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1. Financial ManagementFORNon-Financial Entrepreneurs/Managers

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2. Agenda Welcome & Introduction The Business Plan Record Keeping Financial Statements Cash Flow Income (Profit/Loss) Balance Sheet Importance of Cash Flow Analyzing the Business Conclusions nwoscore.org
3. General Management Functions Planning Organizing Leading/Staffing Controlling Reviewing/Re-evaluation nwoscore.org
4. Financial Management Functions Obtain funds (cash/loans) for the company at the lowest possible cost. Use obtained funds to maximize profits. Plan & control the finances of the company to achieve its objectives. OR nwoscore.org
5. The Business Plan An Overview nwoscore.org
6. Business Plan Elements Legal Structure Key Success Factors Product/ Service Market Location Competition Ownership Market Opportunity Mission of the Enterprise Major Goals Sales Logistics Risks & Contingency Plans DEPARTMENT PLANS Admin Operations Management & Personnel Plans Marketing Finance nwoscore.org
7. Financial Parts of the Business Plan: Financial Planning Product Costs & Pricing Profitability Plan Operating Costs Determine Cash Flow Cycle Operational Cash Flow Asset Purchases Determine Capital Needs (Cash) Owner Contributions Borrowings Metric Measurements nwoscore.org
8. Good Recordkeeping (a must) Starts with the Business Owner. Owner needs good records to: Run the business. Help with budgets & planning. Prepare, review & analyze the 3 key monthly financial statements. Understand trends through standardized metrics. Prepare Income Tax returns. nwoscore.org
9. Good Recordkeeping (a must) Consistency—well defined General Ledger/Chart of Accounts. Owner must retain oversight for all cash transactions & banking relationships. Pay all expenditures by check—except petty cash. Keep a petty cash fund (locked cashbox) for small expenses. Match vendor invoices against each check. Reconcile monthly banking statements for all checking accounts. Use of an outside professional accountant strongly advised. nwoscore.org
10. Good Recordkeeping (a must) THE BUSINESS OWNER’S “GOLDEN RULE”: DO NOT CO-MINGLE (MIX) BUSINESS & PERSONAL FUNDS!!! nwoscore.org
11. Good Recordkeeping (a must) Good financial records allows an owner to analyze & evaluate his/her business. Measures performance: This month/year vs. last month/year vs. same month last year, Actual vs. Budget, Plan, Forecast or Projection. Ratio Analysis—compares relationships between line items. Against Industry standards. Helps recognize red flags; becomes a diagnostic tool. Helps determine cash needs. Helps control inventories & accounts receivable. Allows you to take advantage of cash discounts. nwoscore.org
12. Financial Statements In order of importance: Cash Flow Statement Income Statement (Profit & Loss) Balance Sheet nwoscore.org
13. Inter-Relationship of Key Financial Statements Balance Sheet Financial condition at a point in time Balance Sheet Financial condition at a point in time Reporting of Business Activity Income Statement Summary of activity for a period of time Statement of Cash Flows Summary of activity for a period of time Beginning of Year End of Year nwoscore.org
14. Balance Sheet The Balance Sheet represents the Financial position (strength) of a company at one point in time—usually at the end of each month or for the year (12/31/xx). See Handout Number 1 for Detailed Example of a Balance Sheet. nwoscore.org
15. Balance Sheet A = L + O.E. Assets Liabilities Resources of the Business What is owed to outside creditors Liabilities & Equity show how the Assets are currently funded. Liabilities are what is owed to other people. Equity refers to Owners’ stake in the business. Owner’s Equity ASSETS - LIABILITIES = NET WORTH Positive means solvent nwoscore.org
16. Balance Sheet Generally, assets require the use of cash —but not always. Assets Current Assets Cash Inventories Accounts Receivable Prepaid Expenses. Long term assets Land Buildings Equipment nwoscore.org
