knowing where you stand (finance) teleconference 6/26

1© 2009 Wright Business Institute, Inc.1

Finance forSmall Business Ownership And Success —An Adventure In Transformation

© Wright Business Institute, Inc.

2© 2009 Wright Business Institute, Inc.

What’s In It For Me?

► More certainty

► Greater accuracy, analysis, and direction

► Greater understanding of how your business works, what works, and what does not

► Improved planning

► Improved problem solving

► Less confusion

► A clear scorecard and feedback

3© 2009 Wright Business Institute, Inc.

The Six Small Business Errors in Finance

► Thinking all money you pay yourself is profit

4© 2009 Wright Business Institute, Inc.

The Six Small Business Errors in Finance

► Thinking all money you pay yourself is profit

► Not keeping good numbers

5© 2009 Wright Business Institute, Inc.

The Six Small Business Errors in Finance

► Thinking all money you pay yourself is profit

► Not keeping good numbers

► Not paying yourself for key roles

6© 2009 Wright Business Institute, Inc.

The Six Small Business Errors in Finance

► Thinking all money you pay yourself is profit

► Not keeping good numbers

► Not paying yourself for key roles

► Not trusting your numbers

7© 2009 Wright Business Institute, Inc.

The Six Small Business Errors in Finance

► Thinking all money you pay yourself is profit

► Not keeping good numbers

► Not paying yourself for key roles

► Not trusting your numbers

► Thinking accountants know business (they know accounting)

8© 2009 Wright Business Institute, Inc.

The Six Small Business Errors in Finance

► Thinking all money you pay yourself is profit

► Not keeping good numbers

► Not paying yourself for key roles

► Not trusting your numbers

► Thinking accountants know business (they know accounting)

► Over Financing

9© 2009 Wright Business Institute, Inc.

Your Two Scorecards – Balance Sheet and P&L Statement

►Balance Sheet—Lets you know your overall financial position in terms of assets and liabilities

►Profit and Loss Statement (P&L)—Lets you know the score of any given unit of time from daily to monthly, quarterly, and annually. The P&L gives you a dynamic picture of what and how you are doing.

►Today we will focus on the P&L.

10© 2009 Wright Business Institute, Inc.

Learning to “Read” Your P&L

Learning to read your P&L requires

► Understanding the basics of the P&L

► Reading the percentages within the P&L

► Reviewing comparisons of the P&L against last year, budget, or other variables

► Understanding key ratios and success factors

11© 2009 Wright Business Institute, Inc.

The Profit and Loss Statement (P&L)

►Revenue– Money in

12© 2009 Wright Business Institute, Inc.

The Profit and Loss Statement (P&L)

►Revenue– Money in

►Direct or Variable Costs—Money out

13© 2009 Wright Business Institute, Inc.

The Profit and Loss Statement (P&L)

►Revenue– Money in

►Direct or Variable Costs—Money out

►Gross Profit

14© 2009 Wright Business Institute, Inc.

The Profit and Loss Statement (P&L)

►Revenue– Money in

►Direct or Variable Costs—Money out

►Gross Profit

►Fixed (Overhead) Costs

15© 2009 Wright Business Institute, Inc.

The Profit and Loss Statement (P&L)

►Revenue– Money in

►Direct or Variable Costs—Money out

►Gross Profit

►Fixed (Overhead) Costs

►Net (Profit)

16© 2009 Wright Business Institute, Inc.

A Small Business P&L

Acme CompanyProfit & Loss StatementFor Month Ended December 31, 2008

Revenue (Sales) 46,895

Cost of Sales & Delivery 20,865

Gross Profit 26,030

Fixed Expenses 21,011

Net Profit 5,019

17© 2009 Wright Business Institute, Inc.

Revenue & Cost of Sales/Delivery Categories

Acme CompanyProfit & Loss StatementFor Month Ended December 31, 2008

Revenue (Sales) 46,895

Cost of Sales & Delivery 20,865

Gross Profit 26,030

Fixed Expenses 21,011

Net Profit 5,019

Revenue (Sales)

Consulting 20,451 Products 26,444 Open CategoryTotal Revenue (Sales) 46,895

Cost of Sales & Delivery

Sales Commissions 4,298 Delivery Costs 16,567 Open CategoryTotal Cost of Sales & Delivery 20,865

18© 2009 Wright Business Institute, Inc.

