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1
web conferencing for small business
Accelerating Your Business Growth
Webinar Series
Presented by:
Guest speakers: John ...
2
Key Questions
• What are the key contributors to my profitability?
• Are my costs in line with my business model?
• How ...
• The Tools – an Overview
o Accounting Basics
o The Profit and Loss Statement
o The Balance Sheet
o The Cash Flow Statemen...
Growth Plan Tools
• The Income Statement – a running record of company
business transactions
 Unit Sales and Revenues
 E...
Accounting Basics
• Cash vs. Accrual Accounting
• Recognizing Income and Expenses
• Chart of Accounts
• Incurring an Expen...
Revenues
Unit Sales 4350
Dollars 1,225,867$
Cost of Goods Sold
Materials 123,589$
Labor 476,632$
Shipping and Handling 45,...
The Balance Sheet
ASSETS
CURRENT ASSETS
Cash 15,214$
Accounts Receivable 61,679$
Allowance for Bad Debt (4,500)$
Prepaid E...
The Cash Flow Statement
• A key measure of
business viability
• A key indicator of
credit requirements
• A poor reflector ...
How do they work together?
Income Statement Balance Sheet Cash Flow Statement
• An accounting of
business transactions:
re...
Common Problems
• Poorly structured chart of accounts.
• Inconsistent categorization of revenues and costs.
• Failure to m...
Financial Ratios
• Profitability
 Gross Profit
 Operating Profit
 Return on Assets
 Fixed Asset Turnover
• Liquidity (...
Profitability Ratios
• Gross Profit: Revenue less COGS or COS
 The first Level of profitability
 Varies widely from indu...
Profitability Ratios
REVENUE # Revenue % of Rev
Themed Events/Celebrations 15 94,500$ 11%
Plated Events 60 228,000$ 26%
Bu...
Profitability Ratios
Return
On
Assets
$88 ÷ $349,303 = .02%
Net Income
Fixed Asset
Turnover
$873,700 ÷ 204,260 = 4.2
Reven...
Liquidity Ratios – Measures of Risk
• Current Ratios (Working Capital)
 Current Assets ÷ Current Liabilities
 Measure of...
Liquidity Ratios
Current Ratio 145,043 ÷ 31,160 = 4.6 : 1 Quick Ratio 115,057 ÷ 31,160 = 3.7 : 1
Days of Cash 15,000 × 365...
Efficiency Ratios (Cash Generation)
• Days Sales Outstanding
 Average monthly A/R ÷ (Annual Revenue ÷ 365)
 Measures eff...
Efficiency Ratios
Days Sales Outstanding 100,057 ÷ (873,700 ÷ 365) = 41.8 Days Payables Outstanding 20,000 ÷ (506,434 ÷ 36...
Cash at Beginning of Period 15,500$
Operating Activities:
Cash Inflows
Sales 873,700
Accounts Receivable (100,057)
Depreci...
The Practical Uses of Financial Ratios
• Use your cash flow statement as a leading indicator of financial
strength or weak...
Q & A
web conferencing for small business
Presented by:
Accelerating Your Business Growth
Webinar Series
Thank You!
web conferencing for small business
Presented by:
Accelerating Your Business Growth
Webinar Series
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Smart Financial Management - from Part 3 of the free webinar series, Accelerating Your Business Growth

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Part 3 of our free webinar series, “Accelerating Your Business Growth” entitled “Smart Financial Management”. This series is presented by AnyMeeting, SCORE, a non-profit association dedicated to helping small businesses launch and grow, and Comcast Business, a provider of advanced communication solutions to millions of small business.

In this series, we’ve presented webinars featuring business leaders and SCORE mentors speaking on topics important to small business.

This webinar features SCORE mentor John Harman who discusses tips on working with financial statements, financial ratios, cash flow forecasts, and trusted advisors to drive and fund your business's growth.

John is Managing Director of Adulant Consulting Services, which advises small and mid-sized businesses on strategies for growth and operational excellence, and a SCORE mentor. John’s prior experience includes senior executive roles at Eastman Kodak, the Gartner Group and Pitney Bowes in sales, marketing, quality management, strategic planning, mergers and acquisitions, and new market development. Before entering the business world, John was an adjunct professor of history at the University of Rochester and worked in the Office of Research Administration as Assistant Director. John is currently an adjunct professor in the Dolan School of Business at Fairfield University in Connecticut.

