1 / 24

Building Better Financials

Building Better Financials. Using Pro-Forma Financial Statements & Their Importance to Your Enterprise Drew Tulchin & Michael Whitehead-Bust Social Enterprise Alliance 5 th National Gathering March 5 th , 2004. Who You Are & What Brought You Here Today. What is your primary job title?

jradford
Download Presentation

Building Better Financials

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Building Better Financials Using Pro-Forma Financial Statements & Their Importance to Your Enterprise Drew Tulchin & Michael Whitehead-Bust Social Enterprise Alliance 5th National Gathering March 5th, 2004

  2. Who You Are & What Brought You Here Today • What is your primary job title? • What is your familiarity & comfort with financial statements? • What have you used for financial modeling to date? • When you leave this session, you hope…

  3. Drew Tulchin Social Enterprise Associates: applies business tools to achieve financial & social ‘double bottom line’ results. (www.socialenterprise.net) MBA Winner, 2001 Global Social Venture Competition & Microenterprise Paper Finalist, “Non-profits Accessing Capital Markets” I’m the one with the goat-tee Michael Whitehead-Bust Foxhall Consulting Services: supporting mission-driven entrepreneurs. Services: business planning, strategic planning, development (www.foxhallconsulting.com) MBA/CFA Winner, 2001 ICIC/National Business School Network. National competition for strategy consulting to inner city businesses I’m the one with the goat-tee Who We Are

  4. Session Overview • Introductions • Value, Importance & Theoretical Framework • Key Pro-Forma Components • Building a Pro-Forma Model • Identifying key assumptions & drivers • Expense & revenue estimates • One year income statement by month • Breakeven calculations • Five-year income, balance & cash flow statements • Handling Mission-Related Expenses & Overhead

  5. Goals Increase comfort with financial statements Impart skills / gain confidence to use pro-forma analysis as a central component of decision-making Explore pro-forma basics Emphasize importance of good research and realistic assumptions Limitations We are not accountants (nor do we wish to be) Financial analysis is a tool, and but one tool, for management decision-making Time allotted for this session limits what we can share Our sense of humor (sorry, no refunds) Session Goals…(& Limitations)

  6. The Value of Pro-Formas(Or, What’s Wrong with Just Using a Budget?) Management – understand the past & the present • Better understand cost/benefits of mission-driven components • Ratio analysis & benchmarking • Ability to perform (and interpret) sensitivity analysis Strategy & Planning – prepare for the future • Forward thinking (Year 1 by month and Years 2-5 by year) • Facilitates more rational decision-making by clarifying business opportunity • Forced articulation of assumptions and clarification of research/data $$$ – allocate resources, explain situations & raise capital • Balance sheet and cash flow statement can highlight risks • Used in evaluation to access new sources of capital (especially lenders, socially responsible investors, venture philanthropists, etc.)

  7. Tips at the Start Use Appropriate Resources • Repeat, “I will not do my pro-formas in MSWord, Excel is my friend” • Invest in high-quality market research & choose meaningful benchmarks • Pay for a good accountant/finance person • May not be the person currently handling your books • Better a passionate business-minded person who understands your mission, than the reverse An Art / Language, Not a Science • Finance people are still subjective • Make your work accessible & understandable to others • Be clear about assumptions; acknowledge what you don’t know Prepare, But Also Be Flexible • Things will change (little-known Harvard Study) • Allow for more time, budget for higher expenses & assume less revenue • Get comfortable with red ink (non-profits aren’t use to losses)

  8. Pro-Forma Process Framework 1) Where are you now? 2) What is the goal? • Spin-off business applying job training & earns income • Benefit from brand recog. in community • Capitalize upon existing org skills in food industry Stable, successful job training program with access to new $$$ 3) What are the incremental steps to advance? • Get board buy-in • Conduct feasibility study • Etc.