Fixed Expense Categories

Acme CompanyProfit & Loss StatementFor Month Ended December 31, 2008

Revenue (Sales) 46,895

Cost of Sales & Delivery 20,865

Gross Profit 26,030

Fixed Expenses 21,011

Net Profit 5,019

Fixed Expenses

Payroll 5,104 Outside services 6,532 Rent 4,875 Supplies 1,155 Taxes (real estate, etc.) 1,000 Utilities 842 Advertising 288 Telephone 389 Car, delivery and travel 387 Accounting and legal 189 Insurance 250 InterestDepreciationOpen CategoryTotal Expenses 21,011

19© 2009 Wright Business Institute, Inc.

Percentage

Change figures

Dec

08

Act

uals

% o

f To

talR

even

ue

Revenue (Sales)

Consulting 20,451 44%Products 26,444 56%Open CategoryTotal Revenue (Sales) 46,895 100%

Cost of Sales & Delivery

Sales Commissions 4,298 9%Delivery Costs 16,567 35%Open CategoryTotal Cost of Sales & Delivery 20,865 40%

Gross Profit 26,030 56%

Fixed Expenses

Payroll 5,104 11%Outside services 6,532 14%Rent 4,875 10%Supplies 1,155 2%Taxes (real estate, etc.) 1,000 2%Utilities 842 1.8%

% o

f Tot

al

Rev

enue

Dec

08

Act

ual

20© 2009 Wright Business Institute, Inc.

Actuals to Budget

Dec

08

Act

uals

Dec

08

Bud

get

$ va

rian

ce

%

Revenue (Sales)

Consulting 20,451 25,000 (4,549) -18%Products 26,444 25,000 1,444 6%Open CategoryTotal Revenue (Sales) 46,895 50,000 (3,105) -6%

Cost of Sales & Delivery

Sales Commissions 4,298 5,000 702 14%Delivery Costs 16,567 15,000 (1,567) -10%Open CategoryTotal Cost of Sales & Delivery 20,865 20,000 (865) -4%

Gross Profit 26,030 30,000 (3,970) -13%

Fixed Expenses

Payroll 5,104 5,000 (104) -2%Outside services 6,532 5,000 (1,532) -31%Rent 4,875 5,000 125 3%Supplies 1,155 1,500 345 23%Taxes (real estate, etc.) 1,000 1,000 0 0%Utilities 842 700 (142) -20%Advertising 288 500 212 42%

21© 2009 Wright Business Institute, Inc.

Comparison to Previous Year

Dec

08

Act

uals

Dec

07

Act

uals

$ va

rian

ce

%

Revenue (Sales)

Consulting 20,451 23,677 (3,226) -14%Products 26,444 25,678 766 3%Open CategoryTotal Revenue (Sales) 46,895 49,355 (2,460) -5%

Cost of Sales & Delivery

Sales Commissions 4,298 4,067 (231) -6%Delivery Costs 16,567 17,888 1,321 7%Open CategoryTotal Cost of Sales & Delivery 20,865 21,955 1,090 5%

Gross Profit 26,030 27,400 (1,370) -5%

Fixed Expenses

Payroll 5,104 4,864 (240) -5%Outside services 6,532 7,335 803 11%Rent 4,875 4,875 0 0%Supplies 1,155 1,289 134 10%Taxes (real estate, etc.) 1,000 900 (100) -11%Utilities 842 902 60 7%Advertising 288 401 113 28%

22© 2009 Wright Business Institute, Inc.

Paying Yourself

Cost of Sales & Delivery

Sales Commissions 4,298 Delivery Costs 16,567 Open CategoryTotal Cost of Sales & Delivery 20,865

Your Sales Commission

Fixed Expenses

Payroll 5,104 Outside services 6,532 Rent 4,875 Supplies 1,155 Taxes (real estate, etc.) 1,000 Utilities 842

Acme CompanyProfit & Loss StatementFor Month Ended December 31, 2008

Revenue (Sales) 46,895

Cost of Sales & Delivery 20,865

Gross Profit 26,030

Fixed Expenses 21,011

Net Profit 5,019

23© 2009 Wright Business Institute, Inc.

