1
Simple Steps for
Growing Your Business
Financial Management
• 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 Simple Steps for Growing 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
A Special Thanks to Our Local Sponsors
Classroom Safety – Argosy U
Emergency
Exits
Restrooms
Please do
not wander
around the
building!
You are HERE
Classroom Safety–ComCenter
Emergency
Exits
Restrooms
You are HERE
Please do
not wander
around the
building!
6
About SCORE
• Successful and experienced business
owners and executives acting as
volunteers
• Free mentoring:
Douglas S. Cavanaugh
• One-on-one
• E-mail
• Signup on our website – Mentoring Tab
• Seminars and workshops
• Resources for small business:
manasota.score.org
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.Management
2.Marketing
3.Sales
4.Finance
5.Operations
Review with your mentor to help you:
Decide what additional workshops to attend
Develop a customized business improvement plan
Workshops - Business Focus Areas
Customers – Impacted by All Functions in Your Business
Marketing Your Business
Marketing
Sales
Growing Your Sales
Customer Service
Managing Operations
Service Delivery
Purchasing / Manufacturing
Distribution
Managing Your Time/
People Resources
Human Resources
Financial Management
Finance
Business Owners / Management - responsible for Business Performance
8
During this workshop we will discuss:
Marta E. Maxwell
• How advisors can help your business
• How to read and use financial
statements
• How to measure your company’s
financial health
• The basics of cost accounting
• Business risk and how to manage it
• How to use cash flow forecasts
• Your options for funding growth
9
Let’s Get Started
Briefly tell us about you:
• Your name
• Your business
Katrina Markoff
• What you hope to achieve through this
workshop
10
11
Your Trusted Advisors
Attorney
Risk
Manager /
Insurance
Your
Business
SCORE
Mentor
CPA
Banker
12
Using Financial Statements to
Manage Your Business
Using Financial Statements to Manage Your Business
Important Terms: GAAP & IFRS
GAAP (Generally Accepted Accounting Principles):
• The current accounting standard used in the U.S.
Doug Zell
IFRS for SME (International Financial Reporting
Standards for Small and Midsized Enterprises):
• The international standard for accounting for small
and mid-sized businesses in most other countries
13
Using Financial Statements to Manage Your Business
14
Important Terms: Bookkeeping Methods
Cash:
•Cash basis bookkeepers recognize income and
expenses when they are received/paid
Accrual:
• Accrual basis bookkeepers recognize income
and expenses when the product/service is
delivered
Jennifer Behar
•Analyze your business with an “accrual view” even if you
pay taxes on a cash basis to make sure you understand
accounts receivable (AR) and accounts payable (AP)
Using Financial Statements to Manage Your Business
15
Financial Statements
A typical set of financial statements is made up of:
•Income Statement (P&L)
•Balance Sheet
•Statement of Cash Flows
Douglas S. Cavanaugh
Others that may be important:
•Accounts Receivable Aging Summary
•Accounts Payable Aging Summary
Your accounting software should be able to create the
reports whenever you need them
Using Financial Statements to Manage Your Business
Income Statement
Top section shows revenues
• Gross revenues
• Adjustments to revenues
• Cost of goods sold (COGS)
• Adding/subtracting the figures above = gross profit
Bottom section shows expenses
• Logical categories of expenses
• Revenues – expenses = net (pre-tax) profit
16
Using Financial Statements to Manage Your Business
Balance Sheet
Assets:
-Current
-Long-term
Liabilities:
-Current
-Long-term
Shareholders’
Equity:
-Paid in capital
-Retained
earnings
17
Using Financial Statements to Manage Your Business
18
Income Statement – Revenue / Gross Profit
Theresa Alfaro Daytner
(statements in your handouts)
Using Financial Statements to Manage Your Business
Income Statement
Expenses and
Net Income before
Taxes
19
Using Financial Statements to Manage Your Business
Balance Sheet
20
Using Financial Statements to Manage Your Business
Statement of
Cash Flow
21
Understanding and Using Financial Ratios
Financial Ratios from the Sample Financial Statements
Further
discussion
of these
ratios later
in the
workshop!
