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Financial ManagementFOR

Non-Financial Entrepreneurs/Managers

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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

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General Management Functions

• Planning

• Organizing

• Leading/Staffing

• Controlling

• Reviewing/Re-evaluation

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• Obtain funds (cash/loans) for the company at the lowest possible cost.

• Use obtained funds to maximize profits.

Financial Management Functions

• Plan & control the finances of the company to achieve its objectives.

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OR

An Overview

The Business Plan

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Business Plan ElementsProduct/ServiceMarket

LocationCompetition

Risks & Contingency

Plans

Market Opportunity

Mission of the Enterprise

Major Goals

Ownership

Management& Personnel

Plans

Legal Structure

KeySuccessFactors

DEPARTMENTPLANS

Logistics

Operations

Marketing

Admin

Sales

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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 Measurementsnwoscore.org

•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.

Good Recordkeeping (a must)

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• 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.

Good Recordkeeping (a must)

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THE BUSINESS OWNER’S “GOLDEN RULE”:

Good Recordkeeping (a must)

DO NOT CO-MINGLE (MIX) BUSINESS &

PERSONAL FUNDS!!!

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• 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.

Good financial records allows an owner to analyze & evaluate his/her business.

Good Recordkeeping (a must)

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Financial Statements

• Cash Flow Statement• Income Statement (Profit & Loss)• Balance Sheet

In order of importance:

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Inter-Relationship of Key Financial Statements

Balance SheetFinancial condition at a point in time

Balance SheetFinancial condition at a point in time

Income StatementSummary of activity for a period of time

Statement of Cash Flows

Summary of activity for a period of time

Reporting ofBusiness Activity

End of YearBeginning of Year

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Balance Sheet

See Handout Number 1 for Detailed Example of a 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).

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Balance Sheet

• Resources of the Business

LiabilitiesAssets

• What is owed to outside creditors

Owner’s Equity• ASSETS - LIABILITIES = NET

WORTH• Positive means solvent

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.

A = L + O.E.

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Balance Sheet

• Assets− Current Assets

Cash Inventories Accounts Receivable Prepaid Expenses.

− Long term assets Land Buildings Equipment

Generally, assets require the use of cash—but not always.

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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.

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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.

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Income/(Loss) Statement

See Handout Number 2 for Detailed Example of an Income/(Loss) Statement

The Income/(Loss) Statement shows Revenue & Expense activity over a period of time—usually a month or year.

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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.

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Cash Flow Statement

See Handout Number 3 for Detailed Example of a 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.

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Cash Flow Statement

• Avoid Confusion in Terms. Cash provided/(used for). Sources/(uses). From/(used for). Sources/(Applications). Cash in/(Cash out).

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• Operating Activities. Income/(Loss). Depreciation—a

non-cash expense. Inventories. Accounts

Receivable. Accounts Payable.

Cash Flow StatementKey parts of the statement—cash

provided/(used for):• Investing Activities. Purchase property &

equipment. Purchase Investments.

• Financing Activities. Increase long term Debt. Debt Retirement. Issue Capital

Stock/increase ownership.

Dividends paid.nwoscore.org

• 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?

The keys to business success:

CASH FLOW

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CASH COMING

IN

Cash Flow

CASHGOINGOUT

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Simply speaking, Cash Flow is:

CASHCOMING

IN

Cash Flow

• Cash sales• Collections on

accounts receivable• Borrowed funds• Investment/ interest

income• Cash invested by

you/other investors

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CASH

GOING

OUT

Cash Flow

• Inventory purchases• Payroll & payroll tax

liabilities• Other operating costs• Loan payments• Owner distributions• Income tax liabilities

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When the movement of cash takes place over a

period of time.

Revenues minus expenses over a period

of time.

PROFIT

CASH FLOW versus PROFIT

CASH FLOW

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WHEN the movement of cash takes place over a period of

time

Revenues minus expenses over a period

of time

PROFIT

CASH FLOW versus PROFIT

CASH FLOW

Making a Profit is nice—CASH FLOW is necessaryCASH FLOW Management is key to Business Success!!!

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Cash Flow

PROFIT

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Non-Cash Expenses Depreciation—Fixed Assets Amortization—Software Goodwill

Change in Working Capital Inventories—(increase)/decrease Accounts Receivable—(inc.)/dec. Accounts Payable—inc./(dec.)

ANSWER:CASH FLOW The missing key.

Cash Flow Confusion

I HAVE NO CASH& I CAN’T PAY MY BILLS!!!

HOW CAN THAT BE?

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My Income Statement Says I Made Money (a Profit), BUT. . .

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)

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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.

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Understanding CASH FLOW

Analyzing your business’s CASH FLOW will help you predict your 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

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Understanding CASH FLOW

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.

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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!

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Preparing a CASH FLOW Projection

1. Prepare a sales forecast.

2. Project anticipated cash inflows.

3. Project anticipated cash outflows.

4. 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.

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Action Steps to Improve CASH FLOW

• 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.

What can be done short term?

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Action Steps to Improve CASH FLOW

• 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.

What can be done short term?

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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

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.

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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.

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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.

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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

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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.orgnwoscore.org

NWO SCORE Sponsors

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NW OHIO SCORE wants: To help you Live your DreamYour Support Your Client ReferralsYour Partnership

419-259-7598www.nwoscore.orgoffice@nwoscore.org

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