Durable Results Transform Your Business By Simplifying Your Metrics Presented by Don Davis
Jan 21, 2016
Durable Results
Transform Your Business By
Simplifying Your Metrics
Presented by
Don Davis
Duckridge Advisors
Release Your Inner Bean Counter Simplify your Financial Statements
and Drive Improved Results Understand the Impact of Metric
Management
Introduction
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Agenda Cash Flow as the Ultimate Metric How Your Financial Statements Fit
Together What Metrics Are Best For Your
Business Industry Examples
Lincare, Invacare, American Home Patient
Using Ratio Analysis for Quick Review
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Cash Flow: The Ultimate Metric
“Too often we measure everything and understand nothing.
The three most important things you need to measure in a business are customer satisfaction, employee satisfaction, and cash flow.
If you’re growing customer satisfaction, market share is sure to grow, too. Employee satisfaction feeds you productivity, quality, pride and creativity. And cash flow is the pulse -- the key vital sign of a company” Jack Welch - former CEO, GE
Quick Primer on Cash Flow
Information Available in Your Monthly Financial Statements
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Cash FlowStatement
Financial Financial StatementsStatements
The Three PillarsThe Three Pillars
Financial Financial StatementsStatements
The Three PillarsThe Three Pillars
Earnings Statement
Balance Sheet
Sales
Cost of Sales
Gross Profit
Operating & Admin
EBIT
Interest & Taxes
Net Income
Net Income
Change in Working Capital
Cash from Operations
CAPEX
Cash from Financing Activities
Cash
CashARRental Equipment
Total Assets
AP & AccrualsDebt
Total Liabilities
Equity
Total Liabilities & Equity
Consolidated Statement of Operations In $ millions 2008 2007 2006
Net revenues 1,664.6 1,596.0 1,409.8
Cost of goods and services 400.8 389.9 316.1
Operating expenses 395.7 365.0 331.9
Selling & Administrative 326.9 317.7 291.6
Bad Debt expense 25.0 23.9 21.1
Depreciation and Amortization 117.5 116.3 102.0
EBIT 398.7 383.1 347.1
EBITDA 516.2 499.4 449.0
Interest & Tax (161.5) (157.1) (134.1)
Net Income 237.2 226.1 213.0
EBIT Margin 24% 24% 25%
Earnings per Share $3.17 $2.58 $2.16
P/E 8.3 13.0 17.6
EBITDA Multiple 4.9X 7.7X 10.8X
Consolidated Statement of Cash Flows
In $ millions 2008 2007 2006
Net Income 237.2 226.1 213.0
Depreciation and amortization 117.5 116.3 102.0
Provision for losses on receivables 25.0 23.9 21.1
Stock-based compensation expense 19.3 18.0 20.3
Deferred income tax 31.7 24.6 18.2
Increase in AR (2.3) (52.3) (49.6)
Increase in AP and Accruals 4.7 26.4 27.0
Other Operating 6.0 23.2 (23.3)
Net Cash Provided by Operating Activities 439.1 406.2 328.7
Net Cash Used for Investing Activities (108.4) (232.9) (127.6)
Net Borrowings & Finance Costs (287.2) 480.7 47.8
Stock Repurchase and Stock Options (22.6) (627.3) (232.4)
Net Cash Provided (Used) by Financing Activities (309.8) (146.7) (184.6)
Increase in cash 20.9 26.6 16.5
Cash at beginning of year 51.7 25.1 8.5
Cash and cash equivalents at end of year 72.7 51.7 25.1
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Ratio Analysis
In $ millions 2008 2007 2006
Sales 1,664.6 1,596.0 1,409.8
EBIT 398.7 383.1 347.1
EBITDA 516.2 499.4 449.0
Net Income 237.2 226.1 213.0
Cash from Operations 439.1 406.2 328.7
AR 176.8 198.9 146.6
Debt 556.9 838 357.4
EBIT Margin 24% 24% 25%
EBITDA Margin 31% 31% 32%
Net Margin 14% 14% 15%
Sales Converted to Cash 26% 25% 23%
Cash to EBITDA 85% 81% 73%
Debt to EBITDA 1.1X 1.7X 0.8X
Days Sales Outstanding 39 45 38
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What Are Most Effective Cash Flow Metrics?
