Management by MeasurementManagement by Measurement

2009 BUSINESS BY THE NUMBERS SERIES

Monthly Webinars geared toward helping businesses succeed in the new economy

COST: ~Bassett clients FREE ~Monthly subscription @ $29/month or

$275/year

JOIN OUR Online MEETUP GROUP for announcements and instructions

Today’s AgendaToday’s Agenda Financial Statements Using Your Accounting Software

as a Management Tool Financial Ratios Key Performance Indicators

(KPIs) Your “Smart Number”

Financial StatementsFinancial Statements

Balance Sheet Income Statement (P&L) Cash Flow Statement

Understanding Financials Gross Revenue Gross Profit NET Profit

WHAT ARE YOUR REAL COST OF GOOD SOLD? (COGS)

Service Businesses - PRIME COSTS

PRIME COST TRACKER

EXAMPLES: Before & After

Balance SheetBalance Sheet Snapshot of what you own and

what you owe.

Assets = Liabilities + Net Worth

CURRENT ASSETSCash 191,617$ Accounts Receivable 385,349 Inventory 297,000 Prepaid Taxes 43,474 Total Current Assets 917,440

FIXED ASSETS, NET 117,190

OTHER ASSETS, NET 139,992

TOTAL ASSETS 1,174,622$

CURRENT LIABILITIESAccounts Payable 210,239$ Accrued Expenses 8,909 Total Current Liabilities 219,148

LONG-TERM LIABILITIESShareholder Loan 273,940 Total Long-term Liabilities 273,940

Total Liabilities 493,088

STOCKHOLDER'S EQUITYCommon Stock 20,000 Retained Earnings 661,534 Total Stockholder's Equity 681,534

Total Liabilities & Stockholder's Equity 1,174,622$

FOR THE YEAR ENDED DECEMBER 31, 2007

LIABILITIES AND STOCKHOLDER'S EQUITY

ASSETS

BANNER CORPORATIONBALANCE SHEET

Income StatementIncome Statement Shows revenues (sales) and

expenses over a period of time.

Important to focus on Gross Profit and Margins (not just net income).

SALES 2,632,499$

COST OF SALESMaterials 1,397,634 Direct Labor 195,096 Other 126,524

TOTAL COST OF SALES 1,719,254

GROSS PROFIT 913,245

EXPENSESAdvertising 39,726 Amortization 17,797 Auto and truck expense 9,745 Depreciation 99,503 Dues and subscriptions 1,491 Insurance 23,568 Interest 79,953 Miscellaneous 11,332 Office Expense 23,919 Professional fees 7,653 Property Taxes and Licenses 5,077 Rent 108,000 Repairs and maintenance 52,772 Salaries, Benefits & Payroll Taxes 340,762 Telephone 6,666 Travel and entertainment 19,296

OPERATING EXPENSES 847,260

OTHER INCOME 38 INCOME BEFORE INCOME TAXES 66,023

INCOME TAXESFederal 17,460 State 7,008 NET INCOME 41,555$

BANNER CORPORATION

FOR THE YEAR ENDED DECEMBER 31, 2007INCOME STATEMENT

Income StatementIncome Statement Cost of Goods Sold (COGS) = all

direct costs of providing a product or service.

Gross Profit = Sales – COGS Gross Profit % = Gross Profit /

Sales Breakeven = Fixed Costs / GP%

Cash Flow StatementCash Flow Statement Most important financial statement

because cash is king!

