Sky rocket your financial knowledge success!


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Workshop delivered on 6th November to PDG Clients helping them de-mistify and understand finance

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  • Encourage you to think of what your own personal aims of today are.
  • This will be our theme of this morning – to talk us through the profit and loss account and why profits and cash are different including why this is important
  • Talk through each category in turn with examples – inter-active session – input from audience based on their experiences.
  • So we need more information to help us interpret how well a company is performing. Then we need to know the reasons, ‘the story’, why performance differs to both last year and to budget – what is going well so you can do more of it, what is not going so well so you can take action to correct it, etc.
  • How does what we have just learnt tie into this saying, the theme of our workshop today?
  • So, we’ve looked at what a simple profit and loss account consists of. Now let’s look at “turnover is vanity, profit is sanity, cash is reality”. What else might you need to know about these contracts in order to make a decision?
  • At least all profitable contracts. VERY important to watch out for in your companies! Might sound brilliant but be unprofitable – eek!Answers could include: are they good payers? Would their high profile make a huge difference to our business? How accurate are our estimated profits?!
  • Always subjective – what is most important to company and what is it trying to achieve?
  • How do we manage cash before money starts coming in? How do we pay salaries, suppliers, etc.? How can we get money in from customers more quickly? Answers could include better credit checks before start + due diligence on new customers, robust payment terms & conditions, strong credit control to chase monies due, account managers can help if good relationship with client. Strong cash management & forecasting is one of the most critical roles your finance function fulfil.
  • We’ll cover a few of these now
  • Gas, electricity, water
  • Exhibitions, Christmas party, travel, sometimes rent in advance, training!
  • Which scenario enables us to run our business better? If not understanding, would we buy new IT equipment or recruit new person based on cash-based? Less likely to on accruals-based P&L as know the correct position. Think in terms of booking your own holiday – which scenario gives you more info?P&L usually most important financial document for management team in order to run business unit as effectively & efficiently as possible.
  • General customer experience, networking, what you say about company down the pub. How can your team help you? Focus on costs you can control, e.g. can’t control rent negotiated for 3 years. Behavioural/cultural changes. Procurement, suppliers – VALUE not cheapest.
  • Finance is the language of businessRun dept/business betterImprove decision makingMore efficient, profitable businessImproved opportunities for growth
  • E.g. attend their team meetings to understand their issues, invite them to your team meetings so they can understand your issues, speak to them 1-2-1 about what you need to know to understand your dept numbers better, question them about variances you are not expecting & find out what you can do about it, etc.
  • Has been a lot to cover in a short space of time.
  • Sky rocket your financial knowledge success!