22
Using Financial Statements to Manage Your Business
Types of Financial Statements
CPA Audited
CPA Reviewed
CPA Compiled
Internally
Prepared
23
Using Financial Statements to Manage Your Business
Pros of In-House Bookkeeping vs. Outsourcing
In-House:
Outsourcing:
 Bookkeeper devoted to
your business
 Quickbooks software is
easy to use – inputs /
reports
 Familiarity with your
business
 May have additional
expertise
 May handle other tasks
 May cost less?
 Software allows easy
data transfer for your
reports
 Technology enables
secure sharing of
sensitive data
 May gain access to
multiple skill sets
24
Using Financial Statements to Manage Your Business
Internally Prepared
•Financial statements prepared by company management
for operating business
•Should be prepared at least monthly
•Easier to prepare timely reports
25
Using Financial Statements to Manage Your Business
CPA Compiled Financial Statements
An annual compilation of a company’s financial
accounts prepared by a CPA or an accountant.
Rupa Bihani Shah
Business financial statements that are assembled
from the records, materials and information of
the business. These statements contain no
independent assurance as to content or
compliance with GAAP.
26
Using Financial Statements to Manage Your Business
CPA Reviewed Financial Statements
Business financial statements that are reviewed by
independent accountants through inquiries of
management and performance of analytical procedures
on financials to provide limited assurance that no material
modifications are necessary to conform to GAAP.
The accountant does not express an opinion on reviewed
statements.
27
Using Financial Statements to Manage Your Business
CPA Audited Financial Statements
Business financial statements that have been examined by
independent certified accountants to determine if they
present fairly financial position, results of operations, and
cash flows in conformity with GAAP.
Statistically valid sampling of the information to verify the
data.
28
Exercise 1 – Using Financial Statements
List how you use financial statements today.
Income Statement
Balance Sheet
Cash Flow Analysis
Who prepares and reviews your financial
statements?
Then we will discuss current and potential future
uses
29
Exercise 1 – Using Financial Statements
5 minutes to fill in your current uses
10 minutes to discuss future uses
30
31
Understanding and Using
Financial Ratios
Understanding and Using Financial Ratios
Financial Ratios
•Liquidity
•Profitability
•Leverage
•Efficiency
•Debt Service
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!
32
Understanding and Using Financial Ratios
Liquidity Ratios
Used to measure the quality and adequacy of
current assets to meet current obligations as
they come due
Surendra N. Kumar
• Current ratio
• Quick ratio
• Days of cash
33
Understanding and Using Financial Ratios
Liquidity Ratios: Current Ratio
Indicates the extent to which current assets are available to
satisfy current liabilities
• Stated as values such as 2.5 to 1.0 or simply 2.5
34
Understanding and Using Financial Ratios
Liquidity Ratios: Quick Ratio
Indicates the extent to which more liquid assets are available to
satisfy current liabilities
• Stated as values such as 1.5 to 1.0 or simply 1.5
35
Understanding and Using Financial Ratios
Liquidity Ratios: Days of Cash
Indicates the number of days revenue held in cash
• Days of cash = safety cash
• Every business will require a different level of safety cash
• Cash equivalents include money market holdings, shortterm liquid investments, marketable securities and
government bonds and bills
36
Understanding and Using Financial Ratios
Profitability Ratios
Used to measure performance of a
company and how well its assets are being
used to generate revenues
Elizabeth Feichter
•
•
•
•
Gross profit margin
Pre-tax profit margin
Return on assets
Return on equity
37
Understanding and Using Financial Ratios
Profitability Ratios: Gross Profit Margin
The percentage of money left after sales when cost of goods
sold (COGS) is subtracted
Formula:
Gross Sales − Cost of Goods Sold = Gross Profit ÷ Gross Sales = Gross Profit Margin
Example:
Gross Amount of Sales ($10,000) - Cost of Goods Sold ($6,000) =
Gross Profit ($4,000)
Gross Profit Margin = Gross Profit ($4000) / Gross Sales ($10,000) = 40%
38
Understanding and Using Financial Ratios
Profitability Ratios: Return on Assets
The profit generated by the total assets employed by a
company
What it means: Higher ratio reflects a more effective
employment of company assets