Get insights and listen to actionable advice as John engages the audience in live Q&A.

Whether you are just starting your business, looking to accelerate your growth or simply want to gain an edge to get your business to the next level, you won’t want to miss out.

Watch the full webinar recording here: https://www.anymeeting.com/WebConference/RecordingDefault.aspx?c_psrid=E951D782824A31

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Smart Financial Management - from Part 3 of the free webinar series, Accelerating Your Business Growth

  1. 1. 1 web conferencing for small business Accelerating Your Business Growth Webinar Series Presented by: Guest speakers: John Harmon, SCORE Mentor, Fairfield County, CT Part 3 of 3: Smart Financial Management
  2. 2. 2 Key Questions • What are the key contributors to my profitability? • Are my costs in line with my business model? • How well do my assets contribute to profitability? • How can I improve my cash flow? • What are my financial risks and how can I manage them? • What is the financial value of my business strategy? • What is my business worth?
  3. 3. • The Tools – an Overview o Accounting Basics o The Profit and Loss Statement o The Balance Sheet o The Cash Flow Statement o Statement Interactions o Common Problems • Financial Ratios and their Uses o Profitability o Liquidity o Efficiency Agenda
  4. 4. Growth Plan Tools • The Income Statement – a running record of company business transactions  Unit Sales and Revenues  Expenses  Net Profit • The Balance Sheet - a snapshot of assets and liabilities  Assets – What you own that’s used in the business  Liabilities – What you owe  Equity or Net Worth – the difference between the two • Cash Flow Statement – a monthly account of cash coming in and going out  A sale is not the same thing as getting paid  Positive cash flow means cash remaining for other things  Negative cash flow means cash must come from elsewhere  Tracks seasonality of cash accumulation
  5. 5. Accounting Basics • Cash vs. Accrual Accounting • Recognizing Income and Expenses • Chart of Accounts • Incurring an Expense vs. Buying an Asset • Depreciation and Amortization
  6. 6. Revenues Unit Sales 4350 Dollars 1,225,867$ Cost of Goods Sold Materials 123,589$ Labor 476,632$ Shipping and Handling 45,220$ Total 645,441$ Gross Margin Dollars 580,426$ % 47.3% Expenses Salaries and Wages 268,000$ Marketing 5,000$ Sales 90,000$ Travel 5,500$ Facilities 75,000$ Total 443,500$ Operating Profit Dollars 201,941$ % 16.5% Interest 58,000 Taxes 50,379 Net Profit Dollars 93,562 % 7.6% The Income Statement Revenues • Your customers • Your market segments • Your products and services Cost of Goods Sold (COS) • Direct, immediate impact on customers • Manage for cost and quality Gross Margins • The basis for company profitability • 35 – 70%, depending on industry • Determining your break even point SG&A • Indirect impact on customers • A balance of short and long term needs • Risk Management Association Net Profit • Indirect impact on customers • Not the only measure of business success
  7. 7. The Balance Sheet ASSETS CURRENT ASSETS Cash 15,214$ Accounts Receivable 61,679$ Allowance for Bad Debt (4,500)$ Prepaid Expenses 500$ TOTAL CURRENT ASSETS 72,893$ FIXED ASSETS Computers & Equipment 21,750$ Furniture 6,100$ Other Equipment 3,550$ TOTAL FIXED ASSETS 31,400$ TOTAL ASSETS 104,293$ LIABILITIES & SHAREHOLDERS EQUITY CURRENT LIABILITIES Accounts Payable 15,794$ Payroll Tax Accured 3,355$ Current Portion of Long-Term Debt1,741$ TOTAL CURRENT LIABILITIES 20,889$ LONG-TERM LIABILITIES ABC Bank Loan - Computers 8,759$ TOTAL LONG-TERM LIABILITIES 8,759$ TOTAL LIABILITIES 29,648$ CAPITAL STOCK 1,000$ RETAINED EARNINGS 34,894$ CURRENT YEAR NET INCOME 38,750$ TOTAL NET WORTH 74,645$ TOTAL LIABILITIES AND EQUITY 104,293$ Life of 12 months or less Equal By DefinitionFixed Assets decline at Depreciation Rate (What you use in the business) (What you owe) (Net Worth )
