small business inc vhc

7/31/2019 Small Business Inc VHC

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Small Business, Inc.

12-31-2008 - 12-31-2009

Financial Diagnostic Report Date Prepared: 12/18/2009 11:57:43 AM

Small Business, Inc. - Profit Doctor Sample 3 year-to-year.opt Page 1


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The Key Measures of Business PerformanceBreakeven Point Goalseek - Solve

Profitability % Profitability % = 0

Current Period 2.92 . Last Period 9.09 . Negative trend downwards. Price Change % Change by (2.92)

Can be further improved by improving Price, Volume, COGS and Operating Expense management. COGS % Change by 2.92

General & Admin. Expenses Change by 81,500Activity

Current Period 1.66 . Last Period 2.02 . Negative trend downwards. Cash After Operations = 0

Can be maximized by efficient use of assets, minimize working capital and selling-off unused assets. Revenue Growth % Change by (11.05)

Price Change % Change by 4.39

Working Capital % COGS % Change by (2.98)

Current Period 33.93 . Last Period 25.49 . Negative trend upwards. General & Admin. Expenses Change by (98,347)

If Revenue is growing, ensure Working Capital% is less than Gross Margin %.

Cash Flow = 0

ROCE % Revenue Growth % Change by (27.24)

Current Period 4.85 . Last Period 18.34 . Negative trend downwards. Price Change % Change by 12.69

The return earned on Net Operating Assets is less than cost of funding them. COGS % Change by (8.20)

General & Admin. Expenses Change by (275,772)

Cash After Operations

Current Period (98,347) . Last Period N/A. .

Ensure a strategy to return to a positive position is implemented.

Cash Flow

Current Period (256,271) . Last Period N/A. . Key Driver Movements 12-31-2009

Revenue Growth % Down 4.22

COGS % Up 5.60

Interest Cover Price Change % Up 0.00Current Period 0.81 . Last Period 3.52 . Negative trend downwards. Operating Expenses % Up 0.59

Interest Commitments cannot be met from operational profits. Effect Interest % Up 1.46

Effect Tax % Down 9.27

Debt Service Cover Days Receivable Up 20.80

Current Period (0.89). Last Period (6.11). . Days Inventory Up 13.25

Total Bank Commitments cannot be met from Net Cash After Operations. Days Payable Up 4.62



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Income Statement - Key Results

Financial Highlights 12-31-2009

Gross Margin % 22.24

Down 5.60

Profitability % 2.92Down 6.16

Net Profit % (0.62)Down 5.81

Retained Earnings % (0.62)

Down 5.81

Revenue 2,787,200Down 122,800

Focus Points Strategy - Goalseek

A business can be broken down into 3 components: Sales/Marketing, Operations and Finance. To improve Profitability % to 3.07

Responsibility for each element of the Income Statement can be attributed to these areas: Change Price Change % by 0.15

1. Gross Margin through Price and Volume - Sales/Marketing Change COGS % to 77.622. Gross Margin through COGS minimization - Operations Change General & Admin. Expenses to 522,925

3. EBIT through Operating Expense management - Operations and Finance

4. Net Profit through Interest and Tax minimization - Finance

Profitability% is one of the Key Business Measures and should be examined in conjunction

with your Asset Turnover.



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Price Volume Sensitivity

Financial Highlights 12-31-2009False

Gross Margin %: Price is

more effective than Volume by 1.03 timesFalse

Profitability %: Price is

more effective than Volume by 1.33 timesFalse

Net Profit %: Price is more effective than Volume by

(0.49)times

Focus Points Strategy - What If?

To make intelligent price volume decisions ensure you understand the Price Volume An increase in Price by 1%

relationship. An increase in Price will have a more favorable impact on business Changes Cash After Operations by 22,412

performance and more quickly improve operational results than an increase in Volume. Changes Cash Flow by 20,200

This is because a 1% increase in price will NOT IMPACT COGS, Operating Expenses Changes ROCE % by 1.64

or Inventory as Volume does.

An increase in Volume by 1%

Tip: Changing the mix of Products or Services towards higher margin Changes Cash After Operations by (8,904)

products/services will have a significant impact on Gross Margin and EBIT. Changes Cash Flow by (9,408)

Changes ROCE % by 0.03



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Balance Sheet - Key Drivers


Days Receivable 71.50

Average 61.10

Days Inventory 143.00

Average 136.37

Days Payable 75.70Average 73.40


Days Receivable, Days Payable and Days Inventory are critical drivers of a businesses A decrease in Days Receivable by 1 day

performance and thus management needs to be very aware of their trends over time. Changes Working Capital % by (0.27)


Manufacturers focus on the elements of Inventory: Raw Materials, WIP & Finished Goods. Changes Cash After Operations by 7,636

