My Business is Growing, Now What? Financial Management Skills for the Entrepreneur

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My Business is Growing, Now

What?Financial Management Skills for the Entrepreneur

David Blain, PartnerMichael Hoffner, Partner

IntroductionsDavid Blain• McKonly & Asbury• Partner• CPA• CVA

Michael Hoffner• McKonly & Asbury• Partner• CPA• Business Unit Director

Good or Bad – You Decide2014 Results

Revenues $5,000,000Net Income ($100,000)Cash $100,000Accounts Rec. $500,000Accounts Pay. $200,000Current LTD $300,000LTD $1,000,000Equity ($900,000)

2015 ResultsRevenues $10,000,000Net Income ($400,000)Cash $150,000Accounts Rec. $1,200,000Accounts Pay. $750,000Current LTD $650,000LTD $1,500,000Equity($1,550,000)

Good or Bad – You DecideGood

• Revenues have increased 100%• Overall available cash has

increased 50%

Bad• Net income continues to

decline• Current ratio (current

assets/current liabilities) continues to deteriorate• Additional borrowing to

finance operations• Continued decline of equity

position

Objectives of Today’s Webinar• Develop Financial Management Skills for the Entrepreneur • Topics we will focus on:• Balance Sheet Management• Cash Flow Management• Ratios – Why Are They Important?• Developing Long Term Value

Balance SheetManagement

Balance Sheet Management•Why the Balance Sheet? Why is it important?• Balance Sheet tells a story as of a point in time• Comparing a balance sheet from one point in time to another can

give the reader a road map as to where the company was, is and will be going.• The balance sheet serves as the life blood of the business.

Balance Sheet Management•Who uses the Balance Sheet?• Third Parties

• Banks and lending institutions• Brokers and insurance agents• Bonding companies• Credit management companies

• Stockholders• Potential Investors

These parties use the balance sheet to make business decisions related to the health and stability of the business. These decisions can have long lasting impacts to the performance of the business.

Balance Sheet ManagementHow Do I Manage My Balance Sheet?• Actively manage all aspects of the balance sheet.• Assets

• Monthly reconciliation of cash accounts• Weekly review of accounts receivable aging• Monthly review of inventory levels• Inventory systems

• Perpetual• Physical

• Fixed asset management

Balance Sheet ManagementHow Do I Manage My Balance Sheet?• Actively manage all aspects of the balance sheet.

• Liabilities• Review vendor payment policies

• Pay within terms• Take advantage of discounts

• Debt management• How are principal and interest payments structured and amortized on the

balance sheet• What assets are pledged as collateral• Line of credit needs

• Other Liability Risks – Payroll, payroll taxes, accrued liabilities

Balance Sheet ManagementWhat does this do for the business?• A strong balance sheet provides the business with access to capital

during growth and expansion periods• During economic downturns, maintaining a strong balance sheet

position will enable the business to remain stable while also being able to take advantage of potential growth opportunities• Protects assets• Provides shareholders and investors with continued value in their

investment

Cash FlowManagement

Cash Flow Management• Cash is King – Your business can not run without cash• Daily focus on cash is critical for all businesses, whether in start

up phase or growth stage of business• Ability to access and manage cash flow and cash flow needs will

determine the businesses ability to operate long term and protect business assets.

Cash Flow ManagementTips for managing short term and long term cash flow• Short Term• Review cash collections daily

• Look for trends in cash collections• What are customer paying habits – Pay within terms, outside of terms?• How do they pay – Cash, check, credit card?

• Accounts receivable aging• How quickly are receivables being collected?• If customers are slow in paying, why? • Are incentives being offered to customers to pay more quickly.