  8. 8. The Cash Flow Statement • A key measure of business viability • A key indicator of credit requirements • A poor reflector of business operations. Jan Feb Mar Apr May Jun Beginning Cash Balance 15,214 - - 1,224 5,244 9,263 Cash Inflows Income from Sales 37,686 37,686 37,686 37,686 37,686 37,686 Accounts Receivable - 30,149 37,686 37,686 37,686 37,686 Total Cash Inflows 37,686 67,836 75,373 75,373 75,373 75,373 Cash Outflows Investing Activities New Fixed Assets Purchases 1,000 1,000 1,000 1,000 1,000 1,000 Inventory Addition to Bal.Sheet - - - - - - Cost of Sales 27,046 36,062 36,062 36,062 36,062 36,062 Operating Activities Salaries and Wages 27,898 27,898 27,898 27,898 27,898 27,898 Fixed Business Expenses 6,150 6,150 6,150 6,150 6,150 6,150 Taxes - - 2,796 - - 2,775 Financing Activities Loan Payments 158 158 158 158 158 158 Line of Credit Interest - 62 86 86 86 86 Line of Credit Repayments - - - - - - Dividends Paid - - - - - - Total Cash Outflows 62,252 71,330 74,149 71,353 71,353 74,128 Cash Flow (24,566) (3,494) 1,224 4,020 4,020 1,245 Operating Cash Balance (9,352) (3,494) 1,224 5,244 9,263 10,508 Required Cash Balance Line of Credit Drawdowns 9,352 3,494 - - - - Ending Cash Balance - - 1,224 5,244 9,263 10,508 Line of Credit Balance 9,352 12,846 12,846 12,846 12,846 12,846
  9. 9. How do they work together? Income Statement Balance Sheet Cash Flow Statement • An accounting of business transactions: revenues, expenses, and earnings • The assets a company needs to run the business and how it pays for them. • A Statement of the cash the business generates and how. Cash from sales Uncollected Sales Assets that generate sales Cash from Receivables Cash for expenses Expenses that generate liabilities Debt Reduction
  10. 10. Common Problems • Poorly structured chart of accounts. • Inconsistent categorization of revenues and costs. • Failure to monitor book keeping entries. • Insufficient revenue and profitability detail. • Insufficient tracking of key balance sheet items. • Insufficient management of cash flow.
  11. 11. Financial Ratios • Profitability  Gross Profit  Operating Profit  Return on Assets  Fixed Asset Turnover • Liquidity (Debt coverage)  Current Ratio  Quick Ratio  Days of Cash • Efficiency (Cash Conversion)  A/R Turnover  A/P Turnover  Inventory Turnover
  12. 12. Profitability Ratios • Gross Profit: Revenue less COGS or COS  The first Level of profitability  Varies widely from industry to industry  Used to calculate Break-Even Point. • Operating Profit: Earnings before interest and taxes  Profits coming from operations  Doesn’t include YTD interest payments and taxes  Best descriptor of operating capability • Net Profit: Profit after all expenses deducted  May or may not be a meaningful description of business success • Return on Assets: Net profit ÷ Total assets  Represents asset contribution to profitability  Varies widely from industry to industry • Fixed Asset Turnover: Revenues ÷ Total Fixed Assets  Fixed asset contribution to revenues  Not meaningful for companies with low fixed assets
