Pace 2009 Effective Financial Management

Effective Financial Management Best Business Practices for a Profitable and Sustainable Business Presented by Advisors On Target

What we will cover today…
Getting Your Business “On Target” for Success
3 Key Financial Indicators of Business Health
Key Metrics – Other Important Financial Data
Profit Improvement Strategies
Creating a Budget to Achieve your Plan

On the road to becoming an ON TARGET Painting Contractor…

Financial Management Best Practice Guide
Accounting system is fully & accurately functioning
Controls are in place to ensure accuracy
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 if not weekly
An adequate credit line is in place
Company is profitable, solvent and able to finance its growth and reward stakeholders

Rewards of being “On Target”
Grow the business
Become more profitable & be able to reward shareholders and key employees
Achieve your business goals
Make timely changes to your strategy
Reduce risk in tough economic times
Improve quality of life both personally and professionally

Effective Financial Management Key Financial Data For Business Survival

3 Key Financial Indicators Of Your Business’ State Of Health
Business is about making money
To 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 – 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 – Direct Expenses to Produce jobs
Indicator of the productivity of your field crews
Indicator of the accuracy of your estimator (and pricing)

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)%

Improving The Gross Profit Margin
To improve the Gross profit margin you need to work on the drivers:
Production / service delivery processes
Material Costs
Labor Costs
Customer relations
Team Skills and Development
Pricing & Estimating

What else affects Direct Labor Costs?
Productivity of Personnel
Ability of the company to keep work in the pipeline
Region – availability of qualified labor
Effectiveness of operating systems in the business
Job Process Systems
Fully supplied crews/trucks
Training/Management

Improving The Net Profit Margin
To improve the Net profit margin you also need to manage the following:
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
50% is goal
45% is industry average*
* Residential and Commercial Contractors under $10MM, depends on mix of work, and use of subcontractors

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

The three “Is it” s of measurement
Is it Accurate?
Is it Acceptable
Is it Sustainable?

Indicator 2: Cash Flow Obtain Cash Purchase Materials Bid & Sell Contract Complete Project

Improving Cash Flow
Cash Flow Cycle
Cash Flow vs. Profit
Long Term Strategies

Financial Result - Profit And Cash Flow

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 = (NP/TA)%
ROI is a profitability ratio – it is the true measure of the financial productivity of a business

ROI: An Example

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

Key Metrics: Other Important Financial Data to Watch
Liquidity
Debt
Collections
Break Even

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 =
Accts Receivable x 365/Annual Revenue
(previous 12 months rolling revenue)
Should be 30 days or less

BEST PRACTICE GUIDE : Breakeven Sales
Breakeven Sales =
Overhead Expenses*/Gross Profit Margin
Calculate by week, month, or year to manage your business effectively and keep a positive bottom line
*Include Variable Costs, Overhead Costs and “Other Costs” if critical to business survival

BEST PRACTICE GUIDE : Cash in Bank – Ideal
Cash in Bank =
Overhead Expenses*/Gross Profit Margin
Plus: Fixed expenses for months 2 & 3
Or – just think 3 months fixed expenses for a quicker calculation
*For the upcoming month - Include Variable Costs and Overhead Costs

Profit Improvement Strategies: How to Make More Money

Drilling Down Into Profit Improvement Planning: Understand The Components Of Sales Revenue
TOTAL REVENUE =
Total Customers x Number of Transactions x Average Sale Value
TOTAL CUSTOMERS = Number of customers at start - customers lost + new customers
NUMBER OF TRANSACTIONS = The number of times each customer deals with you
AVERAGE SALE VALUE = The average value of each sale

How To Increase Total Sales Revenue
Get more customers
Improve customer retention rate
Improve return visit rate
Improve average sale value
AND
Have customers recommend you to their friends and associates

Key Profit Drivers
How can these drivers can be manipulated to improve profitability and to focus on the areas where most potential increase in profit is available
Price
Volume of sales
Variable costs
Fixed costs

Profit Improvement Strategies
Increase sales revenue by increasing price and/or volume
Keep variable costs at least equal to or below the rate of increase in sales revenue
Achieve greater productivity from the resources which are financed by overheads
The key is to understand the likely outcomes of each strategy. Proper planning allows you to work through each potential scenario and reduce business and financial risk.

Here’s What You Need To Do
Increase sales revenue by increasing price and/or volume
Keep variable costs down (equal or below the rate of increase in revenue)
Achieve greater productivity from resources which are financed through overhead
Ensure that tight control is exercised over assets
SO THAT
Cash flow increases simultaneously with the increase in net profit

Create a Budget to achieve your Profit Plan

Get to know your numbers
Shape up your Chart of Accounts
Plan for success – the budgeting process
Stay informed with timely reporting
Know the score with ongoing monitoring of actual to budget performance

The Budgeting Process
Start with last year’s year to date information
Base your current profit plan on your business plan objectives
Project labor cost and hours
Ensure budgeted hours will meet revenue targets
Review marketing plan & adjust costs according
Update expenses based on foreseen changes

Re-evaluate all components
What is revenue target?
What is projected cost of direct labor?
What other expenses need adjustment?
Does budget achieve profit target?
Do hours support revenue target?
Should revenue target be adjusted?
Does marketing plan support revenue target?
Revenue Target Marketing Plan Hours Labor Cost Profit Target Other Expenses

Monitor your Progress
Incorporate Budget into QuickBooks
Monitor Monthly & YTD Progress
Make management decisions to achieve plan (or revise the plan, if necessary)
Identify Action Steps for upcoming month

Monitor Monthly*: Review & Analyze
Profit Margins
Costs
Cash Flow
Liquidity
Debt
Collections
Break Even
Compare Actual to Budget Performance
Job Costing
Realization
Marketing & Sales Data
Compare to plan
What’s working?

Thank you for attending! See us at the Trade Show Booth # 924
Contact Information
Linnea Blair
Tel 619.291.3700
Email [email_address]
www.AdvisorsOnTarget.com

Pace 2009 Effective Financial Management

by Linnea Blair

Accessibility

Categories

Upload Details

Usage Rights

1 Embed 2

Statistics