    1. 1. SKY-ROCKET Your Financial Knowledge & Success! By Andi Lonnen
    2. 2. Aims of Today: • 2 hour workshop • Categories included on a profit & loss account (P&L) • Understanding & analysing a P&L • Difference between cash & profits • P&L adjustments • Influencing profitability positively • Jargon buster
    3. 3. Who am I?! • Fully qualified ACCA accountant (FCCA) • Commercial Finance Director & Group Financial Controller roles last 9 years • President of ACCA Yorkshire Women’s Network • Former Chair of ACCA Business Leaders Forum • Articles published in Financial Director magazine, FT Adviser, ACCA Corporate Sector e-zine • Featured in Jun13 national Accounting & Business magazine • Recently filmed by ACCA re-mentoring activities • Expert panellist at global conference advising FDs around the world on business growth in SMEs • Joined PDG as Associate Business Finance trainer!
    4. 4. Who are you?! • Your name • Company you work for • Your role there
    5. 5. *Workshop Theme* • Turnover is vanity • Profit is sanity • Cash is reality!
    6. 6. Simple Profit & Loss Account (P&L) Revenues Less: Direct Costs Gross Profit Gross Margin % Add: Other Income Less: Overheads Pre-tax profit Net Profit Margin % Less: Tax Post-tax profit £100,000 -£40,000 £60,000 60.0% £5,000 -£50,000 £15,000 15.0% -£3,450 £11,550
    7. 7. P&L Performance • How is this company performing?
    8. 8. Performance Now? Revenues Less: Direct Costs Gross Profit Gross Margin % Add: Other Income Less: Overheads Pre-tax profit Net Profit Margin % Less: Tax Post-tax profit Actual £100,000 -£40,000 £60,000 60.0% £5,000 -£50,000 £15,000 15.0% -£3,450 £11,550 Budget £150,000 -£60,000 £90,000 60.0% £5,000 -£50,000 £45,000 30.0% -£10,350 £34,650
    9. 9. And Performance Now? Revenues Less: Direct Costs Gross Profit Gross Margin % Add: Other Income Less: Overheads Pre-tax profit Net Profit Margin % Less: Tax Post-tax profit Actual £100,000 -£40,000 £60,000 60.0% £5,000 -£50,000 £15,000 15.0% -£3,450 £11,550 Budget £150,000 -£60,000 £90,000 60.0% £5,000 -£50,000 £45,000 30.0% -£10,350 £34,650 Last Year £50,000 -£20,000 £30,000 60.0% £1,000 -£30,000 £1,000 2.0% -£230 £770
    10. 10. Turnover is Vanity Profit is Sanity Cash is Reality
    11. 11. “Turnover is Vanity, Profit is Sanity, Cash is Reality” • What does this statement mean? • Don’t we need turnover?
    12. 12. Turnover is Vanity • You have a choice of 3 contracts to bid on • Which contract do you want to focus your attention on from the following: Revenue Contract A £50,000 Contract B £25,000 Contract C £15,000 • Contract A: High profile, exciting opportunity • Contract B: Good, reliable customer known to us • Contract C: Currently unknown to company
    13. 13. Profit is Sanity • More information: Revenue Profitability Profitability % Contract A £50,000 £2,500 5% Contract B £25,000 £2,500 10% Contract C £15,000 £2,500 17% • What are our thoughts regarding which contract we’d like to go for now? • What other information might we need to know?
    14. 14. Cash is Reality • “Getting paid is the most important part of your business” – Lord Alan Sugar • A sale is NOT a sale until the cash is received Payment Terms Contract A 120 days Contract B 30 days Contract C 60 days • In what ways does this new information change our view?
    15. 15. So Why is Cash “King”? • A very popular phrase in the current economic climate • Why do you think this is?
    16. 16. Why is Cash “King”? • Cash is the lifeblood & oxygen of any organisation • Without cash coming through the door, you have no physical money to: – pay salaries, suppliers, bank loans, etc. – Invest in growth, i.e. new machinery, more people, etc. • Compare to your own life: – Cash in (salary, savings, investments, etc.) in order to pay cash out for mortgage, council tax, bills and hopefully lots of fun stuff, too!
    17. 17. Cash vs Profit – question? What are your thoughts on why cash and profits are different?
    18. 18. Cash vs Profit – answer! 1. Timing differences 2. P&L accounting adjustments
    19. 19. 1. Timing Differences • Raise a sales invoice – shows in Revenue & Profits on P&L on that date • Receive cash 30, 60, 90 days later….
    20. 20. Profit vs Cash: Timing Differences • How might we improve this cash position?
    21. 21. 2. P&L Accounting Adjustments • Paper adjustments, not cash • Includes: • Depreciation • Amortisation • Impairment • Accruals • Prepayments • Provisions • Stock adjustments
    22. 22. Depreciation • Depreciation: – What does it mean when our cars depreciate in value? – What has happened to the value of some of our properties during this recession? • Note: – “Amortisation” and “impairment” – Exactly same as depreciation – Applied to different types of assets
    23. 23. Accruals • • • • E.g. use telephone Jan, Feb & Mar Receive bill in April Accrue best estimate in Jan, Feb, Mar What other examples can you think of?
    24. 24. Prepayments • Pay an annual subscription to a professional body • Prepay this over the course of the full year, i.e. period to which it relates • Allocate an equal amount to each month for the use of that subscription • What other examples can you think of?
    25. 25. Why do we do this? • Why not just show cash position? CASH-BASED Revenue Less: Telephone Costs Pre-tax profit ACCRUAL-BASED Revenue Less: Telephone Costs Pre-tax profit M1 M2 M3 TOTALS M4 £1,000 £1,000 £1,000 £3,000 £3,000 £0 £0 £0 £0 -£2,500 £1,000 £1,000 £1,000 £3,000 £500 M1 M2 M3 TOTALS M4 £1,000 £1,000 £1,000 £3,000 £3,000 -£833 -£833 -£833 -£2,500 -£2,500 £167 £167 £167 £500 £500
    26. 26. Cash vs Profit • Can you make profits and still go bust?
    27. 27. Can you make profits & still go bust? • Of course! • As the previous example and countless victims of the recession have shown
    28. 28. Warning signs of cash problems • • • • • • • • Grow too fast Dependent on key customer Dependent on key supplier Capital expenditure over-commitment Supplier price hikes Overheads creep up Get sued Disaster – fire, flood
    29. 29. Influencing Profitability • Profit = revenue less costs • Brainstorm: – How to improve revenues, even if not in sales role – How to improve costs
    30. 30. Jargon Buster! Jargon Interpretation P&L Profit & Loss Account PBT Profit Before Tax (pre-tax profit) EBITDA Earnings Before Interest, Tax, Depreciation & Amortisation Gross Margin Gross profit / revenue % Net Profit Margin Net profit / revenue % Fixed Costs Set in stone for a period, do not budge (e.g. rent) Variable Costs Vary with volume (e.g. overtime) Bottom Line Pre-tax profit Capex Capital expenditure, e.g. cars, IT equipment, office furniture (not to be confused with share capital!) Opex Operational expenditure, e.g. everyday expenses Others?
    31. 31. Why do I need to know about Finance? • For what reasons do you think it is so important to understand financials, both for your business unit and your business?
    32. 32. Improve working with Finance • In what ways can you work with your Finance team more closely? • How can you help each other?
    33. 33. We’re nearly there…!
    34. 34. Quick Quiz! • Why is cash ‘KING’? • What are the two main reasons for differences between profit and cash? • Can you be a profitable business & still go bust? • What is an accrual? • What is the ‘bottom line’?
    35. 35. This workshop has covered: • Categories included on a P&L • Analysing a P&L against budget & last year • Turnover is vanity, profit is sanity, cash is reality – including reasons why • Difference between cash & profits • P&L adjustments • Influencing profitability positively • Jargon buster
    36. 36. Personal Review • What did you learn today that you didn’t know before? • In what ways might you apply this training? • What 1 thing will you do differently at work tomorrow as a result of this course?
    37. 37. You have completed the SkyRocket Your Financial Knowledge & Success Workshop!