1 Simple Steps for Growing Your Business Financial Management

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About SCORE 6 Douglas S. Cavanaugh Successful and experienced business owners and executives acting as volunteers Free mentoring: One-on-one Signup on our website – Mentoring Tab Seminars and workshops Resources for small business: manasota.score.org manasota.score.org

Assessing Your Business 7 If you have not looked at the SCORE Business Needs Assessment, it is in your packet! It will help you assess the current state of your business in 5 key areas: 1.Management 2.Marketing 3.Sales 4.Finance 5.Operations Review with your mentor to help you: Decide what additional workshops to attend Develop a customized business improvement plan

8 Sales Customer Service Purchasing / Manufacturing Distribution Finance Business Owners / Management - responsible for Business Performance Marketing Service Delivery Customers – Impacted by All Functions in Your Business Workshops - Business Focus Areas Marketing Your Business Growing Your Sales Managing Operations Financial Management Human Resources Managing Your Time/ People Resources

During this workshop we will discuss: How advisors can help your business How to read and use financial statements How to measure your company’s financial health The basics of cost accounting Business risk and how to manage it How to use cash flow forecasts Your options for funding growth 9 Marta E. Maxwell

Briefly tell us about you: Your name Your business What you hope to achieve through this workshop 10 Let’s Get Started Katrina Markoff

Your Trusted Advisors 11 Your Business AttorneyBankerCPA SCORE Mentor Risk Manager / Insurance

Using Financial Statements to Manage Your Business 12

Important Terms: GAAP & IFRS GAAP (Generally Accepted Accounting Principles): The current accounting standard used in the U.S. IFRS for SME (International Financial Reporting Standards for Small and Midsized Enterprises): The international standard for accounting for small and mid-sized businesses in most other countries 13 Doug Zell Using Financial Statements to Manage Your Business

Important Terms: Bookkeeping Methods Cash: Cash basis bookkeepers recognize income and expenses when they are received/paid Accrual: Accrual basis bookkeepers recognize income and expenses when the product/service is delivered Analyze your business with an “accrual view” even if you pay taxes on a cash basis to make sure you understand accounts receivable (AR) and accounts payable (AP) 14 Jennifer Behar Using Financial Statements to Manage Your Business

Financial Statements A typical set of financial statements is made up of: Income Statement (P&L) Balance Sheet Statement of Cash Flows Others that may be important: Accounts Receivable Aging Summary Accounts Payable Aging Summary Your accounting software should be able to create the reports whenever you need them 15 Douglas S. Cavanaugh Using Financial Statements to Manage Your Business

Income Statement Top section shows revenues Gross revenues Adjustments to revenues Cost of goods sold (COGS) Adding/subtracting the figures above = gross profit Bottom section shows expenses Logical categories of expenses Revenues – expenses = net (pre-tax) profit 16 Using Financial Statements to Manage Your Business

17 Assets: -Current -Long-term Liabilities: -Current -Long-term Shareholders’ Equity: -Paid in capital -Retained earnings Using Financial Statements to Manage Your Business Balance Sheet

18 Theresa Alfaro Daytner Using Financial Statements to Manage Your Business Income Statement – Revenue / Gross Profit (statements in your handouts)

Income Statement Expenses and Net Income before Taxes 19 Using Financial Statements to Manage Your Business

20 Using Financial Statements to Manage Your Business Balance Sheet

21 Using Financial Statements to Manage Your Business Statement of Cash Flow

Understanding and Using Financial Ratios 22 Financial Ratios from the Sample Financial Statements Further discussion of these ratios later in the workshop!

23 CPA Audited CPA Reviewed CPA Compiled Internally Prepared Types of Financial Statements Most Trusted Least Expensive Using Financial Statements to Manage Your Business

24 In-House:  Bookkeeper devoted to your business  Quickbooks software is easy to use – inputs / reports  Familiarity with your business  May have additional expertise  May handle other tasks Outsourcing:  May cost less?  Software allows easy data transfer for your reports  Technology enables secure sharing of sensitive data  May gain access to multiple skill sets Pros of In-House Bookkeeping vs. Outsourcing Using Financial Statements to Manage Your Business

Internally Prepared Financial statements prepared by company management for operating business Should be prepared at least monthly Easier to prepare timely reports 25 Using Financial Statements to Manage Your Business

CPA Compiled Financial Statements An annual compilation of a company’s financial accounts prepared by a CPA or an accountant. Business financial statements that are assembled from the records, materials and information of the business. These statements contain no independent assurance as to content or compliance with GAAP. 26 Rupa Bihani Shah Using Financial Statements to Manage Your Business

CPA Reviewed Financial Statements Business financial statements that are reviewed by independent accountants through inquiries of management and performance of analytical procedures on financials to provide limited assurance that no material modifications are necessary to conform to GAAP. The accountant does not express an opinion on reviewed statements. 27 Using Financial Statements to Manage Your Business

