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Financial Health Check seminar
- 2. UNCLASSIFIED UNCLASSIFIED Welcome Introduction to Seminar What do you hope to learn in the next two hours: Burning issues? Topics of interest? Opportunity to network Have fun!
- 3. UNCLASSIFIED UNCLASSIFIED Financial Health Check Why? Understand your business better Use financial statements to improve business performance Make informed decisions on fact not fiction Assess the financial health of your business Be aware of financial warning signs Take a proactive approach to managing your business through difficult times
- 4. UNCLASSIFIED UNCLASSIFIED Topics for today’s seminar What is your profit and loss statement telling you? How to read a balance sheet – it’s easy! Easy ways to do the numbers Are your business finances as good as your competitors? The five financial warning signs – solve the problems before they happen
- 5. UNCLASSIFIED UNCLASSIFIED Profit and Loss statement Summary of income, costs and expenses Also referred to as: Income statement Revenue statement Statement of performance Reflects past performance of your business Tracks how a business is performing
- 6. UNCLASSIFIED UNCLASSIFIED Profit and Loss statement Why? Understand how much profit you are making review sales, margins, expenses Make decisions on fact not fiction Assist with BAS and other tax requirements Compare your business performance to other businesses in the same or similar industries Provide information on the business performance to lenders or investors
- 7. UNCLASSIFIED UNCLASSIFIED Profit and Loss Statement Total all types of revenues Deduct the costs of the goods that have been sold (purchases + beginning stocks – ending stocks) Deduct all the costs and expenses of operating the business What remains is profit (or perhaps a loss)
- 8. UNCLASSIFIED UNCLASSIFIED Gross Profit Less Sales Discounts Sales Commissions Equals Gross Profit Cost of Goods Sold Less Equals Sales Net Sales
- 9. UNCLASSIFIED UNCLASSIFIED Cost of Goods Sold Opening Stock Plus Stock Purchases Equals Stock available for sale Less Closing Stock
- 10. UNCLASSIFIED UNCLASSIFIED Profit and Loss statement Equals Gross Profit Less Expenses (Fixed & Variable) Cost of Goods Sold Less Net Sales Net Profit Equals
- 11. UNCLASSIFIED UNCLASSIFIED Reading the Profit and Loss statement Use a financial system Have the information set up to provide meaningful information Chart of accounts allocates transactions into categories Chart of accounts dictates how the information will be presented in these financial statements
- 12. UNCLASSIFIED UNCLASSIFIED Reading the Profit and Loss statement Let’s look at the Profit and Loss Statement on page 7.
- 13. UNCLASSIFIED UNCLASSIFIED Balance Sheet Shows the financial position of the business at a point in time Items listed in terms of immediacy – short term and longer term Used to analyse the financial health of the business Shows the net worth of the business to the owners
- 14. UNCLASSIFIED UNCLASSIFIED Balance Sheet Hint Assets $122,400 Liabilities $101,200Funded Through Shareholders’ Funds $21,200 This diagram shows how the Balance Sheet works
- 15. UNCLASSIFIED UNCLASSIFIED Balance Sheet Classifications Current Assets All assets that will be turned into cash within 12 months Current Liabilities All liabilities that have to be repaid within 12 months Non Current Assets All assets other than current assets Non Current Liabilities All liabilities other than current liabilities
- 16. UNCLASSIFIED UNCLASSIFIED Balance Sheet Let’s look at the Balance Sheet on page 10.