39
Understanding and Using Financial Ratios
Profitability Ratios: Return on Equity (ROE)
The profit generated by the net assets employed
ROE is an important financial ratio applying to small business
owners and a good measure of performance by management
40
Understanding and Using Financial Ratios
Profitability Ratios: Pre-Tax profit margin
Taxes vary by location, so pre-tax profit margin is a good ratio to
look at and use for comparisons
41
Understanding and Using Financial Ratios
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
Andrew Dunn
42
Understanding and Using Financial Ratios
Leverage Ratios: Debt to Equity
Indicates how well a business is leveraging its debt against the
capital invested by its owners
If liabilities exceed net worth, creditors have a greater
stake than the shareholders
43
Understanding and Using Financial Ratios
Efficiency Ratio
Measurements of the effectiveness of using current
assets and managing current liabilities
Marta E. Maxwell
• Days of accounts receivable (A/R)
• Days of inventory
• Days of accounts payable (A/P)
44
Understanding and Using Financial Ratios
Efficiency Ratios: Days A/R Outstanding
Indicates the number of days to collect a period’s worth of accounts
receivable
Though industries vary, if you can keep your A/R collection cycle
close to the net terms of sale days, you have an efficient
collection process – typical may be 30 days
45
Understanding and Using Financial Ratios
Efficiency Ratios: Days of Inventory
Indicates the average number of days it takes to turn over
your inventory during the year
46
Understanding and Using Financial Ratios
Efficiency Ratios: Days of A/P
Indicates the number of days of trade and service payables
your company is owing
If your vendor offers net 30 terms with a 2% prompt
payment discount (within 10 days), taking the discount
when you can may be important
47
Understanding and Using Financial Ratios
Efficiency Ratios: Debt Service Ratios used by Banks
EBIT (I) = EBIT / interest and EBIT (CM) - EBIT / current maturities
Fixed charge coverages on businesses needing permanent working capital
(Debt Service payment coverage from traditional cash flow:
= Earnings after taxes / current maturities)
48
Understanding and Using Financial Ratios
Class Discussion: Ratios
•Which ratios are most valuable in improving cash flow?
•Should seasonal/cyclical businesses vary days of cash?
•What are risks of not turning A/R fast enough?
•Debt to equity ratio
•How to calculate gross profit margin
•Markup vs. margin
15 minutes
49
50
Cost Accounting
51
Cost Accounting
Financial vs. Cost Accounting
Financial Accounting:
Cost Accounting:
Complies with standards
such as GAAP or IFRS
Balance Sheet and
Income Statement
Statement of Cash Flows
Complete picture of
company’s overall financial
health at a point in time or
over a period of time
Used by stakeholders to
evaluate company
Used to compute internal
costs and profits on
individual jobs or products
Break-even analysis
Financial ratio benchmark
Used to make
management decisions on
a daily basis
Used by management to
make sure operations are
profitable
Cost Accounting
52
Break-even Analysis
Paul Cernuto
•Valuable for all businesses
•Breakeven - when total costs (fixed +
variable) = total revenue
•Important calculation if you have high fixed
costs and variable sales
•Most important for manufacturers and other
businesses that have significant investments in
equipment
•Businesses with Project based revenues will
want to evaluate each project
Cost Accounting
Break-even Analysis Terms
•Annual or Unit sales revenue: revenue from selling your
product or service
•Annual or Unit variable cost: cost of goods sold (COGS)
•Annual fixed cost: total of all business overhead costs
anticipated on an annual basis
•Contribution margin: amount of money in annual or unit
sales revenue that exceeds annual or unit variable costs
53
54
Cost Accounting
Break-even Analysis:
How many sales do you need to make, at what price, at what costs
and in what time period to be profitable?
Formula:
When Fixed + Variable Costs =
Total Revenue (during the year)
Example:
Annual Fixed Costs = $60,000
Unit Sales Revenue = $100
Unit Contribution Margin = $30
Contribution margin (fraction) = .30
Break-even Sales=
$60,000 ÷ .30
Fixed Cost (annual) ÷
Contribution Margin (fraction)
Annual Break-Even Sales = $200,000
Monthly = $16,666
Annual Units = 2000
55
Cost Accounting
Simple Breakeven
Break-even
– A Analysis
View of the Analysis
Sales revenue over time for
our example.