Daily Cash Report How Much Cash Did You Begin the Day With? How Much Cash Came In? How Much Cash Went Out? How Much Cash Do I Have at End Of Day?
Month End Cash Flow Statement Compare to Prior Months for Orientation Develop Sales Converted to Cash Orientation
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Simplify Your Metrics Drive Results Compare
Either versus prior year or prior months The more comparison points the better
Summarize Always have a one page summary
prepared. Use the summary to evaluate the detail
Divide Use ratios to your advantage Benchmark yourself against yourself
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Industry Examples Quick Snap Shot of Publicly Traded
Industry Leaders Focus on Simplicity and Relevancy Incorporates the Idea of Compare,
Summarize and Divide What Other Metrics Would You
Add?
Company Comparison and Ratio Analysis
As of December 31, 2008In $ millions Rotech
Sales 1,664.6 266.9 544.5 1,755.7
Cost of Sales 400.8 65.2 220.2 1,266.8
Bad Debt Write-offs 25.0 4.6 19.3 14.3
S G & A 326.9 19.8 300.8 398.3
EBIT 398.7 21.4 4.2 87.7
EBITDA 516.2 51.6 73.7 131.4
Net Income 237.2 0.5 (246.9) 38.6
Cash from Operations 439.1 35.4 68.4 76.4
AR 176.8 39.1 61.8 270.6
Debt 556.9 234.3 500.1 478.8
EBIT Margin 24% 8% 1% 5%
COS to Sales 24% 24% 40% 72%
Bad Debt to Sales 2% 2% 4% 1%
SG&A to Sales 20% 7% 55% 23%
Sales Converted to Cash 26% 13% 13% 4%
Debt to EBITDA 1.1X 4.5X 6.8X 3.6X
Days Sales Outstanding 38.8 days 53.5 days 41.4 days 56.3 days
Cash Flow
P&LKey Ratios
Gross Margin EBIT Margin Sales Converted to
Cash Sales by Employee Payroll to Sales Other Identified
Costs to Sales
Days Sales Outstanding
Inventory Turns Gross Margin by
Product Line Quick Ratios Debt to EBITDA Debt to Equity
Balanc
e
Sheet
Gauging Sales by Employee
2008 2007
Under $50,000 3% 21%
$51K to $75K 2% 9%
$76K to $100K 8% 12%
$101K to $125K 16% 18%
$126K to $150K 19% 18%
$150+K 52% 21%
Per Steven Richards & Associates, Inc
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Major Players: Sales, PROFIT & Cash per Employee
At 12.31.08 Lincare AHOM Rotech Invacare
Employees
Per Employee $’s
Sales
EBITDA
Cash from Operations
DSO: a Matter of Opinion?
0%
5%
10%15%
20%
25%
30%
35%40%
<30days
30-45days
45-60days
60-75days
75-90days
>90days
200620072008
Per Steven Richards & Associates, Inc
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DSO:The Assorted Math
Calculations Differ by Organization Some use rolling average Some annualize
Timing of Write-offs Has Impact What Impact Does a Day Mean?
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DSO:The Assorted Math
Lincare Example(in $ Millions)
4th Quarter 2009
Full Year 2009
Sales
Accounts Receivable
DSO
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DSO:The Assorted Math
Timing of Write-offs Matter
ABC XYZ
Sales 3,600 3,600
Bad Debt (Reported)
108 0
Bad Debt to Sales
3% 0%
Accounts Receivable
450 558
DSO 45 56
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DSO:The Assorted Math
What Is A Day Worth?
Sales $ 3,650,000
One Day’s Sales (One time effect)
$ 10,000
Write-off 1% (annually)
$ 36,500
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So What? Summarize, Compare and Divide
For High Level Review Establish Your Own Metrics Quick Summaries allow for Quick
Reviews for Busy Executives Different Comparisons provide
Different Points of View Focus on Cash
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Transform Your Business By Simplifying Your Metrics
Daily Cash Report Monthly Review of Cash Flow
Sales converted to Cash Compare all Metrics
Prior Months Prior Year to Date Budget
Where to Get More Information Get remote electronic access to your
Financial Reporting Software and Explore
Learn more about your own Company by Understanding Your Industry Leaders www.sec.gov/edgar.shtml Click on Search for Company Filings Focus on 10-K Annual Reports
Contact me at [email protected] or 412-805-0662
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