Measures cash flow from 3 activities Operations Financing Investing

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income 41,555$ Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 99,503

Amortization 17,797

Increase in accounts receivable (57,247)

Increase in inventory (56,000)

Increase in prepaid taxes (43,475)

Increase in payables 23,492

NET CASH PROVIDED BY OPERATING ACTIVITIES 25,625

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets (19,624)

CASH USED BY INVESTING ACTIVITIES (19,624)

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowing - Shareholder Loan 77,955

CASH PROVIDED BY FINANCING ACTIVITIES 77,955

NET INCREASE IN CASH 83,956

CASH, JANUARY 1, 2007 107,661

CASH, DECEMBER 31, 2007 191,617$

STATEMENT OF CASH FLOWS (INDIRECT METHOD)BANNER CORPORATION

FOR THE YEAR ENDED DECEMBER 31, 2007

CASH FLOWS FROM OPERATING ACTIVITIES

Cash collected from customers 2,506,378$

Interest and dividends received 38

Other operating cash receipts, if any 4,261

Cash paid to employees and other suppliers of goods and services (2,391,672)

Interest paid -

Income taxes paid (91,380)

Other operating cash payments, if any (2,000)

NET CASH PROVIDED BY OPERATING ACTIVITIES 25,625

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets (19,624)

CASH USED BY INVESTING ACTIVITIES (19,624)

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowing - Shareholder Loan 77,955

CASH PROVIDED BY FINANCING ACTIVITIES 77,955

NET INCREASE IN CASH 83,956

CASH, JANUARY 1, 2007 107,661

CASH, DECEMBER 31, 2007 191,617$

STATEMENT OF CASH FLOWS (DIRECT METHOD)BANNER CORPORATION

FOR THE YEAR ENDED DECEMBER 31, 2007

Bad Income and Expense StatementBad Income and Expense Statement

Jan - Dec 07Income

Sales 325,486.71Total Income 325,486.71Cost of Goods Sold

Purchase Discounts 35.63Cost of Goods Sold

Retail Items 1,141.62Folders 1,513.89Supplies

Office Supplies 169.24Printing & Binding 9,238.55Adhesives 827.37Glue 243.81Supplies - Other 47,518.23

Total Supplies 57,997.20

Hazardous Removal Cost 14,724.59Specialists

Fax 32.00Copywriter 5,043.00Specialists - Other 1,121.00

Total Specialists 6,196.00

Editor 15,024.72Total Cost of Goods Sold 96,598.02

Total COGS 96,633.65Gross Profit 228,853.06

ExpenseVehicle Expense 98.62Credit Card Fees 6,679.45Professional Fees 12,760.00Salaries & Wages

Subcontract Labor 3,675.00Salary-Staff Hourly 82,215.38Salary-Officer 15,432.16Salaries-Contract workers 7,684.42Salaries & Wages - Other 2,587.00

Total Salaries & Wages 111,593.96Misc -264.00Major Equipment 20,000.00Contribution 150.00Licenses and Fees 153.47Legal Fees 125.00Loan Payments 5,000.00Accounting and Payroll Services 4,678.14Advertising and promotion

Internet 21.73Classified Ads 174.21Magazine 150.00

ABC Services, LLC

Statement of Income and ExpensesJanuary through December 2007

Bad Income and Expense Statement (cont.)

Bad Income and Expense Statement (cont.)

Brochures/Flyers/Postcards 715.99Other forms of Advertising 51.34Local Advertising 480.00Internet Listing 495.00Phone Book 889.87Advertising and promotion - Other 647.81

Total Advertising and promotion 3,625.95

Amortization Expense 5,212.58Bank Charges 67.54Business Gifts 49.99Computer Support 126.57Depreciation 1,410.10Dues and Subscriptions 312.68Employer Payroll taxes 15,706.00Insurance

Liability Insurance 110.00Business Owners Insurance 75.00Workers Compensation 862.33Insurance - Other 8,217.16

Total Insurance 9,264.49Interest Expense 12,898.77Meals and entertainment 456.21Minor equipment 75.00Office expense

Computer Repair/Maintenance 857.92Toiletries 8.20Ink for Printers/Fax 295.95Paper 81.24Misc. Supplies 136.36Cleaning Supplies 233.96Office expense - Other 4,587.41

Total Office expense 6,201.04Payroll Suspense -13,084.93Postage 563.47Rent 23,621.78Repairs and maintenance 2,110.08Security System 78.15Staff events 141.45Taxes and licenses 591.11Telephone - Phone/Internet/Ads 14,962.87Travel 435.80Uniforms 66.23Utilities

