introduction to the financial fence (business)

© Copyright One Sherpa Pty Ltd 2008

INTRODUCTION TOTHE FINANCIAL FENCE®


The Financial Fence®Way of Thinking


• Many people who see The Financial Fence® have thought it is simply a new technique and way of reporting the numbers.


• It is however a completely different way of thinking about the numbers which changes the paradigm around how you

and measure its performance.fund a business


Why use a fence?

1. Fences are made of two parts :A. Posts that anchor the fence into the ground at a point AND B. Rails that carry the fence over a distance.

2. Fences incorporate Milestones (Posts) and Activity (Rails) in the same analogy.

3. Financial statements have these two parts :A. “Milestones” - Balance Sheet. B. “Activity” – Profit & Loss Account & Cash

Flow Statement.

4. Fences provide a boundary and security.


MILESTONE

MILESTONE

ACTIVITY

ACTIVITY

The Standard two rail fence


The Financial Fence®

Equity

Capital Capital

Debt

Equity

Debt

THE TWO MILESTONES ON THE FINANCIAL FENCE ®

Funding



Equity

Capital Capital

Debt

Equity

Debt

Interaction withCustomers

InfrastructureExpenses

Investment inBusiness

THE THREE ACTIVITIES ON THE FINANCIAL FENCE ®



Equity

Capital Capital

Key PerformanceIndicators

Debt

Equity

Debt




PERFORMANCE MONITORING ON THE FINANCIAL FENCE ®





SINGLE DIRECTION OF MANY NON FINANCIAL EXECUTIVES

NET PROFIT



Equity

Capital Capital

Key PerformanceIndicators

Debt

Equity

Debt




DIRECTIONS REQUIRED FOR TRADINGTHE FINANCIAL FENCE ®


EQUITY

COSTOF INTERACTION

NETPROFIT

MOVEMENTIN WORKING

CAPITAL

CONTRIBUTIONMARGIN

INFRASTRUCTUREEXPENSES

OPERATING CASH FLOW

MOVEMENTIN FIXEDCAPITAL

NET PROFIT

NET CASHFLOW

FIXEDCAPITAL

WORKING CAPITAL

EQUITY

DEBT

SALES

FIXED CAPITAL

WORKING CAPITAL

DEBT

The Financial Fence® Way of Thinking


EQUITY$265,000

COSTOF INTERACTION-$1,400,000

NETPROFIT

$150,000

WORKINGCAPITAL MVT-$140,000

CONTRIBUTIONMARGIN

$350,000

INFRASTRUCTUREEXPENSES$200,000

OPERATING CASH FLOW$10,000

FIXEDCAPITAL MVT-$25,000

NET PROFIT

$150,000

NET CASHFLOW-$15,000

FIXEDCAPITAL

$375,000

WORKING CAPITAL

$230,000

EQUITY$415,000

DEBT$190,000

PROFIT & LOSS ACCOUNT“FOR THE PERIOD”

CASH FLOW STATEMENT“FOR THE PERIOD”

THE FINANCIAL FENCE ®

BALANCE SHEET“AS AT”

