1 Grow Your Business! Find Ways to Improve Cash Flow and Profits.

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Grow Your Business!

Find Ways to Improve Cash Flow and Profits

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The SCORE Foundation would like to thank

for showing their support of America’s small businesses by sponsoring this series.

The content provided in the Grow Your Business! materials is intended as a business resource only and does not guarantee

a successful outcome when applied to individual business use.

To find additional resources on growing your business, visit www.score.org and www.openforum.com

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A Special Thanks to Our Local Sponsors

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Classroom Safety – Argosy U

Emergency Exits

Restrooms

Please do not wander around the building!

You are HERE

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Classroom Safety–ComCenter

Emergency Exits

Restrooms

Please do not wander around the building!

You are HERE

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About SCORE

Douglas S. Cavanaugh

• Successful and experienced business owners and executives acting as volunteers

• Free ongoing mentoring:One-on-oneE-mailSignup on our website – Mentoring

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• Seminars and workshops

• Resources for small business: manasota.score.org

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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.Management2.Marketing3.Sales4.Finance5.OperationsReview with your mentor to help you:

Decide what additional workshops to attend Develop a customized business improvement plan

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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 - Focused on key business processes

Marketing Essentials to Attract More Customers

Focus on Customers to Increase Your Sales

Improve Your Services and Gain Productivity

Find Ways to Improve Cash Flow and Profits

Improve performance to Grow Your Business!

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Briefly tell us about you:

• Your name• Your business

(30 second “elevator” speech)

• Do you already have a SCORE mentor?

• What you hope to achieve during and after this workshop

9Let’s Get Started

Katrina Markoff

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• Importance of financial management to a small business owner

• Using Financial Statements• Financial management practices,

rules and tools for a small business• Funding: business growth, working

capital, and/or assets• Common risks in a small business• Business warning signs and risk

management plans

During this workshop we will discuss:

Marta E. Maxwell

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Good Financial Management Practices

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Good Financial Management Practices

Reach YOUR goals by making good decisions• Use commercial business accounting software• Prepare a budget and measure performance• Understand and manage your cash flow• Keep track of profit /loss for your business• Find appropriate funding for operations and

growth • Develop a business financial forecast – monthly,

for the next 1 or 2 years• Continue to improve measurements and practices• Your accountant may help, but it is YOUR

business!

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Importance of Excellent Bookkeeping

• Critical component of company financial management

• Organized process of tracking all income and expense transactions

• Transaction entries must be current

• Basis for all financial management, business decisions, financing, taxes,owner’s draw / salary, and retirement planning.

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Basic Bookkeeping Steps

1. Obtain business accounting softwareDiscuss with your accountant:– QuickBooks – Pro (Services) or Premier

(Manufacturing)– Peachtree Accounting

2. Open a separate business checking account 3. Deposit all sales receipts

– Checks / Cash– Credit card sales – direct deposit by clearing

house

4. Write business checks for business expenses5. Reconcile your checking account monthly6. Obtain a separate business credit card

– Pay bill monthly – credit card financing is expensive!

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7. Pay business expenses first8. Track Sales – register tape / invoices9. Pay yourself with owner’s draw / salary10. Generate and use profit and loss (P&L) and cash

flow statements – at least monthlyNote: Most small businesses use the CASH method as

their tax basis and it shows the current cash statusThe ACCRUAL method view shows additional “future” information:1- Sales that have been made, but payment has not been received 2 - Purchases that have been made, but the invoice is not yet paid.

Look at BOTH with your software to get the best perspective

on your financial status10.

Basic Bookkeeping Steps

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Preparing a Budget

A budget is a tool that helps you:• Plan for the future – usually monthly for the next

year• Forecast and then track your actual financial

transactions • Adjust activities when needed

• Marketing to attract more customers to increase sales

• Reducing costs• Consider the impacts of

expansion• Estimate profitability

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Primary Elements of a Budget

CATEGORY MONTHLY BUDGET MONTHLY ACTUAL

SALES

COST OF GOODS SOLD

RENT/MORTGAGE

UTILITIES

PROFESSIONAL HELP

ADVERTISING

PAYROLL

INSURANCE/TAXES

OTHER

PROFIT

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Your accounting software will provide detailed accounts for each category

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SCORE Budgeting / Forecast Template

• You may use a simple format like the last slide

• SCORE also offers a comprehensive spreadsheet template for developing your budget or business financial forecast

Download:http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

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Exercise 1 How Do You Budget for Your

Business?