Phone/Internet 514.02Electric 1,075.42

Total Utilities 1,589.44Wages

Contract Workers 0.00Total Wages 0.00

Total Expense 247,457.01Net Income -18,603.95

Good P&LGood P&L

Jan - Dec 07Income

Advertising Revenue 260,389.37Subscription Revenue 65,097.34

Total Income 325,486.71Cost of Goods Sold

Cost of Goods SoldRetail Items 1,177.25Folders 1,513.89Printing & Binding 72,721.79Copywriter 6,196.00Editor 15,024.72

Total Cost of Goods Sold 96,633.65Gross Profit 228,853.06

ExpenseAdvertising and promotion 3,625.95Amortization Expense 5,212.58Bank Charges 67.54Business Gifts 49.99Computer Support 126.57Contribution 150.00Credit Card Fees 6,679.45Depreciation 1,410.10

Dues and Subscriptions 312.68Employer Payroll taxes 15,706.00Insurance 9,264.49Interest Expense 12,898.77Legal Fees 125.00Licenses and Fees 153.47Meals and entertainment 456.21Office expense 6,012.04Postage 563.47Professional Fees 17,438.14Rent 23,621.78Repairs and maintenance 2,110.08Salaries & Wages 98,509.03Staff events 141.45Taxes and licenses 591.11Telephone 14,962.87Travel 435.80Uniforms 66.23Utilities 1,667.59Vehicle Expense 98.62

Total Expense 222,457.01Net Income 6,396.05

ABC Services, LLC

Statement of Income and ExpensesJanuary through December 2007

P&L - Current Year Versus Prior YearP&L - Current Year Versus Prior Year

Jan - Mar 07 Jan - Mar 06 $ Change % Change

Ordinary Income/ExpenseIncome 193,205.00 96,700.00 96,505.00 99.8%

Cost of Goods Sold 80,728.02 100,032.86 -19,304.84 -19.3%

Gross Profit 112,476.98 -3,332.86 115,809.84 -3,474.79%

Expense2400 · General and Administrative 40,098.16 34,824.62 5,273.54 15.1%

Total Expense 40,098.16 34,824.62 5,273.54 15.1%

Net Ordinary Income 72,378.82 -38,157.48 110,536.30 289.7%

Net Income 72,378.82 -38,157.48 110,536.30 289.7%

Quality-Built Construction

Profit & Loss Prev Year ComparisonJanuary through March 2007

Important Financial Ratios

1. Gross Profit % (EBIDA) 2. Break Even Analysis –

B/E=FC/GP% IMPORTANT TOWARD GOAL

SETTING Example – BOTTOM UP PLANNING “Paying for Growth”

Liquidity RatiosLiquidity Ratios

Current Assets

Current Liabilities

Current Assets - Inventory

Current Liabilities

Net cash provided by operating activities

Current liabilities

Working capital

Current Assets - Current Liabilities

Quick or acid-test ratio

Current cash debt ratio

Formula Description

Current Ratio

The extent to which current assets cover currentliabilities; a surrogate for ability to generate sufficientcash in the short-term to cover obligations as theybecome due.

A conserative view of creditors' protection, since itexcludes less liquid assets (inventory and prepaids).A company is usually in a good liquid position whenthis ratio is > 1.

The extent to which liquid assets exceed currentliabilites; provides an indication of ability to generateresources for growth over time.

Measures company's ability to generate operatingcash flows adequate to meet obligations coming duein the short term.

Profitability RatiosProfitability Ratios

Gross Profit

Net Revenues

Net income

Net sales

Net Income

Average total assets

Net income

Average stockholders' equity

Net income - preferred dividends

Weighted shares outstanding

Cash Dividends

Net income

Gross Profit Ratio

Formula Description

Rate of return on equity

Earnings per share

Payout ratio

Profit Margin on Sales

Rate of return on assets

Measures "the bottom line" as a percentage ofrevenues. Other Income Statement subtotals maybe used as the numberator, such as operatingincome or income before taxes.