Paying Yourself

Cost of Sales & Delivery

Sales Commissions 4,298 Delivery Costs 16,567 Open CategoryTotal Cost of Sales & Delivery 20,865

Your Sales Commission

Fixed Expenses

Payroll 5,104 Outside services 6,532 Rent 4,875 Supplies 1,155 Taxes (real estate, etc.) 1,000 Utilities 842

Your Pay for Delivery

Acme CompanyProfit & Loss StatementFor Month Ended December 31, 2008

Revenue (Sales) 46,895

Cost of Sales & Delivery 20,865

Gross Profit 26,030

Fixed Expenses 21,011

Net Profit 5,019

24© 2009 Wright Business Institute, Inc.

Paying Yourself

Cost of Sales & Delivery

Sales Commissions 4,298 Delivery Costs 16,567 Open CategoryTotal Cost of Sales & Delivery 20,865

Your Sales Commission

Fixed Expenses

Payroll 5,104 Outside services 6,532 Rent 4,875 Supplies 1,155 Taxes (real estate, etc.) 1,000 Utilities 842

Your Pay for Delivery

Your Administrative

Salary

Acme CompanyProfit & Loss StatementFor Month Ended December 31, 2008

Revenue (Sales) 46,895

Cost of Sales & Delivery 20,865

Gross Profit 26,030

Fixed Expenses 21,011

Net Profit 5,019

25© 2009 Wright Business Institute, Inc.

Paying Yourself

Cost of Sales & Delivery

Sales Commissions 4,298 Delivery Costs 16,567 Open CategoryTotal Cost of Sales & Delivery 20,865

Your Sales Commission

Fixed Expenses

Payroll 5,104 Outside services 6,532 Rent 4,875 Supplies 1,155 Taxes (real estate, etc.) 1,000 Utilities 842

Your Pay for Delivery

Your Administrative

Salary

Acme CompanyProfit & Loss StatementFor Month Ended December 31, 2008

Revenue (Sales) 46,895

Cost of Sales & Delivery 20,865

Gross Profit 26,030

Fixed Expenses 21,011

Net Profit 5,019

Your Profit

26© 2009 Wright Business Institute, Inc.

The Three Musts in Constructing Your General Ledger

1. Record your sales and pay yourself a commission as a salesperson.

27© 2009 Wright Business Institute, Inc.

The Three Musts in Constructing Your General Ledger

1. Record your sales and pay yourself a commission as a salesperson.

2. Record your personal delivery hours and wages and pay yourself as you would any delivery person.

28© 2009 Wright Business Institute, Inc.

The Three Musts in Constructing Your General Ledger

1. Record your sales and pay yourself a commission as a salesperson.

2. Record your personal delivery hours and wages and pay yourself as you would any delivery person.

3. Pay yourself as an administrator.

29© 2009 Wright Business Institute, Inc.

The Three Musts in Constructing Your General Ledger

1. Record your sales and pay yourself a commission as a salesperson.

2. Record your personal delivery hours and wages and pay yourself as you would any delivery person.

3. Pay yourself as an administrator.

► Identify profit and loss—even if you choose not to pay yourself all you “earned.”

30© 2009 Wright Business Institute, Inc.

The Three Musts in Constructing Your General Ledger

1. Record your sales and pay yourself a commission as a salesperson.

2. Record your personal delivery hours and wages and pay yourself as you would any delivery person.

3. Pay yourself as an administrator.

► Identify profit and loss—even if you choose not to pay yourself all you “earned.”

► Distinguish profit from salary.

31© 2009 Wright Business Institute, Inc.

► What is the first thing you look at and why?

Reading Your Profit and Loss Statement

32© 2009 Wright Business Institute, Inc.

► What is the first thing you look at and why?

► What is the second thing you look at and why?

Reading Your Profit and Loss Statement

33© 2009 Wright Business Institute, Inc.

► What is the first thing you look at and why?

► What is the second thing you look at and why?

► What are the three most important lines on your P&L?

Reading Your Profit and Loss Statement

34© 2009 Wright Business Institute, Inc.

► What is the first thing you look at and why?

► What is the second thing you look at and why?

► What are the three most important lines on your P&L?

► How do you use your P&L to analyze apparent successes and problems?