450000
400000
Breakeven - when total costs
(fixed + variable) = total
revenue
350000
Revenue ($)
300000
250000
200000
$20,000 sales
or 200 units
150000
100000
50000
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Units Sold (x100)
Revenue
Fixed Cost
Fixed + Variable
Note: May be additional “Semi
Fixed Costs” influenced by
volume but not associated per
unit (example - commission
tiers, temporary labor, office
supplies)
Cost Accounting
General and Administrative Expenses
Expenses that support the company’s operations, but are not
directly related to sales or COGS
• Management and Office personnel payroll
• Portion of utility expenses attributable to office costs
• Telephone, Internet, computers used to run business
but not part of COGS
• Insurance
56
57
Managing Risk
58
Managing Risk
Types of Risk:
David, Laureen & Dan Barber
• Risk mitigated by insurance (property,
general liability, auto, worker’s
compensation and perhaps business
interruption)
• Risk that partner or widow(er) will be left
with business debt (key man life insurance)
• Risk of not being paid by a foreign
customer (business credit insurance)
• Product risk due to product failure , misuse
or defects that create liabilities
59
Using Cash Flow Forecasts
Using Cash Flow Forecasts
Cash Flow Forecasting
Very important all the time:
•Making Payroll on time
•Paying Taxes
•Paying Vendors and all other obligations
•Minimizing use of expensive credit lines
Other special circumstances:
•When company is growing rapidly or business experiences a decline
Using a13-week cash flow forecast is an effective way to manage tight
cash flow during challenging times.
60
Using Cash Flow Forecasts
Cash Flow
Forecasting
Cash Balance
tab
Accounts
Receivable tab
Accounts
Payable tab
Download at: http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
61
62
Funding For Strategic Growth
Funding Sources
•
•
•
•
•
•
•
•
SBA Microloans – up to $50,000
SBA Express Loans – up to $350,000
SBA 7 (a) Loans – up to $5 million
SBA 504 Loans – up to $4 million
Buildings/Land/Capital Improvements
USDA B&I (Business and Industry) loans
CDC (Certified Development Corporation) for local
community development
Community Development Financial Institutions (CDFI)
Small Business Investment Companies (SBICs)
63
Funding Sources
• Bank / Credit Union / S&L – Term Loans, Line of Credit,
Revolving Credit
• Finance Companies – Asset based loans
• Insurance Companies – Commercial mortgages
• Leasing Companies – Any assets not intended for resale
• Seller financing – negotiated variations
• Franchisor support – Term loans for acquisition
• Angel Investors
• Personal loans
– Home equity
– Credit card
– Peer to Peer (P2P) loans
Chapter may have more local information!
64
Financing in the current business environment
• What experience have you had in the past three years to
obtain financing?
Successes and Turndowns?
Factors that helped / hurt?
• How can you improve your management of assets and
liabilities to improve cash flow?
• What can you do to improve your chance of a successful load
application?
15 minutes to discuss
65
Funding – Other SCORE resources
66
• For most commercial loans, a business plan with an accompanying
financial forecast is required.
• The SCORE workshop, Building Your Business Plan will help guide
your plan development
• A financial forecasting spreadsheet is available for download:
http://www.score-suncoast.org/QWS/SGHandouts-Financial.aspx
– Comprehensive 3 year financially planning tool
• To learn how to use the forecasting tool, talk to your mentor or
attend Simple Steps for Starting Your Business - Workshop 4 –
Financial Projections
67
Review
Review
• Accurate financial statements are critical to the
success of your company.
• Learning how to read an income statement, balance
sheet and cash flow statement and spotting trends will
help you manage your business more effectively.
• Financial ratios help you analyze certain aspects of
your operations so you can make adjustments to
become more profitable.
68
Next Steps
• Set up your company’s cash flow 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
Help Us, Help You
Please fill out the workshop
evaluation form
Your feedback is important to
help us improve our programs!
70