Discussion:

1. Do you currently prepare an annual budget?2. Do you track your results compared to budget

monthly?3. How does this help with your business decisions /

forward plans?5 minutes

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Understand and Manage Cash Flow

What is cash flow?• Moving cash in or out of a business including

sales revenue receipts and expense transactions

• Balance of cash received less the amountof cash paid out over a period of time

• Cash flow can be positive or negativeduring the period

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Cash Flow Analysis

• Generate Cash Flow reports at least monthly with your accounting software

• Compare your Actual business performance to your Budget in all categories– Where were the gaps?– What impact did business performance have on

Cash Flow?– What needs to change to increase positive cash

flow?• Prepare a Cash Flow projection to help adjust

performance when needed– Helps you manage your cash so you can pay

your bills on a timely basis and keep the doors of your business open

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Projecting / Estimating Future Cash Flow

Prepare a financial statement using assumptions to forecast for a future time period:

• Use your Budget estimates and adjust assumptions based on current information

• Current company cash flowing in and out• Future cash flow during a specific time

period• Project whether cash receipts (in flows)

will be sufficient to cover projected cash disbursements (out flows).

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How can a cash flow projection help?• Set sales and expense goals• Plan equipment purchases for replacement or

expansion• Determine cash needed to purchase inventory for

seasonal cyclesWhy do I need a Cash Flow projection?

• Track liquidity when accrual accounting masks cash realities

• Help you determine the need for financing• Show lenders your ability to plan and repay

financing (Frequently required with loan applications)

• Predict cash shortage period(s) that may require adjustments

Projecting / Estimating Future Cash Flow

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Cash Flow Projection Example

Sources of Cash

Operating Uses of Cash

Non-Operating

Uses of Cash

BT CONTEMPORARY CREATIONS, INC. Year ended CASH FLOW STATEMENT 12/31/2010

Net income 21024

Cash flow from operating activities Depreciation 5237 Change in accounts receivable -3747 Change in inventory -3302 Change in accounts payable - trade 2055 Change in accounts payable - other 122 Change in prepaid expenses 1124 Change in accrued taxes 249 Total cash flow from operating activities 1738

Cash flow from investing activities Fixed asset purchases -21116 Disposal of fixed assets 0 Total cash flow from investing activities -21116

Cash flow from financing activities Retirement of long term debt -5160

Change in cash -3514

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Possible Ways to Increase Cash Flow

• Increase the number of items sold• Increase the price• Reduce expenses• Change the timing of expenses• Obtain sources of cash other than sales (e.g., line of credit)• Reduce or change timing of Owner’s Draw• Buy inventory from vendor at lower price• Obtain credit from vendor(s)• Establish policy to get paid sooner by customers

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Exercise 2 How Do You Manage Cash Flow?

Discussion:

1. How many of you have had cash flow problems?2. What were the causes?3. What did you do?4. Did it work?

5 minutes

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Cash Flow Projection - Worksheet

The SCORE Cash Flow Projection spreadsheet can be used to estimate weekly cash flow.

Download at:

http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

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Profit and Loss Statement (P&L)

• Measures revenues andexpenses over a periodof time

• Tracks profitability: is the business making a profiton what it sells?

• Shows how successfully the buying and selling process has been managed

• Measures the ability of your business to grow, repay debt service and support you

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Top section of the P&L shows Revenue• Gross revenue• (Plus or minus) Adjustments to revenue• (Minus) Cost of goods sold (COGS)• = Gross Profit

Bottom section of the P&L shows Expenses• Logical categories of expenses, including

overheads

Revenue minus Expenses = Net (pre-tax) Profit or Loss

29Profit and Loss Statement (P&L)

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Theresa Alfaro Daytner

P&L - Revenue / Gross Profit

(statements in your handouts)

Profit and Loss Statement (P&L) Example

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P&L Expenses

Net Income before Taxes

31Profit and Loss Statement (P&L)

Example

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Net Profit is a GOAL!

