This document provides an overview of financial literacy topics for small business owners. It discusses the differences between profit and cash, the importance of liquidity and working capital, calculating break-even points, and analyzing the causes of low profits and volatile cash balances. The document also provides examples of a break-even calculation and steps to take in financial analysis, concluding that small business owners should seek advice and continuously measure key financial metrics to stay in control of their business.

2. With thanks to The Open
University, Profit Mastery and
Tutor Doctor
All my life I have had apassion for cash

3. Goals of the session
 Improve your financial literacy
 Understand some of the causesand effects of doing
business on your finances
 Look at break evens
 To provide for you an approach to financial problem
solving

4. Profitis simply notthe same as cash
- Why?
Because you can’tpayyour bills withprofit you need
some of these

5. Staying in business is about NOT ONLY
knowing howtobe profitable – It is
about how to be liquid
Let’s do a quick quiz – I
know you love them!

6. Quiz
Q1-Which ofthe followingbestdescribes the
purpose offinance?
A. Fundsforbusiness
B. Customersfora business
C. Profitsfora business
Answer
A – Finance relates to the inward and outward movement of funds

7. Q2– Identifythemostlikely source offinance for a small
business
A. A debenture
B. An overdraft
C. A mortgage
Answer B– mostlikelyan overdraft –another
could bea longer termloan or factoring
Quiz

8. AnswerB– Short termassetsprovide vital daily
liquiditytoyour business – Personal savings butnot
in isolation!
Quiz
Q3 – Whatisa good definitionofshort-termassetsa.k.a.
‘current asset?
A. Security thatcan be used for a loan
B. Allthings the business owns and which can be converted into
cashwithin 12 months
C. Your personal savings

9. Q4. –Which onetheseis NOT a current liability?
A. A bill from HMRC relating to payroll
B. An outstanding invoice for stock that is sitting on your shelf
C. A balloon payment due on a car lease that expire in 15
months
Quiz
AnswerC –Alltherest areitemsyou mustpayfor
(moneyout) withinthenext12 months

10. Q5. Whatbestdescribes your relationshipto‘workingcapital’?
A. A goal to get a job in London
B. The amount of ‘brownie points’ you have to pay your partner
to compensate for never being there
C. The differencebetweenyour current assetsand current
liabilities
Quiz – Last one!
Answer C –ofcourse

11. Why is working capital important?
The accountant says-
“Becauseit is a financialmetricthat indicatesthe levelat whichthe current assets
of a businessexceed itsliabilitiesand can beappliedto its operation”.
And the businessownersays –
Ifyou haven’tgot workingcapitalit islikelythat you haven’tgot work
Source: Boundless. “Importance ofWorking Capital.” Boundless Finance. Boundless, 02Jul. 2014.Retrieved09Feb.2015fromhttps://www.boundless.com/finance/textbooks/boundless-
finance-textbook/introduction-to-working-capital-17/working-capital-122/importance-of-working-capital-502-1473/

12. Cause & Effects
Low profits and low levels of cash are all
outputs of doing business.
They are caused by something else
SEE THE CAUSE AND YOU HAVE CONTROL
Your business is “only ever complete whenit is workingfor
you, rather than youworking for it”
(Scott Allen)

13. What do we use profit for?
1. To convert into income for the owners of the
business – drawings / dividends
2. To meet existingliabilities
3. To invest in new assets

14. If your businesshas low net profits it is
likely caused by:
£
• Lowretainedearnings
• Highborrowingcosts
• Highcurrentliabilities
• Lowmargins–notknowing
yourpriceinrelationtoyour
costs

15. You should look at the following :
 Pricing–are youtoocheap?HaveyoulookedatyourBreak Even
level?Is itattainable?
 GrossMargins–are yousellingenoughofthehighermargin
business?Doyouknowthedifferencebetweenmarginandmark-
up?
 Inventory–whatare youspendingthemoneyon?Howlongisit
sittingonyourshelf?Are youbeingSMARTaboutyoursupply
chain?
 Borrowing-howmuchandat what price?

16. If you business has low, volatile
cash balances it will likely have:
£
• Seasonality-notfullyunderstood
• Poorinventorycontrols
• Checkforbookkeepingerrors
• Carryingtoomuchstock
• Offeringtoofavourabletermsof
business

17. You should look at the following:
 Cash-flowmatching - Howdo your salesperform overeach month? How
do your costscome in? Aretheymisaligned?
 Inventory / stock control –Do you know how to track your stock? When
are your assetsbeingused? Canyou use QR Codesand Smart phone to help?
 Numbers andforecasts - Check your numbers,right signs+/-; rightchecks
and balances?Areyou awareof thosebig outgoingsand can you ‘save to
pay’?
 Terms of trade– too generous to customers–to compliantto suppliers?A
fewdaysof narrowingcan makea big difference

18. Break-Evens – what we mean WHY THEY ARE
IMPORTANT
 Thisis the point at which your business covers its costs but
makes zero net profit
 Why is it important – well if the UNITS of salesare low for
break even to be achieved then profitability should be quick to
reach; it must be the case that the opposite is then true
 You need to know how to do B/E
analysisis if you want to
grow

19. Example of Break-Evencalculation
Total Annual Fixed costs = £250,000
Average Unit Selling Price = £375
Average Variable Cost per unit = £265
Question – How many units must be sold to break even?
Answer – Sale of one unit £375
Less variable costs -£265
Contribution margin per sale = £110
Fixed Costs = £250,000 / £110 ≈ 2,273 units
Q. Is that a realistic assumption?

20. Steps to take in any financialanalysis
 Make sureyou haveall the relevantinformation
 Ifyou don’t knowhow to usea spreadsheetlearnbecauseit’sthe besttool
for analysis
 Look at somekey financialratios –investin a book or seekadvicefroma
ColbeaBusinessAdviser
 Ifyou workfor a franchiseor an establishedindustrylook for whatpeople
considerto be industrystandard –and measureyourself againstthem
 Look for causesand effectsfor areasof concern
 TAKE ACTION–change to resolvebut alwayscontinue to measure

21. In conclusion
 If numbers frighten you then don’t
approach them alone, don’t attempt
everything in one go – bit by bit is best
 Think about your business from the
‘helicopter perspective’
 Everything in your business is
interdependent and connected
 PLAN / TARGET AND MEASURE

22. Finally – name the three things weuse profit for
1. For redistributiontoowners in thefromofdrawing or
dividends
2. To service liabilities
3. To buy moreassets

23. Being in Control is liberating
Here to help