Distributors and Retailers focus on converting slow moving stock items to cash. A decrease in Days Inventory by 1 day

Service Industry focus on billing Work in Process as early as possible. Changes Working Capital % by (0.21)


Tip: All businesses should assess the value of taking discounts versus paying creditors early. Changes Cash After Operations by 5,938

An increase in Days Payable by 1 day

Changes Working Capital % by (0.21)


Changes Cash After Operations by 5,938



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Working Capital Cycle


Days Receivable Up 20.80

Trade Debtors Up 141,786

Days Inventory Up 13.25Inventory Up 102,646

Days Payable Up 4.62Accounts Payable Up 40,535

Working Capital Days 138.80Working Capital 945,597

Working Capital % 33.93

Gross Margin % 22.24


The higher the Working Capital Cycle, the more costly it is to fund. To improve Working Capital % to 22.24

Change Days Receivable to 28.84

To minimize Working Capital Cycle: Ensure invoices are provided with a delivery or Change Days Inventory to 88.13

bill at the time work is performed; Utilize Inventory Management systems to control and Change Days Payable to 130.57minimize stock holdings; and constantly review supplier and customer terms of payment. Change COGS % to 14.36

Change Price Change % to 441.19

Working Capital % measures the investment a business has made in Working Capital for

each unit of Revenue. Compare Working Capital % to Gross Margin % when a business

increases Revenue. If Working Capital % is greater than Gross Margin %, for every additional

unit of Revenue generated, cash will be required.



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Asset Turnover


Activity 1.66

Down 0.36Average 1.84

Activity - Current 2.95Down 0.98

Average 3.44

Activity - Non Current 3.79Down 0.37

Average 3.97

Revenue 2,787,200

Net Operating Assets 1,680,597


Activity is a primary measure of balance sheet efficiency as it indicates how quickly To improve Activity to 1.82

Net Operating Assets are turned over in a single period. Activity is thus a function of Change Price Change % to 15.53

Revenue. The higher the Activity, the less Net Operating Assets are required to fund growth. Change COGS % to 47.92

Change Revenue Growth % to 20.86

The relationship between the current and non current portions must also be understood. Change Days Receivable to 51.42

The current portion reflects the variable component and should not increase over time. Change Days Inventory to 117.17

Whereas, the non-current portion may increase over time, if the business invests in Change Days Payable to 101.53

assets for the future. Change Fixed Assets to 581,644

Activity is a component of ROCE%, thus you should consider it when examining ROCE%.



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ROCE %


ROCE % 4.85

Down 13.49Average 11.60

Profitability % 2.92Down 6.16

Activity 1.66Down 0.36

Effect Interest % 9.50

Up 1.46

The Return on Capital is less thanthe Cost of Borrowing in the current period.


ROCE% is one of the Key Business Measures of business performance. To improve ROCE % to 9.50

ROCE% measures the return (EBIT) on the Capital Employed (Net Operating Assets) . Change Price Change % to 2.86

Change COGS % to 75.01

The higher ROCE% is, the better the business is performing. Change General & Admin. Expenses to 448,843Manufactures should aim for a ROCE% greater than 20%, Distribution companies greater Change Revenue Growth % to 2,509.64

than 30% and Service businesses greater than 40%. Change Days Receivable to (36.23)

Change Days Inventory to 4.46

Profitability% is a measure of EBIT and Activity is a measure of NOA. Therefore, focus Change Days Payable to 214.24

on the elements within EBIT and NOA to improve ROCE. Change Fixed Assets to (87,659)

ROCE% can also be compared to the Effective Interest %, where the return on the capital

must be more than the cost of borrowing.



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Cash Wastage


Actual Cash Flow (256,271)

Total Cash Waste (382,632)

Sustainable Cash Flow 126,361

Focus Points Strategy - What If? .

Cash Wastage indicates how the Business has managed its growth. A decrease in Days Receivable by 1 day

Changes Total Cash Waste by (7,636)Growth in Accounts Receivable, COGS and Operating Expenses are compared to A decrease in Operating Expenses % by 1

Revenue Growth, where growth above Revenue Growth is considered Cash Wastage Changes Total Cash Waste by (27,872)

or Unsustainable Growth. If growth in Inventory is more than COGS growth it is considered A decrease in COGS % by 1

Waste. Whilst a growth of Accounts Payable less than COGS is also considered Waste. Changes Total Cash Waste by (28,531)

A decrease in Days Inventory by 1 day

Total Waste or Gain is subtracted from Change in Net Debt to determine the level of Changes Total Cash Waste by (5,938)

cash flow that is Sustainable by the business. An increase in Days Payable by 1 day

Changes Total Cash Waste by (5,938)



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Cash Flow


Cash After Operations (98,347)

