Your Business
Finances
On Target Group Coaching
Effective Financial
Management
3

Financial Indicators
Profits, Cash Flow, ROI
 Cost
Behavior
 Profit Improvement Planning
 More Key Performance Indicators

Liquidity, Solvency, Collections, Breakeven
 Creating
a Budget/Profit Plan
3
Best Practices: Finance

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Accounting system is fully & accurately functioning
Controls are in place to ensure accuracy
A Realistic Workable Profit Plan (aka Budget) is in
place
Financial Monitoring is being used effectively as a
business tool
Key Metrics are being used to keep your finger on
the financial pulse of your business
Owner reviews Financial Data and Metrics at least
monthly
An adequate credit line is in place
Company is profitable, solvent and able to finance
its growth and reward stakeholders
4
Sound Financial Management
is critical if you wish to:
 Put
together a solid business plan
 Be in the best position to obtain financing
 Grow a sustainable business
 Create a valuable company that you can
later sell or otherwise provide for your exit
from the business
Effective
Financial
Management
Key Financial Data For
Business Survival
3 Key Financial Indicators Of Your
Business’ State Of Health
Business is about making money
To do this, it must simultaneously increase
three things:
 Net profit margin – Operating profit
margin
 Cash flow
 Return on investment (ROI)
Indicator 1: Profit Margins

Gross Profit = What’s left
over after you deduct direct
job costs from the revenue
your business generates
Gross Profit = Total Income
minus Direct Expenses
to Produce work


Indicator of the productivity
of your production people
Indicator of the accuracy of
your estimating and selling

Net Profit = What’s left
over after you deduct ALL
expenses from the
revenue your business
generates
Net Profit = Total
Income minus Total
Expenses


THE bottom line in your
business
Indicator of the overall
management of the
business
How To Calculate Profit
Margins
 Gross
Profit Margin (GP%) is profit derived
from work produced divided by Gross
Revenue
 Gross Profit Margin = (Gross
Profit/Revenue)%
 Net
Profit Margin (NP%) is after-tax net
profit divided by Gross Revenue
 Net Profit Margin = (Net Profit/Revenue)%
Improve The Gross Profit
Margin by working on the
drivers:
 Production
/ service delivery processes
 Material Costs
 Labor Costs
 Customer relations
 Team Skills and Development
 Pricing & Estimating
 Selling Skills
Improve the Net Profit Margin
by managing:
 Administrative
 Variable
operating processes
Costs
 Overhead Costs
 Customer relations
 Administrative Team Skills and
Development
 Marketing Activities and Costs
BEST PRACTICE GUIDE : Gross
Profit %
Gross Profit Margin = (Gross
Profit/Revenue)%
 Higher
is better – obviously 
 Industry averages are different for
different industries
 Set a target based on your budget
BEST PRACTICE GUIDE :
Net Operating Profit %**
Net Operating Profit Margin = (Net
Operating Profit/Revenue)%



Higher is better
15% is goal (25% BEFORE Owner’s
Compensation)
5% is industry average*
*Residential and Commercial Contractors under
$10MM
** There is a distinction between Net Profit and Net
Operating Profit, which is Profit before taxes, and
“other” income & expenses not related to operations
of the business including financing costs (interest
expense)
The three questions of
measurement
 Is
it Accurate?
 Is it Acceptable
 Is it Sustainable?
What Does The Cash Flow Cycle
Mean To Your Business
Operations?
 There
will be occasions when money is
flowing out faster than it is flowing in
 Virtually every business experiences times
when there is a cash flow gap
 Managing cash flow so as to avoid any
critical situation due to lack of cash when
it is needed is a major responsibility of a
business owner
Cash Flow – More Than Just
Profit
 Businesses
can make a profit but have
negative cash flow
 Failing businesses can have positive cash
flow, possibly due to large asset sales or
collections from past sales
 Business start-ups require large cash
outlays to build the asset base = cash
flow risk
Cash flow Over The Longer
Term
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Over the longer term, you have to manage
your cash flow to fund your business growth
You can grow your business in the short term
by ‘borrowing’ credit through late payment of
suppliers
Eventually, however, everything evens out
and such strategies are not sustainable
With that in mind, projected growth should be
managed
within
known
cash
flow
constraints…and if external funds are
required, this needs planning in advance
Improve Cash Flow
 Shorten
the Cash Flow Cycle
 Understand the difference between Cash
Flow and Profit
 Plan in advance for business growth
and/or downturns
BEST PRACTICE GUIDE :
Cash Flow
 Prepare
a Cash Flow Projection
 Manage Your Spending on a monthly, if
not weekly basis
 Invoice Promptly
 Develop a systematized approach to
receivables and collections
 Obtain a line of credit
Indicator 3: Return On
Investment

Return On Investment is net profit expressed
as a percentage of the value of the total
assets you have tied up in the business
ROI = (Net Profit/Total
Assets)%