17. Balance Sheet Generally, Liabilities will consume cash —but not always. Liabilities Current Liabilities Accounts Payables Short term debt due within 1 year. Taxes Payable Accrued Expenses Other Liabilities Long term Debt—due in future years Deferred Income Taxes. nwoscore.org
18. Balance Sheet Owners’ or Stockholders’ Equity provides cash resources. Owners’ Investment or Capital infusion from stockholders (common). Retained Earnings—net of income/losses accumulated from current & prior periods. nwoscore.org
19. Income/(Loss) Statement The Income/(Loss) Statement shows Revenue & Expense activity over a period of time—usually a month or year. See Handout Number 2 for Detailed Example of an Income/(Loss) Statement nwoscore.org
20. Income/(Loss) Statement Includes both cash & non-cash items of revenues & expenses. Revenues typically represent the sales of the business. Expenses are broken down in pre-determined categories (accounts) to aid in the controlling/evaluation of the costs to generate the above mentioned sales. nwoscore.org
21. Cash Flow Statement The Cash Flow Statement shows cash activity (in & out) over a period of time—usually for a month or year. This Statement also brings together the cash effects of the Balance Sheet & Income Statement. See Handout Number 3 for Detailed Example of a Cash Flow Statement nwoscore.org
22. Cash Flow Statement Avoid Confusion in Terms. Cash provided/(used for). Sources/(uses). From/(used for). Sources/(Applications). Cash in/(Cash out). nwoscore.org
23. Cash Flow Statement Key parts of the statement—cash provided/(used for): Operating Activities. Income/(Loss). Depreciation—a non-cash expense. Inventories. Accounts Receivable. Accounts Payable. Investing Activities. Purchase property & equipment. Purchase Investments. Financing Activities. Increase long term Debt. Debt Retirement. Issue Capital Stock/increase ownership. Dividends paid. nwoscore.org
24. CASH FLOW The keys to business success: What it is & what it is not. How is CASH FLOW different from profit? Understanding & Analyzing a Business’s CASH FLOW. How does CASH FLOW impact your business? What is a CASH FLOW projection & why is it important? What can be done short term to improve CASH FLOW? nwoscore.org
25. Cash Flow Simply speaking, Cash Flow is: CASH COMING IN CASH GOING OUT nwoscore.org
26. Cash Flow CASH COMING IN Cash sales Collections on accounts receivable Borrowed funds Investment/ interest income Cash invested by you/other investors nwoscore.org
27. Cash Flow CASH GOING OUT Inventory purchases Payroll & payroll tax liabilities Other operating costs Loan payments Owner distributions Income tax liabilities nwoscore.org
28. CASH FLOW versus PROFIT Cash flow profit When the movement of cash takes place over a period of time. Revenues minus expenses over a period of time. nwoscore.org
29. CASH FLOW versus PROFIT Cash flow profit WHEN the movement of cash takes place over a period of time Revenues minus expenses over a period of time Making a Profit is nice—CASH FLOW is necessary CASH FLOW Management is key to Business Success!!! nwoscore.org
30. Cash Flow PROFIT Non-Cash Expenses Depreciation—Fixed Assets Amortization—Software Goodwill Change in Working Capital Inventories—(increase)/decrease Accounts Receivable—(inc.)/dec. Accounts Payable—inc./(dec.) nwoscore.org
31. Cash Flow Confusion I HAVE NO CASH & I CAN’T PAY MY BILLS!!! HOW CAN THAT BE? My Income Statement Says I Made Money (a Profit), BUT. . . ANSWER: CASH FLOW The missing key. nwoscore.org
32. Understanding CASH FLOW Analyzing your business’s CASH FLOW will provide a much better understanding of the “timing” of CASH FLOW. Credit terms & Policies Accounts receivable (e.g.—aging) Inventory (e.g.—turns) Accounts payable (e.g.—aging) nwoscore.org
33. Understanding CASH FLOW Analyzing your business’s CASH FLOW will give you better control of CASH FLOW. IMPLEMENT INTERNAL CONTROLS: Accounts payable process requiring authorization for payment. Hand sign all checks. Use a payroll service. Open & review monthly bank statements. Keep personal & business accounts separate. nwoscore.org