  13. 13. Profitability Ratios REVENUE # Revenue % of Rev Themed Events/Celebrations 15 94,500$ 11% Plated Events 60 228,000$ 26% Buffets 45 234,000$ 27% Hors d'Oeuvres 52 124,800$ 14% Non Profit Events 10 90,000$ 10% Weddings 4 102,400$ 12% NET REVENUE 186 873,700 COST OF GOODS SOLD (COGS) COGS % Themed Events/Celebrations 47,250 50% Plated Events 136,800 60% Buffets 133,380 57% Hors d'Oeuvres TOTAL COS 72,384 58% Non Profit Events 60,300 67% Weddings 56,320 55% Total 506,746 58% GROSS PROFIT (Margin) 366,954 42.0% SALES, GENERAL & ADMINISTRATIVE EXPENSES: Fixed Expenses: Rent 23,820 Telephone, Internet, Utilities 5,430 Repairs and Maintenance 1,674 Equipment Depreciation 5,500 Vehicle leases 6,200 Total 42,624 4.9% Labor and Benefits Expenses: Compensation of Owner/Officer 75,000 Salaries and Wages 180,000 Payroll Taxes 20,400 State Unemployment Taxes 5,237 Total 280,637 32.1% Administrative Expenses: Office and Computer Supplies 450 Postage and Freight 300 Insurance 497 Professional Fees 1,440 Bank Charges 197 Testing 4,975 License & Fees 575 Advertising & Marketing 5,000 Other 5,937 Total 19,370 2.2% Total SG&A 342,632 39.2% SG&A Margin % 39.2% OPERATING PROFIT (Margin) 24,322 2.8% DEPRECIATION, INTEREST AND TAXES Interest Expense 6,960 Depreciation 17,240 Taxes 34 Total 24,234 NET INCOME (Margin) 88 0.0% Riverhead Parties and Events Statement of Income (Profit & Loss)
  14. 14. Profitability Ratios Return On Assets $88 ÷ $349,303 = .02% Net Income Fixed Asset Turnover $873,700 ÷ 204,260 = 4.2 Revenues ASSETS: CURRENT ASSETS: Cash 15,000$ Accounts Receivable 100,057 Allowance for Bad Debt (5,000) Inventory 34,986 TOTAL CURRENT ASSETS 145,043 FIXED ASSETS: Computers 28,000 Furniture 8,000 Other Equipment 65,500 Ovens and Walk In Coolers 40,000 Building renovations 80,000 TOTAL GROSS FIXED ASSETS 221,500 ACCUMULATED DEPRECIATION (17,240) NET FIXED ASSETS: 204,260 TOTAL ASSETS 349,303 LIABILITIES & STOCKHOLDERS EQUITY: CURRENT LIABILITIES: Accounts Payable 20,000 Payroll Tax Accrued 4,200 Current Portion of Long-Term Debt 6,960 TOTAL CURRENT LIABILITIES 31,160 LONG TERM LIABILITIES: Computers 28,000 Furniture 8,000 ABC Bank Loan - ovens and walk in coolers 40,000 Bank Loan - Renovations 40,000 TOTAL LONG-TERM LIABILITIES 116,000 TOTAL LIABILITIES 147,160 STOCKHOLDERS' EQUITY: Capital Stock 37,663 Paid-In Capital 100,000 Retained Earnings 64,146 Current Period Net Income 88 TOTAL STOCKHOLDERS' EQUITY 201,897 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY349,303 Riverhead Parties and Events Statement of Financial Conditon (Balance Sheet)
  15. 15. Liquidity Ratios – Measures of Risk • Current Ratios (Working Capital)  Current Assets ÷ Current Liabilities  Measure of company’s ability to pay off debt; 1.5 : 1 considered adequate  BUT … usefulness depends on how fast receivables and inventory can be converted to cash • Quick Ratios  Cash + A/R ÷ Current Liabilities  Applies to companies w/o inventory; 1:1 considered adequate  More conservative risk indicator still subject to A/R conversion rate. • Days of Cash  Cash × 365 ÷ Annual Revenues  Should cover cash needs for 30 to 60 days  Apply the “sleep at night” factor
  16. 16. Liquidity Ratios Current Ratio 145,043 ÷ 31,160 = 4.6 : 1 Quick Ratio 115,057 ÷ 31,160 = 3.7 : 1 Days of Cash 15,000 × 365 ÷ 873,700 = 6.3 days Revenues LIABILITIES & STOCKHOLDERS EQUITY: CURRENT LIABILITIES: Accounts Payable 20,000 Payroll Tax Accrued 4,200 Current Portion of Long-Term Debt 6,960 TOTAL CURRENT LIABILITIES 31,160 LONG TERM LIABILITIES: Computers 28,000 Furniture 8,000 ABC Bank Loan - ovens and walk in coolers 40,000 Bank Loan - Renovations 40,000 TOTAL LONG-TERM LIABILITIES 116,000 TOTAL LIABILITIES 147,160 STOCKHOLDERS' EQUITY: Capital Stock 37,663 Paid-In Capital 100,000 Retained Earnings 64,146 Current Period Net Income 88 TOTAL STOCKHOLDERS' EQUITY 201,897 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY349,303 ASSETS: CURRENT ASSETS: Cash 15,000$ Accounts Receivable 100,057 Allowance for Bad Debt (5,000) Inventory 34,986 TOTAL CURRENT ASSETS 145,043 FIXED ASSETS: Computers 28,000 Furniture 8,000 Other Equipment 65,500 Ovens and Walk In Coolers 40,000 Building renovations 80,000 TOTAL GROSS FIXED ASSETS 221,500 ACCUMULATED DEPRECIATION (17,240) NET FIXED ASSETS: 204,260 TOTAL ASSETS 349,303 Riverhead Parties and Events Statement of Financial Conditon (Balance Sheet)
