Great presentation for Small Business owners to understand the importance of being able to read financial statements, the difference between profit and cash flow, the power of 1 and basic ratios and percentages to keep an eye on operational performance and cash flow...
2. Agenda
• Who we are
• The modern Accounting Landscape
• Types of Financial Statements
• Lets take a look at a P&L and Balance Sheet
• Power of 1
• Why is Cash flow King!
• Working Capital Cycle
• Key Points
3. Who Are We
• Chartered Accountants and Business Advisors
• Over 30 years experience in the SME market
• We are proud to have over a 1000 clients and growing…
• Over the past 7 years our client engagement in financial advisory services has
grown from a mere 10% to over 60% of our clients in 2014
• Extensive multi industry expertise with specialisation in Retail, Construction,
Manufacturing and Education
Our Purpose – Energising you and your
business
• Improve the performance of your business
• Increase the economic value of your business
• To grow and protect the wealth of our clients
• Look after our clients compliance affairs effective
4. Trusted Advisor – We Understand Your Business
• No more long nights crunching numbers
• We want you to focus more on your business and not “in”
your business
• Give you confidence with numbers for better decision
making
• Help you make more profits and increase cash flow
• We understand your specific industry
• Access to our strategic partner network e.g. Insurance
brokers, Mortgage Brokers HR consultants etc…
6. Types of Business Financial Statements
• Profit and Loss
– Equation is Revenue - Expenses = Net Profit (or net loss)
– Measures financial performance
– Show you the profit (or loss) from business operations during a period of time
• Balance Sheet
– Equation is Assets = Liabilities - Owners Equity
– Shows a snapshot of the businesses financial position at a specific date e.g.
March 31st
– Shows what the business owns (assets), owes(liabilities) and the shareholders’
funds(owners’ equity)
• Movements in Shareholders Equity
– Shows the movement in the shareholders’ (owners) stake in the business for a
twelve month period
• Statement of Cash flows
– Shows the cash generated and used for a specific period of time e.g. monthly
money in via sales vs money out for expenses
7. Chart of Accounts
• Every business will decide on a set number of accounts to be
created based on their business type and input from their
accountant
• 5 Types of Accounts
– Revenue accounts (P&L); Expense Accounts (P&L), Assets
Accounts (BS); Liability Accounts(BS) and Shareholder
Equity(BS)
– Different types of business transactions will increase or
decrease the different accounts above
8. Example Chart of Accounts
• You will have to create an account name
• An account code e.g. Revenue stream accounts are coded to the 100 to 199
range
• Choose the type of account
• Tax Rate
10. Sample Profit and Loss (P&L)
Profit and Loss 2014 % of Revenue
Revenue 5,000,000
Less COGS (Direct Costs)
E.g. Materials
Sub Contractors
Labour/Wages
4,000,000 80%
Gross Profit 1,000,000 20%
Less Overheads
E.g. Electricity
Legal
Administration
500,000 10%
Net Profit before interest and tax
(EBIT)
500,000 10%
Net Profit after Tax and Interest 250,000 5%
ABC Building Ltd
11. Key Numbers – Profit & Loss
1. Gross Margin % = Gross Profit/ Sales x 100
– This tells you how profitable your services or products are
2. Operating Profit (EBIT) Margin % = EBIT/ Sales x 100%
– This tells you the profitability of your operations
3. New Profit Margin % = Net Profit/Sales x 100%
– This tells you how much money you have left over after all
expenses are paid for every $1 in sales
12. Power of 1
1. Price – You can increase the price of your services
2. Sales – You can sell more at your current prices
3. COGS – You can reduce the price you pay for your raw
materials and labour costs
4. Operating Expenses – You can reduce these costs
5. Accounts Receivable – You can collect faster from your
customers
6. WIP – You can reduce your work in progress days
7. Accounts Payable – You can slow payments to your suppliers
13. Sample Profit and Loss (P&L)
Profit and
Loss
2014 Increase
Sales by 1
Job
Reduce
COGS by 1%
Reduce
Overheads
by 1%
Outcome
Revenue 5,000,000 5,250,000 5,000,000 5,000,000
Less COGS
(Direct
Costs)
4,000,000 4,000,000 3,960,000 4,000,000
Gross
Margin
1,000,000 1,250,000 1,040,000 1,000,000 Increase in
GM dollars
Less
Overheads
500,000 500,000 500,000 495,000
EBIT 500,000 750,000 540,000 505,000 Increase in
Profits
ABC Building Ltd with the Power of 1
15. Sample Balance Sheet
Balance Sheet 2014
Current Liabilities
Bank Overdraft 250,000
Accounts Payable 250,000
Total Current
Liabilities
500,000
Non current
Liabilities (Long
Term Liabilities)
Term Loan 350,000
Total Liabilities 850,000
Equity 300,000
Total Liabilities +
Equity
1,150,000
ABC Building Ltd
Balance Sheet 2014
Current Assets
Cash at Bank 5000
Accounts Receivable 295,000
Work in Progress 600,000
Total Current Assets 900,000
Non current Assets
(Fixed Assets)