34. Understanding CASH FLOW Analyzing your business’s CASH FLOW will help you predictyour CASH FLOW needs. CASH FLOW PROJECTIONS: Prepare cash flow projection (weekly or monthly). Compare actual CASH FLOW performance to the projection/forecast. Track quarterly, annual & periodic payments nwoscore.org
35. What is a CASH FLOW Projection? A CASH FLOW Projection is a budget (estimate) of the cash flowing in & out of your business over a period of time in the future (monthly, quarterly, etc.). A CASH FLOW Projection is a plan. nwoscore.org
36. Why Do a CASH FLOW Projection? A business that fails to plan… plans to fail (by default). Surveys of failed businesses indicate that 60% failed due to CASH FLOW problems. Don’t be one of them! nwoscore.org
37. Preparing a CASH FLOW Projection Prepare a sales forecast. Project anticipated cash inflows. Project anticipated cash outflows. Combine 1-3 into a net cash flow projection for a week, month, quarter, or year. Sample CASH FLOW Projection template included in your packet—see Handout Number 4. nwoscore.org
38. Action Steps to Improve CASH FLOW What can be done short term? Prepare a CASH FLOW Projection. Review accounts receivables. Increase collection efforts on past due accounts. Revise credit policy to encourage prompt payment. Evaluate current inventory & market demand. Sell slow moving & obsolete items. Reduce inventory levels. nwoscore.org
39. Action Steps to Improve CASH FLOW What can be done short term? Negotiate extended payment terms with vendors. Seek a short-term loan from outside sources—Line of Credit (LOC). Renegotiate long-term loans. Decrease owners’ distributions. Implement a Cost Reduction Program. Layoffs, wage freezes, reduce employee benefits, other cost reductions. nwoscore.org
40. Reviewing Financial Statements Traditional Financial Statements. Handouts 1, 2 & 3. Trend Financial Statements. Handout No. 5—12 month Income/(Loss) Statement. Handout No. 6—12 month Sales/Adm. Expenses. Handout No. 7—12 month Balance Sheet. Handout No. 8—12 month Cash Flow Statement. nwoscore.org
41. Trend Financial Statements Allows viewing multiple periods (months) at one time. Much easier to see (seasonal) trends. Unusual events—expenses, account balances also easier to see. Can be tailored to your company needs/operations. Makes for more meaningful graphic representations. nwoscore.org
42. Ratios--Analyzing Financial Statements Refer to Handout: Reading & Understanding Financial Statements—pages 13 – 14: Measuring Return on Investment. Return on Equity. Return on Assets. Measuring Safety & Liquidity. Net Working Capital. Current Ratio. Liabilities to Equity Ratio. Times Interest Earned. Debt Service Ratio. nwoscore.org
43. Ratios--Analyzing Financial Statements Refer to Handout: Reading & Understanding Financial Statements—page 15: Measuring Operating Efficiency. Average Collection Period. Receivables Turnover. Number of Days’ Sales Inventory. Inventory Turnover. nwoscore.org
44. Conclusions It all starts with pro-active Planning. When you’re out of cash, you’re out of business! Analyze your cash flow & business performance—establish measurable metrics. More inventory turns means more cash/profit! Faster collections means more cash/profit! Keep good (excellent) records. Banks look for the 5 C’s: Capacity, Capital, Credit, Collateral, Character nwoscore.org
45. Conclusions Select an accountant that specializes in small business. Build & use meaningful financial statements (e.g., QuickBooks)—every month! Work with a financial resource that understands you & your business. Set up an Advisory Board to mentor you. Use NWO SCORE resources. Nwoscore.org nwoscore.org
46. NWO SCORE Sponsors nwoscore.org
47. NW OHIO SCORE wants: To help you Live your Dream Your Support Your Client Referrals Your Partnership www.nwoscore.org office@nwoscore.org 419-259-7598 nwoscore.org