- 17. UNCLASSIFIED UNCLASSIFIED Easy ways to do the numbers Analysing financial statements can be used to predict the success, potential failure and progress of your business Spot trends in your business Compare your business with similar businesses in the same industry Don’t worry about the calculations – it is more important to understand the results
- 18. UNCLASSIFIED UNCLASSIFIED Financial Statement Ratios Liquidity: The ability of the business to pay the bills as they fall due Solvency: The ability of the business to meet all debt obligations Profitability: Measure business performance and ultimate success of operations Management: How effectively working capital is being managed Balance Sheet: How efficient the business is using assets and equity
- 19. UNCLASSIFIED UNCLASSIFIED Liquidity Ratios The ability of the business to pay the bills as they fall due Current Ratio: Measures of financial strength Total current assets Total current liabilities Quick Ratio: Best measure of liquidity Current assets – stock Current liabilities
- 20. UNCLASSIFIED UNCLASSIFIED Solvency Ratios The ability of the business to meet all debt obligations Leverage: How assets are being funded Total liabilities Equity Debt to asset: Percentage of assets being financed by liabilities Total liabilities Total assets
- 21. UNCLASSIFIED UNCLASSIFIED Profitability Ratios Measure business performance Gross Margin: % of sales dollars remaining (after obtaining or manufacturing the goods sold) available to pay the overhead expenses of the business Gross profit Net Sales Net Margin: % of sales dollars left after all expenses Net profit Net Sales
- 22. UNCLASSIFIED UNCLASSIFIED Management Ratios Days stock: How well your stock is being managed? Average Stock x 365 Cost of goods sold Days debtors: How quickly cash from customers is being collected? Debtors x 365 Net Sales Days creditors: How well accounts payable are being managed? Creditors x 365 Cost of goods sold
- 23. UNCLASSIFIED UNCLASSIFIED Balance Sheet Ratios How efficient the business is using assets and equity Return on assets: How efficiently profits are being (ROA) generated from the assets of the business Net profit before tax x 100 Total assets Return on investment: Measures the return on (ROI) equity in the business Net profit before tax x 100 Total Equity
- 24. UNCLASSIFIED UNCLASSIFIED Benchmarking Are your finances as good as your competitors? Use benchmark data ATO SBV IBISWorld FRMC Industry associations Industry averages by Turnover Geographical placement CBD vs regional
- 25. UNCLASSIFIED UNCLASSIFIED Benchmarking Let’s have a look at the benchmarks (PDF).
- 26. UNCLASSIFIED UNCLASSIFIED Five Warning signs 1. Inability to pay your debts Prepare weekly cashflow forecasts Sell old or excess stock Solid procedures for collecting outstanding debts Others?
- 27. UNCLASSIFIED UNCLASSIFIED Five Warning signs 2. Poor Profitability Regularly check gross and net margins Sales – are your measures to retain and attract new customers working? Discounting –differentiate your offer based on non-monetary traits Others?
- 28. UNCLASSIFIED UNCLASSIFIED Five Warning signs 3. No access to finance - could be the start of the end Seek finance facility when business is going well Extending supplier terms Monitoring cashflow through forecasts to rectify cashflow issues before they happen Others?
- 29. UNCLASSIFIED UNCLASSIFIED Five Warning signs 4. High staff turnover Be an employer of choice Involve staff in managing the business Look at the culture of your business Others?
- 30. UNCLASSIFIED UNCLASSIFIED Five Warning signs 5. Inadequate financial records Set aside time each week Understand what the key financial areas are of your business Update your financial management training Knowing what the warning signs are is the first step to taking control of your business in tough times!
- 31. UNCLASSIFIED UNCLASSIFIED Appendix One CPA Australia Managing in tough times fact sheet Appendix One page 27
- 32. UNCLASSIFIED UNCLASSIFIED Todays Top Tips Profit and Loss statement and Balance Sheet Know how to read them Understand your business better Use these to improve business performance Make informed decisions on fact not fiction Analyse the financial ratios Use benchmarks to compare your business Be aware of financial warning signs Take a proactive approach to managing your business through difficult times
- 33. UNCLASSIFIED UNCLASSIFIED List 3 actions you will follow through with as a result of this workshop Then List 3 things that you’ve learned in this seminar List 3 actions you will follow through with as a result of this seminar List 3 things that you’ve learned in this seminar
- 34. UNCLASSIFIED UNCLASSIFIED Business mentors help you to identify a clear direction for you and your business. Business mentors can also advise you on how to: conduct market research work out your break-even point price and/or cost your products or services develop an effective marketing strategy use other business management tools To arrange a free mentoring session with a business mentor complete the evaluation form and select FREE Mentoring Session on page 2. You will then receive an email with details on claiming your free mentoring session. FREE mentoring session
- 35. UNCLASSIFIED UNCLASSIFIED Questions? Thank you for attending Check out business.vic.gov.au/events for more workshop information