ROI is a profitability ratio – it is the true
measure of the financial productivity of a
business
BEST PRACTICE GUIDE : ROI
Return on Investment =
(Net Profit/Total Assets)%
 Higher
is better
 Should be at least 10%
 25% or higher is a goal
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Characteristics of
Financial Health
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High tangible net worth (equity)
Consistent profitability
High cash flow from operations
Cash balances representing 30-45 days of
operating expenses
AR representing less than 30 days sales
A ratio of current assets to current liabilities
(“current ratio”) in excess of 3:1
A high level of working capital
A ratio of liabilities to assets of 1.0 or less (debt
ratio)
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How do we find out where we
stand?
 Starts
with Financial Statements:
 Profit & Loss Statement (Income
Statement)
 Balance Sheet
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Regarding Your Financial
Statements…

Accuracy is Essential



GIGO
Hire Kerry to help you shape up your books 
Accrual vs. Cash Basis

Accrual Basis – Day to Day operations



Enter Invoices and Bills as they are incurred – not
as they are paid
Cash Basis – Paying Tax
Enter data on Accrual Basis/Click of a button
will show reports in either format (in QuickBooks)
24
Chart of Accounts Tips

Good Structure

Sufficient detail to analyze data
Use sub accounts where more detail is needed
 Consider using classes if appropriate


Group Expense accounts appropriately
All direct costs in COGS
 Non Operational Income and Expenses in
“Other Income & Expense” section


Group Balance Sheet Liabilities appropriately

Loans that will not be repaid this year in Long
Term Liability section
Profit and Loss Statement
Income
Direct Costs (Cost of Goods Sold)
Gross Profit
Variable Expenses
Overhead Expenses
Net Operating Profit
Other Income & Expenses
Net Profit
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Profit and Loss Statement
Balance Sheet
Description
Cash
Checking, Savings, Petty Cash
Accounts Receivable Amounts Due from Customers
Other Current Assets
Prepaid Expenses, Amounts due from others
Total Current Assets
Fixed Assets
Equipment, Vehicles, Property, Depreciation
Other Assets
Startup expenses, Goodwill from purchase, Company
deposits, Long term loans made to others
Total Assets
Accounts Payable
Amounts owed to Vendors
Credit Cards
Other Current
Liabilities
Payroll Taxes Payable, Customer Deposits, Short Term
Lines of Credit
Total Current Liabilities
Long Term Liabilities
Loans, Lines of Credit that will not be paid off in one year
Equity
Contributions, withdrawals, Retained Earnings, Net
Income
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Total Liabilities & Equity
Must equal Total Assets to Balance
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Balance Sheet
Key
Performance
Indicators
Factors that indicate the
current and future
performance of a business in
areas that are critical to the
company's success.
Financial KPIs
 Revenue
to Budget
 Gross Profit
 Net Profit
 Break Even Sales
 Liquidity - Current Ratio
 Solvency - Debt Ratio
 Collections (Days Sales Outstanding)
BEST PRACTICE GUIDE : Gross
Profit %
 Gross
Profit Margin =
 (Gross Profit/Revenue)%
 Higher is better
 Industry Averages Differ
 Set a budget target to measure
31
BEST PRACTICE GUIDE :
Net Operating Profit %**

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
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Net Operating Profit Margin =
(Net Operating Profit/Revenue)%
Higher is better
15% is a goal to shoot for (25% BEFORE
Owner’s Compensation)
** There is a distinction between Net Profit and
Net Operating Profit, which is Profit before taxes,
and “other” income & expenses not related to
operations of the business
32
BEST PRACTICE GUIDE :
Liquidity Ratios
Current Ratio =
Current Assets
Current Liabilities
Should be a minimum of 1.5 or higher (3.0 or
greater is better)
Quick Ratio =
Should be at least 1.0
Higher is better for both
Cash + Equivalents
Current Liabilities
BEST PRACTICE GUIDE :
Debt Ratios
Debt Ratio =
Total Liabilities
Total Assets
Should be less than 1.0
Debt to Equity Ratio = Long Term Debt
Stockholder’s Equity
Should be less than 1.5 or 150%
BEST PRACTICE GUIDE :
Days Sales Outstanding
(Collections)
Days Sales Outstanding =
Accounts Receivable x 365
Annual Revenue
(previous 12 months rolling revenue)
 Should
be 30 days or less
BEST PRACTICE GUIDE :
Cash in Bank – Ideal
Cash in Bank =
Overhead Expenses* (next month)
Gross Profit Margin
Plus: Fixed expenses for months 2 & 3
Or – just think 3 months fixed expenses for a
quicker calculation
*Include Variable Costs and Overhead Costs
37
BEST PRACTICE GUIDE :
Cash in Bank – Ideal
Cash in Bank =
Overhead Expenses* (next month)/Gross Profit %
Plus: Fixed expenses for months 2 & 3
Or – just think 3 months fixed expenses for a
quicker calculation
*Include Variable Costs and Overhead Costs
38
BEST PRACTICE GUIDE : ROI
•
•
•
Return on Investment =
(Net Profit/Total Assets)%
Higher is better
Should be at least 10%
25% or higher is a goal
Implementation Steps
 Review
your own financial statements
and chart of accounts
 Ask me to review if you would like my
perspective
 If you need help with your QuickBooks,
hire Kerry
 Next Month: We’ll talk about Profit
Planning and creating a budget
 Start thinking about your financial goals
for 2013