  9. Philosophy / Key Concepts • Incrementation: think in units • Children’s building blocks • Establish a compelling story • But, be realistic, transparent & state your logic • Know your goals • Separate financial from mission-driven • Understand limitations / pressures on each • Earned income = Net Income • Producing profits or just generating revenue? • Build, measure, build, measure, build • (The carpenter’s ‘measure twice, cut once’ - measure continuously, because what you are cutting keeps changing)

  10. Pro-Forma Components • Key assumptions w/ market data • Income Statement: • Yr 1 monthly, Yrs 2-5 annually • Balance Sheet: Yrs 1-5 annually • Cash Flow Statement: • Yr 1 monthly, Yrs 2-5 annually • Breakeven Analysis

  11. Definitions / Key Terms • Variable/Fixed Costs • Variable costs differ based on activity level. Typically driven by number of customers • Fixed costs remain constant, regardless of sales volume • Contribution Margin • Revenues – variable expenses = contribution margin • Operating Leverage • Ratio: fixed to variable expenses • Assumptions / Drivers • Sensitivity Analysis • Evaluation of changes in business results based on alterations to key assumptions

  12. Begin the Model w/ Assumptions • Establish the background story • Select a reasonable goal • Gather data • Determine key indicators • Establish driving unit(s) of measurement Note:the more specific you are with real information for outputs and outcomes, the easier it is to build towards them…(while being prepared they WILL change)

  13. Assumptions – Expenses Audience Participation Activity (polite applause): • List major expenses • Classify: fixed or variable? • Identify unit(s) of measurement • Select drivers (what indicates the amounts?) • Consider growth rates / change over time

  14. Assumptions – Revenues • Follow same steps from expenses • List revenues, separate by product • Establish the base unit for ‘incrementation’ • Determine a defendable growth rate • Philanthropic sources excluded at this time to focus on project revenue, but note potential exceptions: • if project produces incremental philanthropic stream (i.e. grants specifically tailored for the project) • if project requires grants for social benefits that are incremental, but inherent, project costs

  15. Determine monthly sales growth rate Separate, describe behavior and timing of fixed / variable expenses Include mission-related expenses, revenues, and org overheads UBIT Quick view of year one profitability / losses Likely not the best evaluation of the opportunity Insight into capital needs Insight into level of risk Monthly Income Statement Steps Outcomes

  16. 2-5 Year Income Statements Revisit original growth assumptions. Carry them forward, with applicable changes, for years 2-5 REMEMBER: • Additional staffing, equipment, space, other needs • Overhead allocations • Even conservative projections are often optimistic – base assumptions on sound data • Rationality wanes after Year 3 (sometimes before). Don’t ‘bet the farm’ on Year 5 projections

  17. 5 Year Balance Sheets • Articulate assumptions: • A/P • A/R • Inventory • Capital Expenses & Depreciation • Financing / Capital Structure: Debt? PRI? Philanthropy? Parent Org investment? Note:Ensure consistency with I/S assumptions

  18. Cash Flow Statements • Monthly (Year 1), yearly Years 2-5 • Note model structure • Work with good financial professionals • Be prepared for red, but have a plan (in advance) • Can have positive net income, but be cash flow negative

  19. Breakeven Analysis • The Formula: Fixed Costs / (revenue per unit – variable costs per unit) = BEP in units • Is it attainable? • Does market research back it up? • What is capacity? • Account for start-up costs/overhead allocations Advanced Note:Do you know your degree of operating leverage?

  20. Handling Mission-Driven Costs • Distinguish whenever possible • Promotes management of “business” side and “program” side • Increases appeal to funders • Facilitates social return & SROI analysis • Initial goal statements make it easier to attend to mission in terms of added expense - hard questions WILL come up

  21. How to Handle Overhead Allocations? • Handle in strategic & thoughtful manner • Depends on entity’s legal status • ‘Gray area’ treatment as fixed or variable • Have an easily explained story • Have information be transparent in assumptions

  22. Final Thoughts • Do your research • Clarify goals (& costs) of mission-related activity • Rigorously research & analyze • This is a living document • Listen to what it tells you, but utilize all tools / data • Have fun

  23. Resources • Robert Higgins. Analysis for Finance Management • Jeffry Timmons. (Note spelling).New Venture Creation: Entrepreneurship for the 21st Century • The Motley Fool • What others do you recommend?

  24. Questions & Answers Michael Whitehead-Bust: mbust@comcast.net www.foxhallconsulting.com(coming soon) Drew Tulchin: drew@socialenterprise.net www.socialenterprise.net

More Related