accounting to cash.
    • Investing activities - purchase and sale of long-term investments and property, plant and equipment.
    • Financing activities - issuance and repurchase of the company's own bonds and stock and the payment of dividends.
    • -> Increase (decrease) in cash
    • Cash, beginning of the year
    • Cash, end of the year
  • 7. Cashflow Budget / Projections
    • Cash, beginning of the year
    • + Receipts:
    • cash sales
    • cash from receivables
    • loan disbursement
    • - Disbursements:
    • cash expenses
    • inventory
    • fixed costs
    • loan repayments
    • = Cash, end of the year
  • 8.
    • BALANCE SHEET
    • Assets
    • Current Assets
    • - cash $ 6,000
    • - accounts receivable $ 1,000
    • - inventory $ 20,000
    • Long term Assets
    • - leasehold
    • improvements $ 20,000
    • - equipment $ 10,000
    • Total Assets $ 57,000
    • Liabilities and Equity
    • Current Liabilities
    • - line of credit $ 20,000
    • - accounts payable $ 5,000
    • Long Term Liabilities
    • - equipment loan $ 5,000
    • Equity
    • - retained earnings $ 27,000
    • Total Liabilities + Equity $ 57,000
    INCOME STATEMENT Revenues $150,000 - Variable Costs $ 75,000 = Gross Margin $ 75,000 - Fixed Costs $100,000 = Net Business Income ($ 25,000) + Grants/Donations $ 35,000 = Net Income $ 10,000
  • 9. True Cost Accounting
    • Capture all costs of your social enterprise
    • Some considerations:
      • Classify and organize your accounts to suit your situations and needs
      • Distinguish between fixed and variable costs
      • Look for hidden costs and contributions
      • Distinguish your social costs from your business costs
  • 10. Ratios
  • 11. Profitability Ratios
    • Gross (Profit) Margin:
    • Gross Profit
    • Sales
    • Using our example:
      • Gross Margin = $ 75,000 = 50%
      • $150,000
  • 12. Profitability Ratios
    • Total (or Net) Profit Margin: Net Income
    • Sales
    • Sales Growth: Current Period Sales - Previous Period Sales
    • Previous Period Sales
    • Reliance on Revenue Source: Revenue Source
    • Total Revenue
    • Operating Self-Sufficiency: Business Revenue
    • Total Expenses
  • 13. Liquidity Ratios
    • Working Capital:
      • Current Assets
      • Current Liabilities
    • Using our example:
      • Working Capital = $27,000 = 1.08x
      • $25,000
  • 14. Operating Efficiency Ratios
    • Inventory Turnover:
      • Cost of Goods Sold/Gross Margin
      • Average Inventory
    • Using our example:
      • Inventory Turnover = $ 75,000 = 3.75x
      • $ 20,000
  • 15. Operating Efficiency Ratios
    • Days in Inventory: Average Inventory
    • COGS x 365
    • Accounts Payable Turnover & Days in AP is same calculation as Inventory
    • Accounts Receivable Turnover: Net Sales
    • Average Accounts Receivable
    • Days in Accounts Receivable: Average Accounts Receivable
    • Sales x 365
    • Total Asset Turnover: Revenue
    • Average Total Assets
  • 16. Leverage Ratios
    • Debt to Equity:
      • Short Term + Long Term Debt
      • Total Equity
    • Using our example:
      • Debt to Equity = $ 25,000 = 0.93x
      • $ 27,000
  • 17. Leverage Ratios
    • Loan to Value:
      • Debt associated with Project
      • Total Value of Project (potentially including “soft costs”)
      • (may also be based on “collateral value” – what could we get if we had to sell it fast)
    • Using our example:
      • Loan to Value = $ 5,000 = 50%
      • $10,000
  • 18. Leverage Ratios
    • Debt Service Coverage:
      • EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization)
      • OR
      • Net Income + Depreciation / Amortization + Interest + Taxes
      • Principal and Interest payment associated with all debt
    • Using our example:
      • Debt Service Coverage = $10,000 = 4.11x
      • $ 2,436
  • 19. Tools for Assessing Financial Risk
  • 20. Understanding Your Cost Structure
    • Revenues
    • - COGS (Variable Costs)
    • = Gross Margin
    • - G&A Expenses (Fixed Costs, or O/H)
    • = Net Income
  • 21. Break Even Analysis & Break Point
    • Break even is the level of sales required for Gross Profits to cover all Fixed Costs
      • Sales – COGS = Fixed Costs
      • (Unit price – Variable unit cost) * volume = Fixed Costs
    • Break point is when a business reaches capacity within their fixed costs (facilities, staff, etc.)
      • Therefore a new investment is required to expand capacity and continue growth
  • 22. Ongoing Monitoring
    • Map some of the most important areas of
    • risk and uncertainty
    Sensitivity Analysis
    • Identify the key risk areas and track them closely
    • Use benchmarks
  • 23. Resources
    • Demonstrating Value Tools & Resources http://www.demonstratingvalue.org/what-we-offer/our-solutions/tools-and-resources
    • Triodos Balancing Risk www.sayervincent.co.uk/Asp/.../File/Balancing%20risk%20guide.pdf
    • Vancity Financial Fitness toolkit series https://www.vancity.com/MyCommunity/Library/NotForProfit/
  • 24. Learning to Speak "Banker"
  • 25. Keys to a Happy Relationship with your Investors
      • Understand your business
      • Know when you need investment
      • Understand your investors’ needs
      • Communicate your strategy to investors
      • Gain investment and grow your enterprise!