Property and
Equipment
200,000
Motor Vehicle 50,000
Total Fixed Assets 250,000
Total Assets 1,150,000
16. Key Numbers – Balance Sheet
1. Current Ratio = Current Assets/ Current Liabilities
– Shows the ability of the business to pay debts as they fall
due
2. Quick Acid Ratio = (Current Assets- WIP)/ Current Liabilities
– More commonly used by banks to assess how easily cash
can be converted to pay debts if needed
3. Working Capital Days = (AR + WIP – AP)/ Sales x 365
– This tells you how many days of working capital is required
by the business
17. Cash flow is KING!
• Many businesses do not understand the relationship between
profit and cash flow
• The term cash flow is used in so many different forms that it
means something different to everyone
• You can get away with an OK strategy, average people and a
lack of consistent implementation but if you don’t have cash
you cannot survive!
• The profit made by a business in the P&L is in essence “stolen”
by the balance sheet
• Most business owners make decisions based on Profits
• Improving your margins and profit improves cash!
19. Sample Balance Sheet
Balance Sheet 2014 2015
Current
Liabilities
Bank Overdraft 250,000 300,000
Accounts
Payable
250,000 200,000
Total Current
Liabilities
500,000 500,000
Non current
Liabilities (Long
Term Liabilities)
Term Loan 350,000 350,000
Total Liabilities 850,000 850,000
Equity 300,000 700,000
Total liabilities
and Equity
1,150,000 1,550,000
Balance
Sheet
2014 2015
Current
Assets
Cash at Bank 5000 5,000
Accounts
Receivable
295,000 400,000
Work in
Progress
600,000 850,000
Total Current
Assets
900,000 1,255,000
Non current
Assets (Fixed
Assets)
Property and
Equipment
200,000 200,000
Motor
Vehicle
50,000 50,000
Total Fixed
Assets
250,000 250,000
Total Assets 1,150,000 1,550,000
20. Summary
• The P&L helps you measure operational performance of a business and the
Balance Sheets shows the financial health of a business
• The 7 levers of the Power 1 is a useful way to find solutions for cash flow
and profit improvement
• Profit and Cash flow are not the same thing! Just because you are making a
Profit does not mean your business is financially healthy!
• Ensure that you review your Gross Margin and Current Assets and Liabilities
regularly to keep track of profitability and cash flow.
• Make sure management and key staff look at ways to improve cash flow at
least quarterly
• Do not make decisions or spend money solely based on Profits
Thank you Marti
Hello/Hi everyone my name is…. I am the Business manager at Monteck
.
Just to frame today’s presentation I am not an accountant but I have over 15 years experience in business ranging from working for corporates to SME and having my running my own business.
Financials – all the step-by-step numbers you need to know, and how to understand them in your business to make good margins and profit on your jobs
Time: 9:00am to 5:00pm
Location: Villa Maria Vineyard, 118 Montgomerie Road, Mangere, Auckland
Most businesses are dynamic, changing daily, put in
place regular financial reporting either by using an
in-house system or, through us
• Accurate financial information at your finger tips is
essential to both manage and grow your business
YOUR business is probably one of the biggest assets you Own
You need to understand the financial statements to maximise business value
Properly understood they can be a key factor in business success
They can help save a business in trouble and make a business more efficient
The Profit and Loss statement offers you an important means of monitoring the progress of your business operations
Measure the profitability of your business…
Shows your revenue, your costs and your overall net profit or loss
Year on year comparisons can show you if gross margins are improving or or…..or if you have made more profit that the previous year
You can analyse your….spot trends and take remedial action
Revenue Growth
Overheads as % of Sales
Gross Margin
Net Profit shows if we have priced our service well so that all our expenses are covered and in this case yes!