Cash Flow ManagementTips for managing short term and long term cash flow• Short Term• Accounts Payable

• Pay within terms• Take advantage of discounts

• Paying in discount periods can provide up to an 18% return annually on your cash

• Are payments made by check, EFT, credit card?• Paying by check also includes the cost of the check and postage. EFT’s sometimes

have charges. • Credit cards might provide cash back when used for business purchases

Cash Flow ManagementTips for managing short term and long term cash flow• Long Term• Capital Needs

• Line of Credit for general business operations• Intermediate term lending for capital and business asset needs

• Financing Needs• Equipment purchases• Business purchases

Cash Flow ManagementTips for managing short term and long term cash flow• Long Term• When determining long term cash flow needs

• Assess payback period – How quickly can the financing be repaid?• What are the interest rates on the financing – Variable or Fixed? How does this

impact monthly cash flow needs of the business?• Be Careful not to over leverage the business – Most banks are cautious of this in the

“New Economy”. Overleveraging the business will put a long term pinch into the businesses ability to access capital for further expansion.

Cash Flow ManagementHow do I determine my cash flow position?• Three primary cash flow indicators are usually reviewed by banks and

lending institutions• EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization• Unlevered Cash Flow – This is cash flow that is free and clear of any

assignments of debt and collateral needs• Operating cash flow from the cash flow statement

• Operating cash flow is the first half of the cash flow statement. This indicates the businesses ability to generate cash through its operating assets and liabilities.

Cash Flow ManagementBalance Sheet and Cash Flow Management Go Hand in Hand.• Good receivable management will improve cash collections while also

ensuring there is no negative adjustment to receivables on the balance sheet.• Taking advantage of payment terms and discounts will manage payable

balances while also saving cash flow.• Daily cash management review will identify slow pay customers that will

allow for quick response to collection and future business activity.• Long term planning for equipment and business financing will help to manage

the balance sheet while providing the cash flow needs to continue to grow the business.

Ratios

RatiosWhy Are Ratios Important for Managing My Business?• Ratios provide a different view of managing the profitability of a business.• Ratios help with identifying trends in business operations such as production,

cost management, cash and other balance sheet management and overall profitability• Ratios will help to establish historical standards for the business while also

assisting the entrepreneur in fine tuning business operations for future growth.• Ratios assist the entrepreneur in making long term business decisions.

Ratios• While there are many ratios that can be used to manage your

business, using ratios is dependent upon the type of business you manage:• A fixed asset intensive organization might look at ratios around return on fixed

assets, sales to fixed assets, fixed asset turnover and fixed assets to equity.• A sales intensive organization might look at ratios around personnel cost to

sales, SG&A as a percentage of sales, selling expense to total sales ratio.

RatiosKey ratios to consider in running your business• Liquidity Ratios

• Current Ratio – Total Current Assets/Total Current Liabilities• Measures overall liquidity position of the company• Higher the percentage the more liquid the company is• Most lending institutions look for a ratio of 1.6 to upwards of 3.00• Look for big decreases in this over time• Ensure that current assets are collectible

• Quick Ratio – Cash Plus Accounts Receivable/Total Current Liabilities• More of a pure liquidity ratio.• Ensure all Accounts Receivable is Collectible• Look at length of time to pay current• Higher the percentage the stronger the company is. 1.00 to 2.10 for most industries

RatiosKey Ratios to consider in running your business• Financial Leverage and Coverage Ratios

• Debt to Equity Ratio – Total Liabilities/Total Equity• Indicates company’s total capitalization – balance between money or assets owed versus

those owned.• Creditors prefer a lower ratio to decrease financial risk – Looking for between 1.2 to 3.00 for

most industries.• Interest Coverage Ratio – EBITDA/Interest Expense

• Indicates company’s ability to service debt with operating cash flow (EBITDA).• Increasing number is good indicator. Most creditors look for a range of between 4.00 to 12.00.

RatiosKey Ratios to consider in running your business• Profitability Ratios

• Gross Profit Margin – Gross Profit/Sales• Indicates percentage of sales revenue that is not paid out in direct costs (costs of sales).• Indicates how many cents of gross profit can be generated by each dollar of future sales• Creditors prefer higher percentage – Looking for between 40% to 60% depending upon

industry.• Net Profit Margin– Adjusted Net Profit before Taxes/Sales

• One of the most important financial ratios.• Measures how many cents of profit the company is generating for every dollar of sells.

