FINANCIAL LANNING FOR MICRO AND SMALL BUSINESSES...•Why financial management is important to small businesses and their owners •Identify financial management practices and tools

FINANCIAL PLANNING

FOR MICRO AND SMALL

BUSINESSES

Welcome

• Introductions

• Workshop format

• Agenda

Introduction

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Agenda

• Why financial management is important to small businesses and their owners

• Identify financial management practices and tools commonly used by small businesses

• Explain how these practices and tools work

Continued….

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Agenda

• Explain financing basics for a small business, including:• Start up financing

• Financing for a growing business

• Financing working capital

• Financing fixed assets

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What is …

Financial management practices and tools include:

• Projections/budgets

• Bookkeeping

• Financial statements

• Monitoring cash flow

Why?

• Reach your goals by making good decisions

• Know if you’re profitable

• Forecast your cash flow and growth

• Planning for change, new product lines, reaching new markets

• Prepare for financing (loans) and even an exit

Information for decision making

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Tilman J. Fertitta

Owner one of the US’s largest restaurant corporations.

In 2013, his net worth was estimated at $2.4 billion

Forbes calls him the “World’s Richest Restaurateur”

‘the first thing I tell everybody is to know your numbers’

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Budgeting

• There are several financial management practices and tools that are commonly used for small business.

Let’s start with budgeting

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Budgeting

• Do you track or forecast your monthly expenses?

• How do you do that and what expense categories do you use?

• If so, how does this help with your business decisions?

• Methods– Zero based

– Incremental

– Top down

– Bottom up

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Bookkeeping

• The critical component of financial management

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Bookkeeping

• (should be) an organized process of tracking all income and expenses of your business

• the basis for all financial management/ business decisions are accurate and timely financial statements

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Bookkeeping Steps

Here are 10 basic bookkeeping steps:

1. Obtain business accounting software (and use it)

2. Open a separate business checking account

3. Reconcile your checking account monthly

4. Track sales and collect (sounds easy)

5. Deposit all sales at bank

Continued …

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Bookkeeping Steps

6. Write business checks for business expenses, don’t use petty cash …

7. Obtain a separate business credit card

8. Pay business expenses first

9. Generate and use an income statement and balance sheet

10.Pay yourself with owner’s draw

Income Statement

What is a Income Statement (also called Profit & Loss)?

An Income Statement:

• Measures revenues and expenses over a period of time

• Tracks profitability: whether the business is making a profit on what it sells

Continued …

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Income Statement

What is an Income Statement?

An Income Statement:

• 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

The Income Statement is probably the most important report from your accounting software program.

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Income Statement

What is the basic formula for a Profit and Loss Statement?

+ Sales

- Cost of Goods Sold

= Gross Profit

- Overheads

= Net Profit

Continued …

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Income Statement

Cost of Goods Sold:

+ Opening stock

+ Purchases

- Closing stock

= Cost of Goods Sold

Continued …

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Income Statement

Net profit pays for:

• Owner’s Draw (sole proprietor) or Dividends (for a Ltd)

• Future expansion and equipment

• Principal loan repayment

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Income Statement

How do I compile a Profit and Loss Statement?

Easy!

… if you have set up a business accounting

software program

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Balance Sheet

• The balance sheet is a "snapshot" of the company's financial position at a point in time

• It shows what a company owns as well as what it owes to other parties as of the date

• Is made up of

– Assets (owns)

– Liabilities (owes)

– Owner's (Stockholders') Equity (sources)

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Cash v’s Accrual

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Important concept

Accounting DOESN’T reflect cash movements

• Sales of $100 in Jan, client pays in Feb

• Stock bought in Jan

• Incur salaries in Jan, but paid in Feb

Jan Feb Jan Feb

Sales 100 100

Cost of Goods Sold (80) (80)

Gross profit (80) 100 20

Expenses

Salary (10) (10)

Net Income (80) 90 10

CASH ACCRUALS

Cash Flow

What is cash flow?

• Def. 1. Balance of cash received less the amount of cash paid out over a period of time

• Def. 2. Moving cash in or out of a business

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Cash is King

Cash Flow Projection

What is a cash flow projection?

• A financial statement using assumptions to forecast:

• 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) –breakeven analysis

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Cash Flow Projection

How can a cash flow projection help and when do I need one?

• Set sales and expense goals

• Determine breakeven point (sales revenue equals fixed and variable costs)

• Plan equipment purchases for replacement or expansion

• Determine cash needed to purchase inventory for seasonal cycles

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Cash Flow Projection

How can a cash flow projection help and when do I need one?