Some important numbers are your gross profit margin, EBIT (operating profit) and your net profit margin to sales
The sensitivity analysis shows incremental changes/movements in cashflow and profits
Price – Niche vs Cost – Reno or New Builds – refer to Marti
Sales – with the right marketing – how much would 1 more jobs or 4 more jobs be worth to you in the year; Labour – more efficiency, forcecast vs actual, rewards and recognition programs
COGS – Once a month call you major suppliers ITM, Bardercard, Placemakers, Carters and see what they can do for you.
Accounts receivable – invoicing quick, every fortnight we will invoice you X, offer early payment discounts, find out why client pay late (mistakes in invoicing or bad service); Send reminder 5 days prior and then 2 days, 5 days and 7 days after invoice due date. Simply ask your clients for payments sooner. Take credit card payments for recurring types of billing. Take deposits
WIP – look at ways to make turnaround faster, so you get paid faster; maybe you could only work on 1 build and finish that as opposed to working on multiple jobs. You could look for labour efficiency forecasted hours vr actual.
Accounts Payable – You can wait till the last day to make payment; you can pay via credit card to your clients
20 jobs by 250K
COGS - Materials negotiation with suppliers
Something you might also notice is that doing an extra Job and reducing material costs affects your Gross Margin, however reducing overhead on impacts your Net Margin.
A Balance Sheet summarizes a company’s Assets, Liabilities and Owners’ Equity (Net Worth)
Most business owners will over look this statement in foavor for tracking revenue and profits in the P&L
There are many ways to analyze the financial health of a business utilizing the Balance Sheet. One of the most important is the calculation of days of Working Capital
[(Current Assets minus Current Liabilities) divided by (Total Annual Expenses divided by 365)
Liquidity and Gearing e.g. CA:CL or DEBT: Equity
Construction Company has low margins. Balance sheet management will assist with better cashflow
Obtains payments in advance, deposits, bills work in progress frequently, pays creditors slowly – low margin business model so good balance sheet management important for good cashflow management….
The balance sheet provides a picture of the financial health of a business at a given moment in time — usually the end of a month or financial year. It can tell you if you owe more money than what you currently have, the current value of your assets and the overall value of your business.
More importantly, if you familiarise yourself with using financial ratios, the balance sheet can provide warning signs so you can solve any problems before they destroy your business. The balance sheet is a vital financial statement you should be reviewing regularly, as it changes with every transaction
Cash is a fact and Profit is an opinion!
What is important profit or cash – well cash if you are a growing business and maintaining profits if you are an established budiness.
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The term ‘cash flow’ is used in so many different forms, that it means something different to each of you
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Cash flow is the key to any business surviving. It is one of the main reasons that 8 out of 10 businesses fail within their first 5 years, because they did not understand the difference between cashflow and profit or if they did, they did not manage the cashflow well enough.
This is why every business owner should understand how to manage cashflow as this is the real life picture of dollars going in and out of your business.
Owners often spend based on profit not cashflow. These are not the same and lets have a look at why they are not the same?
Age of receivables – you may be making a profit but if you are not receiving your payments it not available to be spent, hence the importance of efficient invoicing and debt collection
Buying stock – you may be making a profit but if you do not have great stock control you will have all your money tied up in stock, it starves you of cashflow and prevents the owner from investing in more higher margins/quicker turnover stock
GST and provision for tax– you may have money or cash is in the bank but this is not profit, therefore you can not spend it. A practical strategy to combat this challenge is to set up a separate GST and tax holding account so you are not tempted to spend that money
Working capital is critical to every business because it is this cash or cashflow that sustains a businesses operations and stock control. Therefore it is imperative to understand how the cycle works in a practical sense.
Working Capital is the amount of cash required to trade
Your working capital is generally consumed by 2 major current assets – your debtors and work in progress (or inventory).
You trade creditors will fund some of this cash.
First of all we start with cash and we use this to purchase stock or inventory. When we make a sale, sometimes we will receive cash, but for many businesses it means creating an invoice or account. So we create accounts receivable or trade debtors, depending on which system/terminology you use.
When the money is collected it comes back as cash again and so the cycle goes on …
As business owners, we must know what drives the cycle in our business. Managing the cycle more efficiently (so making the circle turn faster) by getting the cash back into the business quicker, will generate more cash for the business which provides our working capital or working cashflow. Remember the car engine analogy, it is like replacing good oil into the engine as it starts to lose oil.
Lets take a look at how to poor management of cash or debtors can effect your cycle.
Attitude/Mindset – This is how it happens in “our industry”