Important for tracking against competitors.• Creditors prefer higher percentage – Looking for between 2% to 10% depending upon

industry.

RatiosKey Ratios to consider in running your business• Profitability Ratios

• Return on Equity – Net Income/Total Equity• Indicates how much profit is being returned to shareholders.• Creditors and shareholders prefer higher percentage – Looking for between 10% to 20%.

• Return on Assets – Net Income/Total Assets• Indicates the company’s ability to use assets to create profits.• Measures how many cents of profit each dollar of assets is producing.• Creditors prefer higher percentage – Looking for between 6% to 10%.

RatiosKey Ratios to consider in running your business• Activity/Efficiency Ratios

• Accounts Receivable Days – (Accounts Receivable/Sales)*365 days• Shows the average number of days that lapse between a sale and receipt of payment.• The lower the amount of days the quicker the collection of cash.• Creditors prefer lower days – Looking for between 20 to 40 days depending upon industry.

• Accounts Payable Days – (Accounts Payable/Sales)*365 days• Shows the average number of days that lapse between the purchase of materials and

payment on those materials.• The lower the amount of days the quicker payment to vendors.• Creditors prefer lower days – Looking for between 10 to 40 days depending upon industry.

RatiosKey Ratios to consider in running your business• Activity/Efficiency Ratios

• Gross Fixed Asset Turnover – Sales/Gross Fixed Assets• Indicates the multiple of annualized sales that each dollar of gross fixed assets is producing.• Important ratio for company’s with fixed asset intensive operations.• Indicator measures how well fixed assets are generating sales and very important to

businesses that require significant investment in such assets.• Higher the ratio the more effective the company’s investments are in net property, plant and

equipment.

Long TermValue Proposition

Long Term Value Proposition• For most entrepreneurs and business owners their retirement is

their business.• Managing and protecting these assets will provide for continued

long term growth of these assets.• Specifically, management of balance sheet and cash flow related

matters provide for the most long term value of any business.

Long Term Value PropositionLong term business value is primarily generated from two specific areas• Positive cash flow generated from operations

• EBITDA• Unlevered Cash Flow

• Positive equity position on the balance sheet• Growing retained earnings position from positive net income • Management of shareholder distributions

Long Term Value PropositionSome will argue that sales generate business growth and ultimate value. While sales are very important to any business, cash flow generation from sales is what generates ultimate value both short term and long term.

Long Term Value Proposition• Value Measurements• Asset Approach

• Focused on cost and net value of assets• Used in valuations of high intensive fixed asset businesses

• Income Approach• Focused on net cash flow generation • Reviews income and cash flow on EBITDA and unlevered cash flow

Long Term Value Proposition• Value Measurements• Market Approach

• Focused on multiples of earnings and cash flow based upon comparable market transactions

• Used in valuations of businesses in highly acquisitive markets (Banks, Insurance)

In summary, protection of the balance sheet while managing cash flow will increase the value of your business in all three value approaches

Conclusion• Managing the balance sheet is critical to long term growth of any

business.• Protecting assets through the daily, weekly and monthly review of key

balance sheet accounts will assist in cash flow management and assessing cash flow needs for the business.• Using ratios to better understand historical and future trends will provide

entrepreneurs with key information to make informed business decisions.• Managing the business through the above mentioned approaches will

ultimately protect business value and wealth generation for the entrepreneur.

Questions?David Blain• [email protected]• Partner• CPA• CVA

Michael Hoffner• [email protected]• Partner• CPA• Business Unit Director

Questions?David Blain• [email protected]• Partner• CPA• CVA

Michael Hoffner• [email protected]• Partner• CPA• Business Unit Director



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