Net profit pays for:• Loan principal repayment• Future income taxes• Owner’s Salary (LLC [S Corp] /

Corporation) • Owners / Shareholders Dividends• Owners Draw (sole proprietor /

partnership)• Future expansion and equipment

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Understanding and Using

Financial Ratios

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Understanding and Using Financial Ratios

Financial Ratios

• Liquidity• Profitability• Leverage• Efficiency• Debt Service

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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

Your mentor can help you determine what ratios are appropriate for your business

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Liquidity Ratios

Used to measure the quality and adequacy of current assets to meet current obligations as they come due

• Current ratio – overall liquidity– Current Assets / Current

Liabilities• Quick ratio – short term liquidity

– (Cash + AR) / Current Liabilities

• Days of cash – (Cash x 360) / Sales

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Surendra N. Kumar

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Profitability Ratios

Used to measure performance of a company and how well its assets are being used to generate revenues• Gross profit margin

• (Sales minus Cost of Good Sold) / Sales

• Pre-tax profit margin • EBT / Sales

• Return on equity • EAT / Equity

• Compare to historical & Industry

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Elizabeth Feichter

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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 - Leverage• Liabilities / Equity

• Compare to historical, or industry averages and trends to assess your risks

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Andrew Dunn

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Efficiency Ratios

Measurements of the effectiveness of managing current assets and current liabilities• Days of accounts receivable (A/R)

• 360 /(Sales/Accounts Receivable)• Days of inventory

• 360 /(Cost of Goods Sold/Inventory)

• Days of accounts payable (A/P)• 360 /(Cost of Goods Sold/Accounts

Payable)• Compare to terms, historical and

industry

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Marta E. Maxwell

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Efficiency Ratios: Debt Service Ratios used by Banks

Fixed Charge coverage and debt service coverage ratios used to measure borrowing ability

• Earnings before Interest and Taxes (EBIT) / Interest

Generally 2.5 is the minimum credit standard

• Earnings Before Taxes / Current Maturities

Debt Service payment coverage from traditional cash flow:

= Earnings after taxes / current maturities

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Breakeven Analysis

• Valuable for all businesses so you know how much you need to sell to cover your total costs!

• Breakeven when total costs (fixed + variable) = total revenue

• Breakeven = Fixed Cost/Gross Profit Margin

• Important calculation if you have high fixed costs and variable sales

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Paul Cernuto

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Breakeven Chart

Breakeven - 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)

Simple Breakeven Analysis

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50000

100000

150000

200000

250000

300000

350000

400000

450000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

Units Sold (x100)

Rev

enue

($)

Revenue Fixed Cost Fixed + Variable

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Funding Business Growth

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Financing Growth – Part of Your Plan!

Sales growth may require:Increased inventory More employeesLarger space Increased receivables

Consider financial impacts of funding growth• Many companies in growth mode run short of $$ and fail• Make sure you are adequately funded!• Potential Source of funding

– Internal – Bank / Lender– Customer– Vendor terms– Crowd Funding

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Financing - Equity vs. Debt

• Debt Financing – a loan or line of credit that comes with a repayment schedule and an interest rate.– Upside: Don’t have to give up equity– Downside: Must pay interest and may require

personal collateral such as home

• Equity Financing – funds received from private or "institutional" investors in exchange for an equity ownership stake– Upside: No loan payments to make– Downside: You have new shareholders that may

want a larger role in managing the business (think “Shark Tank” TV show)