SALES

$1,750,000FIXED CAPITAL

$350,000

WORKING CAPITAL$90,000


DEBT$175,000

The Financial Fence® - Example Company


EQUITY$265,000


NETPROFIT

$150,000


CONTRIBUTIONMARGIN

$350,000




NET PROFIT

$150,000


FIXEDCAPITAL

$375,000

WORKING CAPITAL

$230,000

EQUITY$415,000

DEBT$190,000





SALES


$350,000



DEBT$175,000


$90,000 + $350,000 = $440,000$175,000 + $265,000 = $440,000

Milestone check


EQUITY$265,000


NETPROFIT

$150,000


CONTRIBUTIONMARGIN

$350,000




NET PROFIT

$150,000


FIXEDCAPITAL

$375,000

WORKING CAPITAL

$230,000

EQUITY$415,000

DEBT$190,000





SALES


$350,000



DEBT$175,000


$265,000 + $150,000 = $415,000

Top rail check


EQUITY$265,000


NETPROFIT

$150,000


CONTRIBUTIONMARGIN

$350,000




NET PROFIT

$150,000


FIXEDCAPITAL

$375,000

WORKING CAPITAL

$230,000

EQUITY$415,000

DEBT$190,000





SALES


$350,000



DEBT$175,000


$175,000 - - $15,000 = $190,000

Bottom rail check


PERFORMANCE MEASUREMENTLet’s look at a couple of our

measurements


RETURN ON SALES


EQUITY

COSTOF INTERACTION

NETPROFIT

MOVEMENTIN WORKING

CAPITAL

CONTRIBUTIONMARGIN


OPERATING CASH FLOW


NET CASHFLOW

FIXEDCAPITAL

WORKING CAPITAL

EQUITY

DEBT



SALES

FIXED CAPITAL

WORKING CAPITAL


DEBT

Return on Sales

ReturnSales

NET PROFIT

DEFINITIONNET PROFIT divided by SALES



CONTRIBUTIONMARGIN

$350,000


NET PROFIT

$150,000



SALES

$1,750,000


$150,000/$1,750,000*100=8.6%

ACTIVITY OF BUSINESSPROFIT TO SALES 8.6%


RETURN ON CAPITAL


EQUITY

COSTOF INTERACTION

NETPROFIT

MOVEMENTIN WORKING

CAPITAL

CONTRIBUTIONMARGIN


OPERATING CASH FLOW


NET CASHFLOW

FIXEDCAPITAL

WORKING CAPITAL

EQUITY

DEBT



SALES

FIXED CAPITAL

WORKING CAPITAL


DEBT

The Financial Fence® Primary measure

Return Capital

NET PROFIT

DEFINITIONNET PROFIT divided by TOTAL CAPITAL


EQUITY$265,000


NETPROFIT

$150,000


CONTRIBUTIONMARGIN

$350,000




NET PROFIT

$150,000


FIXEDCAPITAL

$375,000

WORKING CAPITAL

$230,000

EQUITY$415,000

DEBT$190,000





SALES


$350,000



DEBT$175,000


KEY TOP LEVEL MEASURERETURN ON CAPITAL 24.8%

$150,000/($230,000+ $375,000)*100=24.8%


EXAMPLE COMPANY

High level review

RETURN ON SALES 8.6%

RETURN ON CAPITAL 24.8%


•Which measure sounds best?


8.6% or 24.8%


•Which measure encouragesthe business owner to keepgoing?

•Which measure helps thebusiness owner appreciate thereal value of what he or she isdoing?



BUT also a far more powerful measure for the business


FIXEDCAPITAL

WORKING CAPITAL

Return Capital

NET PROFIT

RETURN ON CAPITAL BECAUSE OFTEN IT’S BIGGER


Today we can only touch the tip of the iceberg

The depth of ourbusiness

Today’spresentation


• The most effective way we have found is by taking the ‘live’ information from a business and ‘putting it on the fence’

• This allows you to see first hand how it gives a completely different perspective on your business and its performance

How to get started

• Until you take this step, your journey is educational but theoretical.

• Until you see your own information on the fence it is impossible to have a business experience with the fence.


• Understand the financial outcome of interacting with your customers

• Make sure you get your fair ‘share of the pie’ by not being squeezed by both customers and suppliers

• Reduce your business risk as a result of improved decision making

• Maximize the cash in your pocket

• Allows you to spend less time working in your business

The Advantages To You……

ADVANTAGES


• Peace of mind that your business is a great investment

• More discretionary time to spend with your family / friends / personal interests

Some Typical Real Benefits ……

• Having the freedom to make decisions and not feelsqueezed by everyone

• Don’t feel like you’re always the last in line to get paid

• Having the freedom to do the enjoyable parts of yourbusiness


Contact usEmail: [email protected]

www.thefinancialfence.comwww.onesherpa.com