CPA Audited Financial Statements Business financial statements that have been examined by independent certified accountants to determine if they present fairly financial position, results of operations, and cash flows in conformity with GAAP. Statistically valid sampling of the information to verify the data. 28 Using Financial Statements to Manage Your Business

List how you use financial statements today. Income Statement Balance Sheet Cash Flow Analysis Who prepares and reviews your financial statements? Then we will discuss current and potential future uses 29 Exercise 1 – Using Financial Statements

5 minutes to fill in your current uses 10 minutes to discuss future uses 30 Exercise 1 – Using Financial Statements

Understanding and Using Financial Ratios 31

Understanding and Using Financial Ratios Financial Ratios Liquidity Profitability Leverage Efficiency Debt Service 32 Can be compared to RMA (Risk Management Association) average ratios Available for business types by NAICS code (North American Industry Classification System) Talk to your SCORE mentor to obtain the RMA data for your business type!

Understanding and Using Financial Ratios Liquidity Ratios Used to measure the quality and adequacy of current assets to meet current obligations as they come due Current ratio Quick ratio Days of cash 33 Surendra N. Kumar

Understanding and Using Financial Ratios Liquidity Ratios: Current Ratio Indicates the extent to which current assets are available to satisfy current liabilities Stated as values such as 2.5 to 1.0 or simply

Understanding and Using Financial Ratios Liquidity Ratios: Quick Ratio Indicates the extent to which more liquid assets are available to satisfy current liabilities Stated as values such as 1.5 to 1.0 or simply

Understanding and Using Financial Ratios Liquidity Ratios: Days of Cash Indicates the number of days revenue held in cash Days of cash = safety cash Every business will require a different level of safety cash Cash equivalents include money market holdings, short- term liquid investments, marketable securities and government bonds and bills 36

Understanding and Using Financial Ratios Profitability Ratios Used to measure performance of a company and how well its assets are being used to generate revenues Gross profit margin Pre-tax profit margin Return on assets Return on equity 37 Elizabeth Feichter

Understanding and Using Financial Ratios Profitability Ratios: Gross Profit Margin The percentage of money left after sales when cost of goods sold (COGS) is subtracted 38 Formula: Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit Margin Example: Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) = Gross Profit ($4,000) Gross Profit Margin = Gross Profit ($4000) / Gross Sales ($10,000) = 40%

Understanding and Using Financial Ratios Profitability Ratios: Return on Assets The profit generated by the total assets employed by a company What it means: Higher ratio reflects a more effective employment of company assets 39

Understanding and Using Financial Ratios Profitability Ratios: Return on Equity (ROE) The profit generated by the net assets employed ROE is an important financial ratio applying to small business owners and a good measure of performance by management 40

Understanding and Using Financial Ratios Profitability Ratios: Pre-Tax profit margin Taxes vary by location, so pre-tax profit margin is a good ratio to look at and use for comparisons 41

Understanding and Using Financial Ratios Leverage Ratios Key measurements in determining a company’s vulnerability to business downturns as well as its capacity for credit and internal capital needs Debt to Equity 42 Andrew Dunn

Understanding and Using Financial Ratios Leverage Ratios: Debt to Equity Indicates how well a business is leveraging its debt against the capital invested by its owners If liabilities exceed net worth, creditors have a greater stake than the shareholders 43

Understanding and Using Financial Ratios Efficiency Ratio Measurements of the effectiveness of using current assets and managing current liabilities Days of accounts receivable (A/R) Days of inventory Days of accounts payable (A/P) 44 Marta E. Maxwell

Understanding and Using Financial Ratios Efficiency Ratios: Days A/R Outstanding Indicates the number of days to collect a period’s worth of accounts receivable Though industries vary, if you can keep your A/R collection cycle close to the net terms of sale days, you have an efficient collection process – typical may be 30 days 45

Understanding and Using Financial Ratios Efficiency Ratios: Days of Inventory Indicates the average number of days it takes to turn over your inventory during the year 46

Understanding and Using Financial Ratios Efficiency Ratios: Days of A/P Indicates the number of days of trade and service payables your company is owing If your vendor offers net 30 terms with a 2% prompt payment discount (within 10 days), taking the discount when you can may be important 47

Understanding and Using Financial Ratios Efficiency Ratios: Debt Service Ratios used by Banks EBIT (I) = EBIT / interest and EBIT (CM) - EBIT / current maturities Fixed charge coverages on businesses needing permanent working capital (Debt Service payment coverage from traditional cash flow: = Earnings after taxes / current maturities) 48

Understanding and Using Financial Ratios Class Discussion: Ratios Which ratios are most valuable in improving cash flow? Should seasonal/cyclical businesses vary days of cash? What are risks of not turning A/R fast enough? Debt to equity ratio How to calculate gross profit margin Markup vs. margin 15 minutes 49

Cost Accounting 50

Cost Accounting Financial vs. Cost Accounting 51 Financial Accounting:  Complies with standards such as GAAP or IFRS  Balance Sheet and Income Statement  Statement of Cash Flows  Complete picture of company’s overall financial health at a point in time or over a period of time  Used by stakeholders to evaluate company Cost Accounting:  Used to compute internal costs and profits on individual jobs or products  Break-even analysis  Financial ratio benchmark  Used to make management decisions on a daily basis  Used by management to make sure operations are profitable