  17. 17. Efficiency Ratios (Cash Generation) • Days Sales Outstanding  Average monthly A/R ÷ (Annual Revenue ÷ 365)  Measures efficiency at converting A/R to cash  < 30 days ideal  Implications for customer relations management • Days Inventory Outstanding  Average monthly Inv. ÷ (Cost of Sales × 365)  Measures efficiency of converting inventory to cash  Implications for satisfying customer demand • Days Payables Outstanding  Average A/P ÷ (Annual Revenue ÷ 365)  Implications for supplier relations management • Cash Conversion Cycle  DSO + DIO – DPO  Indicator of company ability to manage its capital assets  Indicator of company ability to pay its suppliers
  18. 18. Efficiency Ratios Days Sales Outstanding 100,057 ÷ (873,700 ÷ 365) = 41.8 Days Payables Outstanding 20,000 ÷ (506,434 ÷ 365) = 14 Days Inventory Outstanding 34,986 ÷ (506,434 ÷ 365) = 25.2 Cash Conversion Cycle 41.8 + 25.2 – 14 = 53 COGS DSO DIO DPO ASSETS: CURRENT ASSETS: Cash 15,000$ Accounts Receivable 100,057 Allowance for Bad Debt (5,000) Inventory 34,986 TOTAL CURRENT ASSETS 145,043 FIXED ASSETS: Computers 28,000 Furniture 8,000 Other Equipment 65,500 Ovens and Walk In Coolers 40,000 Building renovations 80,000 TOTAL GROSS FIXED ASSETS 221,500 ACCUMULATED DEPRECIATION (17,240) NET FIXED ASSETS: 204,260 TOTAL ASSETS 349,303 LIABILITIES & STOCKHOLDERS EQUITY: CURRENT LIABILITIES: Accounts Payable 20,000 Payroll Tax Accrued 4,200 Current Portion of Long-Term Debt 6,960 TOTAL CURRENT LIABILITIES 31,160 LONG TERM LIABILITIES: Computers 28,000 Furniture 8,000 ABC Bank Loan - ovens and walk in coolers 40,000 Bank Loan - Renovations 40,000 TOTAL LONG-TERM LIABILITIES 116,000 TOTAL LIABILITIES 147,160 STOCKHOLDERS' EQUITY: Capital Stock 37,663 Paid-In Capital 100,000 Retained Earnings 64,146 Current Period Net Income 88 TOTAL STOCKHOLDERS' EQUITY 201,897 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY349,303 Riverhead Parties and Events Statement of Financial Conditon (Balance Sheet)
  19. 19. Cash at Beginning of Period 15,500$ Operating Activities: Cash Inflows Sales 873,700 Accounts Receivable (100,057) Depreciation and Amortization 17,240 Change in Current Assets and Liabilities: Inventories (34,965) Accounts Payable 20,000 Total Operating Inflows 775,919 - Cash Outflows Cost of Goods Sold 506,434$ Fixed Expenses 42,624$ Labor and Benefits 280,637$ Admininstrative Expenses 19,371$ Total Operating Outflows 849,066$ Investing Activities: Capital Expenditures 40,000 Cash Used for Investing Activities 40,000 Financing Activities: Payments of Long Term Debt Principal 17,240 Interest Payments 6,600 Cash Used for Investing Activities 23,840 Net Increase / Decrease in Cash (136,988) Cash at Beginning of Period 15,500 Cash at End of Period (121,488) Riverhead Parties and Events Statement of Cash Flow
  20. 20. The Practical Uses of Financial Ratios • Use your cash flow statement as a leading indicator of financial strength or weakness • Pick a few key ratios relevant to your business • For most small businesses, they key ratios are likely to be • Gross Margins • Net Income • Day Sales Outstanding and Days Inventory Outstanding • Positive Liquidity • When selling the business other ratios increase in important • Return on Assets • Fixed Asset Turnover • Return on Equity • There’s more to running a successful business than financials
  21. 21. Q & A web conferencing for small business Presented by: Accelerating Your Business Growth Webinar Series
  22. 22. Thank You! web conferencing for small business Presented by: Accelerating Your Business Growth Webinar Series

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