Reading Your Profit and Loss Statement

35© 2009 Wright Business Institute, Inc.

► What is the first thing you look at and why?

► What is the second thing you look at and why?

► What are the three most important lines on your P&L?

► How do you use your P&L to analyze apparent successes and problems?

► How do you use your P&L to plan?

Reading Your Profit and Loss Statement

36© 2009 Wright Business Institute, Inc.

► What is the first thing you look at and why?

► What is the second thing you look at and why?

► What are the three most important lines on your P&L?

► How do you use your P&L to analyze apparent successes and problems?

► How do you use your P&L to plan?

► What is the most important line in your P&L to drive your business day-to-day?

Reading Your Profit and Loss Statement

37© 2009 Wright Business Institute, Inc.

The Map – Overview and Review

Level 1

Level 2

Level 3

Level 4

Level 5

Level 6

Initiating

Establishing

Emerging

Differentiating

Generating

Self-Developing

38© 2009 Wright Business Institute, Inc.

Initiating – Financial Overview

Level 1 Initiating

Level 2 Establishing

Level 3 Emerging

Level 4 Differentiating

Level 5 Generating

Level 6 Self-Developing

• No P&L• Don’t know how to use it• Think money you get is profit• Irregular pay--generally just write

checks as needed• You are the bookkeeper.• Financing with

• SBA loan• Savings• Credit card• Family loans• Family investments

39© 2009 Wright Business Institute, Inc.

Establishing – Financial Overview

Level 1 Initiating

Level 2 Establishing

Level 3 Emerging

Level 4 Differentiating

Level 5 Generating

Level 6 Self-Developing

• May have P&L• Still don’t know how to use your P&L• Still don’t trust numbers • Just learning to read P&L• Use P&L a little• Still think money you pay yourself is

profit• Cash flow is beginning to be a

challenge.• Either you are the bookkeeper or you

have a part time one• Financing with savings and credit cards• You need to guarantee loans, if any,

personally.

40© 2009 Wright Business Institute, Inc.

Emerging – Financial Overview

Level 1 Initiating

Level 2 Establishing

Level 3 Emerging

Level 4 Differentiating

Level 5 Generating

Level 6 Self-Developing

• P&L and basic finance in place• Learning to read and use P&L• Cash flow is a challenge for many,

especially service businesses.• Banks will now pay attention to you.• You are on a first name basis with your

banker.• Using line of credit to finance.• You are moving toward a full time

bookkeeper.• You still need to guarantee loans

personally.

41© 2009 Wright Business Institute, Inc.

Differentiating – Financial Overview

Level 1 Initiating

Level 2 Establishing

Level 3 Emerging

Level 4 Differentiating

Level 5 Generating

Level 6 Self-Developing

• Your bookkeeping is useful in analyzing your business.

• If you haven’t begun budgeting yet, you find the need to project and allocate because you have too many variables going to just deal with things as needed.

• You are now more attractive to all kinds of investors.

• You are developing your financial systems for scalability

• You likely have a full time bookkeeper.• You probably still guarantee loans

personally.

42© 2009 Wright Business Institute, Inc.

Generating – Financial Overview

ThisLevel 1 Initiating

Level 2 Establishing

Level 3 Emerging

Level 4 Differentiating

Level 5 Generating

Level 6 Self-Developing

• You have an accounting staff.• You may finance major moves rather

than using your own capital.• You no longer need to guarantee loans

yourself.• Your compensation systems are

beginning to be very focused.• You may be considering going public, if

you are not committed to staying private.

43© 2009 Wright Business Institute, Inc.

Generating – Financial Overview

ThisLevel 1 Initiating

Level 2 Establishing

Level 3 Emerging

Level 4 Differentiating

Level 5 Generating

Level 6 Self-

Developing

• You use the full range of financing.• You have systems of accountability that

support the company mission• Your systems of reward maximize

performance• You consider going public (IPO).

44© 2009 Wright Business Institute, Inc.

► Microloans

► SBA loans

► Franchise financing

► Developmental financing with SBA 504 loans

► Import/export loans

► Bank financing

Small Business Financing

45© 2009 Wright Business Institute, Inc.

► Angel Investors

► Venture Capital

► Investment Bankers

► Leasing

► Sell Stock (IPO)

► Merge

Other Financing