Cost Accounting Break-even Analysis Valuable for all businesses Breakeven - when total costs (fixed + variable) = total revenue Important calculation if you have high fixed costs and variable sales Most important for manufacturers and other businesses that have significant investments in equipment Businesses with Project based revenues will want to evaluate each project 52 Paul Cernuto

Cost Accounting Break-even Analysis Terms Annual or Unit sales revenue: revenue from selling your product or service Annual or Unit variable cost: cost of goods sold (COGS) Annual fixed cost: total of all business overhead costs anticipated on an annual basis Contribution margin: amount of money in annual or unit sales revenue that exceeds annual or unit variable costs 53

Cost Accounting 54 Formula: When Fixed + Variable Costs = Total Revenue (during the year) Break-even Sales= Fixed Cost (annual) ÷ Contribution Margin (fraction) Example: $60,000 ÷.30 Annual Break-Even Sales = $200,000 Monthly = $16,666 Annual Units = 2000 Break-even Analysis: How many sales do you need to make, at what price, at what costs and in what time period to be profitable? Annual Fixed Costs = $60,000 Unit Sales Revenue = $100 Unit Contribution Margin = $30 Contribution margin (fraction) =.30

Cost Accounting 55 Break-even – A View of the Analysis Sales revenue over time for our example. Breakeven - when total costs (fixed + variable) = total revenue $20,000 sales or 200 units Note: May be additional “Semi Fixed Costs” influenced by volume but not associated per unit (example - commission tiers, temporary labor, office supplies)

Cost Accounting General and Administrative Expenses Expenses that support the company’s operations, but are not directly related to sales or COGS Management and Office personnel payroll Portion of utility expenses attributable to office costs Telephone, Internet, computers used to run business but not part of COGS Insurance 56

Managing Risk 57

Managing Risk Types of Risk: Risk mitigated by insurance (property, general liability, auto, worker’s compensation and perhaps business interruption) Risk that partner or widow(er) will be left with business debt (key man life insurance) Risk of not being paid by a foreign customer (business credit insurance) Product risk due to product failure, misuse or defects that create liabilities 58 David, Laureen & Dan Barber

Using Cash Flow Forecasts 59

Using Cash Flow Forecasts Cash Flow Forecasting Very important all the time: Making Payroll on time Paying Taxes Paying Vendors and all other obligations Minimizing use of expensive credit lines Other special circumstances: When company is growing rapidly or business experiences a decline Using a13-week cash flow forecast is an effective way to manage tight cash flow during challenging times. 60

Using Cash Flow Forecasts Cash Flow Forecasting Cash Balance tab Accounts Receivable tab Accounts Payable tab Download at: 61

Funding For Strategic Growth 62

Funding Sources SBA Microloans – up to $50,000 SBA Express Loans – up to $350,000 SBA 7 (a) Loans – up to $5 million SBA 504 Loans – up to $4 million Buildings/Land/Capital Improvements USDA B&I (Business and Industry) loans CDC (Certified Development Corporation) for local community development Community Development Financial Institutions (CDFI) Small Business Investment Companies (SBICs) 63

Funding Sources 64 Bank / Credit Union / S&L – Term Loans, Line of Credit, Revolving Credit Finance Companies – Asset based loans Insurance Companies – Commercial mortgages Leasing Companies – Any assets not intended for resale Seller financing – negotiated variations Franchisor support – Term loans for acquisition Angel Investors Personal loans – Home equity – Credit card – Peer to Peer (P2P) loans Chapter may have more local information!

Financing in the current business environment 65 What experience have you had in the past three years to obtain financing? Successes and Turndowns? Factors that helped / hurt? How can you improve your management of assets and liabilities to improve cash flow? What can you do to improve your chance of a successful load application? 15 minutes to discuss

Funding – Other SCORE resources For most commercial loans, a business plan with an accompanying financial forecast is required. The SCORE workshop, Building Your Business Plan will help guide your plan development A financial forecasting spreadsheet is available for download: – Comprehensive 3 year financially planning tool To learn how to use the forecasting tool, talk to your mentor or attend Simple Steps for Starting Your Business - Workshop 4 – Financial Projections 66

Review 67

Review Accurate financial statements are critical to the success of your company. Learning how to read an income statement, balance sheet and cash flow statement and spotting trends will help you manage your business more effectively. Financial ratios help you analyze certain aspects of your operations so you can make adjustments to become more profitable. 68

Next Steps Set up your company’s cash flow forecast using the instructions provided for the Excel spreadsheet – download at: Calculate some or all of the financial benchmarks we have discussed that are important to your business Ask your mentor to get the RMA ratios for your business type Review the With Your Mentor handout for topics to discuss with your mentor Don’t have a SCORE Mentor? Connect with one today! SCORE has over 13,000 successful and experienced executives with small business know-how that want to help you Visit manasota.score.org for more information

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