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Business Financing

• Working Capital– Bank line of credit – borrow repeatedly up to a certain

amount Repay and re-borrow as required– Extended Vendor payment terms – gives you more time

to sell product and get paid and pay vendors

• Equipment / Fixed Assets Financing– Bank / Credit Union– Collateral for a long term loan may be the assets you

purchase– SBA 504 Fixed Asset loans through financial institutions– Commercial mortgage if you plan to buy, build or

enlarge a building

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Managing Risk

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Types of Risk

• Internal Risks– Occur within the company– May or may not be controllable by the

company– The company must respond to mitigate

the risk

• External Risks– Caused by events outside the company– The company cannot control the events– The company must respond to mitigate

the risk

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Internal – Human Risks

• Death– Owner / Key person– Employee

• Illness– Short term– Long term– Indefinite

• Employee Injuries• Critical Employee(s) leave

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Internal – Human Risks

• Theft and fraud– Product and inventory theft– Time sheet fraud– Accounting and cash fraud

• Low morale, dissatisfaction– Failure to perform– Sabotage of systems,

equipment or customers

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Internal – Equipment Risks

• Equipment breakdowns– New equipment integration– Inadequate maintenance– Worn older equipment– Damage to property / vehicles– Failure cause by misuse

• Physical plant repairs– Servicing lines or utilities– Routine maintenance

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Internal – Information Technology Risks

• Unplanned downtime• Lack of backup or recovery system• Updates and repairs• Power and connectivity • Outdated systems than cannot be repaired• Physical damage• Lack of administrative controls• Data theft• Problems with new software apps

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• Cash flow changes– Unexpected costs– Loss of credit lines– Customers fail to pay on time– Expenses to establish lines of credit

Internal – Financial Risks

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External – Competition and Market Risks

• Loss of clients or customers• Loss of employees• Decrease in sales prices/fluctuating markets• Increases in vendor costs• Fuel / Energy price increases• Fixed cost changes (e.g., rent)

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External – Business Environment Risks

• Laws• Weather• Natural Disaster• Community• Obsolescence

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External – Personnel Conflict Risks

Employees or Contractors:• Family obligations, illnesses or deaths• Events or disaster that affect the home• Work / life balance

Owners:• Community involvement distractions

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Risk Mitigation – Insurance Considerations

• General liability• Property• Business interruption• Worker’s Comp• Key person life and health• Other

The costs need to be weighed against potential impact of risk

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Exercise 3 – Business Risks

• Identify potential internal and external risks that could impact your company.

• Think about actions you can take to minimize risk before or immediately after an event occurs.

• 5 minutes to identify your risks

• 5 minutes to share

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Business Performance – Risk Warning Signs

Look at trends in your business: • Excessive debt in relation to owners equity (total

liabilities / owner’s equity)• Reliance on a small number of customers• Reliance on one product • Reliance on one or a small number of vendors• Cash flow problems• Irregularities in accounting, bank or timecard

records• Irregularities in computer system administrative

reports• High employee turnover rate

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Risk Identification and Planning

• Develop a written business plan• Use outside sources to assist in identifying risks

– Consultants– Trade Association– SCORE mentor

• Risks of your vendors or supplier• Identify needs for potential or planned growth• Discuss risks with managers• Communicate risks to managers • Identify needs and PLAN for business continuity

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Review

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Review

Budgeting and forecasting help you plan success

Accurate financial statements are critical to the success of your company

Frequent analysis of your income statement, balance sheet and cash flow statement and spotting trends will help you manage your business more effectively

Find the most beneficial sources of funding your growth

Financial ratios help you analyze certain aspects of your operations so you can make adjustments to become more profitable

Beware of potential risks and planned mitigation

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Next Steps

• Set up your company’s cash flow forecast and/or annual budget / forecast using the instructions provided for the Excel spreadsheet – download at:

http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx

• 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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Help Us, Help You

Please fill out the workshop evaluation form

Your feedback is important to help us improve our programs!

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Other Sources of Financing

Friends or familyHome equity loanCredit cards (VERY costly)Department of Community and Economic DevelopmentDepartment of Agriculture & Rural Development ServiceAngels and venture capitalists (equity financing)Crowd funding – may be donations, loans and/or equity

investmentPeer to Peer Loans – i.e. www.prosper.com or

http://www.lendingclub.comMore options will be available in 2013

Grants – generally NOT available with for-profit business