• Track liquidity when accrual accounting masks cash realities

• Helps you determine the need for financing

• Show lenders your ability to plan and repay financing (frequently required with loan applications)

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Cash Flow Projection Sample

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Sources of Cash

Operating Uses of Cash

Non-Operating Uses of Cash

Sources of cash Opening Jan Feb

Beginning cash balance

Cash sales

A/R collection

Loans rec'd

Equity contributions

Total cash available A

Operating uses of cash

Expenses

Expenses

Expenses

Total cash outflow B

Net cash A - B

Non-Operating uses of cash

Debt servicing

Equipment purchase

Inventory pruchase

Owners draw

Total cash outflow C

Total cash available A - B - C

Cash Flow Projection

To increase cash flow, the owner could:

1. Increase the number of items sold

2. Increase the price

3. Reduce expenses

4. Change the timing of expenses

5. Save money to have sufficient Opening Cash to get through the “start-up” period

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Cash Flow Projection

To increase cash flow, the owner could:

6. Obtain sources of cash other than sales (eg a line of credit)

7. Reduce or change timing of Owner’s Draw

8. Buy inventory from vendor at lower price

9. Obtain credit from vendor

10. Establish policy to get paid sooner by customers (offer discounts)

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Business Financing

What is business financing?

• Financing is getting the money you need to start, operate or grow your business.

Basic Financing Concepts:

• Equity financing vs. debt financing

• Financing working capital vs. financing fixed assets

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Business Financing

What are the Do’s and Don’ts for small business financing?

• Invest your own money • Earn the right to borrow • Show profitability and positive cash flow• Understand and keep working capital • Be lean on fixed assets (buy used or lease)• Match sources and uses of funds

Continued …

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Business Financing

What are the Do’s and Don’ts for small business financing?

• Understand your financial statements

• Understand collateral options

• Understand risks and costs for loan types (eg loan, lease, overdraft)

• Shop around

• If you’re not sure get advise (eg your bank)

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Loans

Steps for Getting Ready for a Loan

• Have a business plan (including projections)

• Know what you can afford

• Study your financial statements (know your numbers!)

• Establish collateral options (personal and business)

• Show your equity contribution

• Research your financing options

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Loan Package

What are common elements of a loan package?

• Business plan

• Business financial statements (current and historical)

• Collateral (business and personal)

• Personal financial statements

• Details on accounts receivable/payable

• Purchase agreement, appraisals, contracts, and estimates

• Covenants

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Qualifying for a Loan

What are the criteria for qualifying for a loan?

• Good credit risk, good management practices

• Equity contribution, skin in the game

• Repayment ability

• Loan to value ratio

• Collateral

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Start Up Financing

What are the financing options for a start-up business?

• Owners equity

• Sweat equity

• (Business) credit card

• Family

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Business Plans (groan…)

• It defines define what the business is or what it intends to be over time, usually 3-5 years – a roadmap

• It should demonstrate how the business has the potential and will make a profit

• Useful management tool (really it is) as it makes you consider wider aspects of the business when setting up

• Doesn’t have to be a long, formal document, and there are huge benefits to gain from just going through the business planning process

• A formal business plan document only usually required for seeking investors or supporting a commercial loan

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Business Plans – what’s in it …

Executive Summary - snapshot of your business plan as a wholeCompany Description - what you do, what differentiates your business from others, and the markets you servesMarket Analysis - research your business industry, market and competitors – where do you fit?Organization & Management - how you’re set up and information on key employees/rolesService or Product Line - What do you sell? How does it benefit your customers? What is the product lifecycle?Marketing & Sales - How do you plan to market your business and what is your sales strategy? Read more about how to include this information in your plan.Financial Projections - If you need funding, providing financial projections to back up your request is critical.

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Fraud risks

• Revenue skimming - customers pay cash for an item or service, the employee pockets the cash without issuing a receipt.

• Payroll fraud - payroll clerk allows employees to inflate hours worked and receives a cut

• Vendor billing – the account payable person either works with an existing vendor who inflates their bill or creates a fake vendor and bills

Prevention – be organized, have controls and segregate where possible

Remain interested in the numbers

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Top Five Key Points to Remember

• Start financial management with a budget

• Sound bookkeeping is the basis for all financial management

• Cash flow projections will help to see cash shortages even when accrual accounting may be masking cash realities

• An income statement is the best tool for knowing if your business is profitable

• Financing is getting the money you need to start, operate or grow your business

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Questions

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Paul Muspratt

[email protected]

926 4850

www.wbfinancial.ky