Earning performance relative to all resources of thebusiness.

Earnings gernerated per share of stock held byinvestors.

Earning performance relative to resources contributedby stockholders. When use of leverage is effective,this rate exceeds the return on assets.

An indication of control over cost of sales and pricingpolicies.

Solvency RatiosSolvency Ratios

Total Liabilities

Stockholders' Equity

Current Liabilities

Equity

Income before Interest and Taxes

Interest

Current Debt to Equity

Times Interest Earned

DescriptionFormula

Debt to EquityAn indication of the relationship betweenthe owners' and creditors' positions.

Compares current debt maturities toequity. A high ratio may indicate theneed to restructure short-term debt.

An indication of how well the companyis able to cover interest throughearnings.

Efficiency RatiosEfficiency Ratios

Net sales

Average trade receivables (net)

365 Days

Account Receivable Turnover

365 Days

Account Receivable Turnover

Cost of goods sold

Average inventory

365 Days

Inventory Turnover

Cost of Goods Sold

Average Accounts Payable

365 Days

Accounts Payable Turnover

Net sales

Average total assetsAsset turnover

Days' Sales in accounts receivable

Receivables turnover

Accounts payable days outstanding

Accounts Payable Turnover

Days' Sales in Inventory

Days' Sales in accounts receivable

Formula Description

Inventory turnover

The number of times receivable turn into cash peryear.

The number of times the businiess liquidated itsinventory during the period. Can Pinpoin whether toolittle or too much inventory is carried.

Measures the effectiveness of generating sales fromassets.

The average length of time from a sale to cashcollection.

Nubmer of days to pay off A/P on average.

The number of times the company paid off tradepayables during the period.

The average length of time from a sale to cashcollection.

The number of days it takes to sell the inventory.Used in conjunction with the accounts receivablecollection period to determine the operating cycle.

III - PREDICTORS, CRITICAL NUMBERS AND SMART NUMBERS

Historical Financial statements

Predicting cash flow• CRITICAL #s defined• SMART #s defined

•(Rockefeller)

CASH FLOW – LESS STRESS Paying for Growth EXIT Price

PREDICTORS, CRITICAL NUMBERS AND SMART NUMBERS

SMART NUMBERS Non accounting smart numbers

SMART NUMBERS• LEADS/SALES • UTILIZATION• REV/HR• REV/FTE• BACKLOG

EXAMPLES AND WHY

IV. SMART NUMBERS

• Dashboards• Scoreboards• KPI’s• CFO Reports

Why Morale 1. Cash Flow – Less Stress 2. Paying for Growth 3. Exit Price

Game of “Work” Don’t regurgitate P&L

GAME OF WORK WHO IS ACCOUNTABLE?

Reason for Dashboard Reports

STOP managing by assumptions, subjective opinions, emotions and egos.

Allows you to take the pulse of your business consistently & accurately

Provides enough info to take effective action steps

(TRACTION)

MEASURABLES

“What get measured gets done” Accountable people appreciate

numbers Numbers create competition Numbers produce results Numbers create teamwork “My accountant has that

information” is not an excuse (The Knack)

Magic Numbers Keep track of monthly sales & gross margins by hand Everyone assumes “not enough sales” 4 ways to deal with “lack of sales” Raise prices Reduce cost Turn down low margin jobs Find products/services with higher margins

Alexander Sec Story

High gross margins translate into high gross profit ~ main source of cash

(The Knack)

Levers of Control

New Boxes Key numbers ~ Backlog Alexander Powell “If you track sales, you can

get into serious trouble SALES DON’T MAKE A COMPANY SUCCESSFUL PROFITS AND CASH FLOW DO

(The Knack)

PAYING FOR GROWTH Growth doesn’t mean cash flow How to plan for growth BOTTOM LINE POINTS Track monthly

V. Using it Living it Alignment Track progress

Resources Recommended Reading: 4 books Bassett and Associates, PA website

and our new “Insiders” Business by the Numbers” Meetup group

Redline website