  • 26. Traditional Point of Investor/Lender Involvement When to Involve Potential Investors or The Sources of Funding and Financing Developing a Relationship Approach Community planning activities including establishing community priorities Development of actual project options to realize these community priorities Confirm sources of funding and financing – finalize terms and conditions Monitor and support these relationships and their involvement once the project is operational
  • 27. What to Bring to A Lender
    • outline for use of funds
    • 4 years of reviewed or audited statements
    • current budget
    • list of directors & key management
    • constitution & bylaws
  • 28. Working with Investors: it’s a partnership
  • 29. Understanding the Conventional Capital Market
  • 30. Pricing capital in Conventional Markets
    • Investors want
      • High returns on investment (ROI)
      • Safety / Security (Mitigated Risk)
      • Liquidity / Exit
      • Convenience / Low Transaction Costs
  • 31. Conventional Investment Intermediaries (i.e. Banks)
    • Must match deposits with loans (ie investor expectations with fund performance)
    • Look for low risk, low cost, convenient transactions
    • Preference for large, more liquid deals
      • Costs as much to do a small deal as a large one
      • No room for patience / judgment / tailoring – especially on smaller scale transactions
    • May compare a deal to every other on the planet
  • 32. Repayable Capital : In Context Senior Debt (Op. credit, secured term, etc) Fully Secured & Proven Earnings Subordinated Debt (VCC, CFDC) Unsecured & Proven Earnings Venture Capital Unsecured & Unproven Earnings Borrowing Cost 7.5% 35% 15% Borrowing Cost & Risk to Investor High Med. Low Risk Level
  • 33. Enterprise Development Path Source: enterprising nonprofits SEED/ PLANNING START-UP Launch START-UP Survival GROWTH Profitability MATURITY Idea/Readiness Feasibility assessment Business Planning Raising Capital Launch Prep Enterprise begins operations Revise strategy / business plan Build enterprise & mgmt capacity Move to profitability Stability/success in initial market Expand to new market/products Equipment, facilities, HR Sustainability Geographic or product growth Spin-off or new enterprises
  • 34. Convenience/Transaction Costs
    • Simplicity
    • Legal costs
    • Hand-holding
    • Monitoring
    • Unusual elements
  • 35. Exit Strategy
    • How will the investor get her money back?
    • How long will she have to wait?
    • Is there a back-up plan?
  • 36. Loan Decision Model Personal Environment Policy Management Repayment Equity Security
    • Experience
    • Skills
    • Education
    • Capabilities
    • Cash
    • Contributions
    • Past performance
    • Forecasts
    • Stability
    • Flexibility
    • Buildings
    • Equipment, etc. at liquidity value
    Has run this kind of business before Has three years of successful performance Average one third equity 100% covered on liquidation value From Sunrich Management
  • 37. Sources of Money
    • Bank Loans (Secured, Market Rates) – pure debt facilitated by co-signers and collateral security
    • Vendor Take-back or Seller Financing
    • Past Surpluses – pure equity
    • Grants (Foundations, Government) – can also be equity
    • Donations (fundraising & in-kind contributions)
    • Sponsorships
    • Partnerships (Public / Private / Voluntary Sector)
    • Tax Credits / Benefits
  • 38. Sources of Money
    • “ Love Money” – members and related organizations
    • Program Related Investments
    • Working Capital (buyers and suppliers)
    • Volunteers & Staff (knowledge & energy)
    • Relationships and Social Capital
    • Risk Capital (e.g. subordinated debt / preferred shares)
    • Social Venture Capital
  • 39. Government Sources
    • Federal Government
        • WD - Community Futures
        • HRSDC
        • Natural Sciences and Engineering Research Council
          • Industrial Research Assistance Program (IRAP)
          • National Research Council (NRC)
        • CMHC (Mortgage Insurance, RRAP Grants)
        • Canada Council
        • INAC
        • BDC
        • Tax Credits and Incentives (RRSP, Charitable Deductions)
  • 40. Gov’t Sources cont’d
    • Provincial / Territorial governments
      • Community Venture Capital Corporations
      • Employee Share Ownership Plans
      • Green Energy support
      • Tax credits / incentives
      • Ministerial spending
    • Municipal / Regional Entities
      • Density allowances
      • Tax policy
      • Local participation / contribution
      • Green Municipal Fund - FCM
  • 41. Institutional Sources
      • Institutional
      • Columbia Basin Trust
      • Northern Trust
      • Coast Opportunities Funds
      • Renewal Partners, TIDES Canada
      • Vancouver Foundation
      • McConnell Foundation (incl. CEDTAP)
      • ABC Canada, ACCs, Peace Hills Trust
      • Also non-institutional, private investors, members of co-ops, etc
      • with different investment objectives
  • 42. Keys to a Happy Relationship with your Investors
      • Understand your business
      • Know when you need investment
      • Understand your investors’ needs
      • Communicate your strategy to investors
      • Gain investment and grow your enterprise!
  • 43. Final Questions?
    • Emily Beam
    • General Manager
    • Street Youth Job Action
    • [email_address]
    • Rebecca Pearson
    • Investment Manager
    • Vancity Community Capital
    • [email_address]