Up 320,353

Net Cash After Operations (107,499)Up 352,115

Net Cash Income (208,521)Up 326,317

CADA (228,521)Up 306,317


A business has five components from a cash flow perspective: To improve Cash After Operations to 0

1. Operating - measured by Cash After Operations Change Price Change % to 4.39

2. Tax - measured by Net Cash After Operations Change COGS % to 74.78

3. Financing (interest paid & current commitments) - measured by Net Cash Income & CADA Change General & Admin. Expenses to 428,653

4. Asset Purchases - measured by Net Cash Income After Assets Change Revenue Growth % to (15.27)5. Shareholder Funding - also measured by Net Cash Income After Equity Change Days Receivable to 58.62

Change Days Inventory to 126.44

Tips: Change Days Payable to 92.27

Management can only control Cash After Operations and hence it is an important measure.

Tax, Interest, Dividends & Debt Repayments must be paid from Cash After Operations.

If Fixed Asset purchases are made, sufficient CADA must be generated.



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Debt Service Cover


Net Cash After Operations (107,499)

Total Commitment to Bank 121,022

Debt Service Cover (0.89)

Total Bank Commitments cannot be metfrom NCAO in the current period.


Debt Service Cover shows the ability of the business to fund its commitments to the bank. An increase in Revenue Growth % by 1%

Commitments to the bank are defined as Interest and the Current Portion of Long Term Debt. Changes Debt Service Cover to (0.96)

An increase in Price Change % by 1%

Net Cash After Operations (NCAO) is the Operating cash flow after tax. Changes Debt Service Cover to (0.74)

Businesses need to ensure they generate enough NCAO to cover their Debt. A decrease in COGS % by 1%

On this basis, if this ratio is under 1 it indicates that there is insufficient cash to meet Changes Debt Service Cover to (0.65)

commitments to the bank. A decrease in Operating Expenses % by 1%

Changes Debt Service Cover to (0.69)

Businesses have very little control over interest and the ability to retire debt, and thus should A decrease in Days Receivable by 1 day

focus on managing NCAO via drivers such as Price, Days Receivable, Days Payable Changes Debt Service Cover to (0.83)

and Fixed Assets. A decrease in Days Inventory by 1 day


An increase in Days Payable by 1 day




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Glossary

Activity Revenue/Net Operating Assets

Activity - Current Operating Assets Revenue/Current Operating Assets

Activity - Non Current Operating Assets Revenue/Non-Current Operating Assets

Asset Turnover This is the analysis of balance sheet efficiency.

Borrowed Funds Short Term Debt + Long Term DebtCash after Debt Amortization (CADA) Net Cash After Operations - Financing Costs - Current Portion of Long Term Debt

Cash After Operations Cash From Sales - Cash Production Costs - Cash Operating Costs

Cash From Sales Revenue + Change in Accounts Receivables

Cash Production Costs COGS (excluding Depreciation) + Change in Inventories + Change in Accounts Payable

Cash Operating Costs Operating Expenses (excluding Depreciation and Amortization) + Other Operating Expenses + Change in Other CA +Change in Other NCA + Change in Other CL + Change in Other NCL

Cash Wastage This concept shows how effectively a business has managed its growth. A Waste is where the business has performedinadequately, where a Gain demonstrates the business has managed its growth adequately.

Cost of Goods Sold (COGS) These are costs that are incurred directly in the production of Revenue.

Current Operating Assets (COA) Current Assets - Current Liabilities (excluding Short Term Debt)

Days Inventory Inventory / COGS x Number of Days in Period

Days Payable Accounts Payable / COGS x Number of Days in PeriodDays Receivable Accounts Receivable / Revenue x Number o f Days Period

Debt Service Cover (NCAO) NCAO / (Interest Paid + Current Portion LTD)

Earnings Before Interest and Tax (EBIT) Revenue - COGS - Operating Expenses - Other Operating Expenses

Effective Interest % Annualized Interest Expense / (Previous Borrowed Funds + Current Borrowed Funds)/2 x 100

Effective Tax % Tax / Net Profit x 100

Fixed Assets Fixed Assets are items held by the business for more than one year. These items would usually be used in the day today operations of the business. Examples of Fixed Assets would be land and buildings, plant & equipment, motorvehicles, office equipment and furniture and fixtures.

Gross Margin Revenue - COGS

Interest Cover EBIT / Interest Expense

Interest Expense This is the financing cost associated with the businesses Long Term and Short Term Debt.

Net Cash After Operations (NCAO) Cash After Operations - Taxes PaidNet Cash Income After Equity (NCIE) Cash after Debt Amortization - Change in Current Assets - Change in Shareholders Funds

Net Cash Income Net Cash After Operations - Financing Costs

Net Operating Assets (NOA) Current Assets + Non Current Assets - Current Liabs (excluding Short Term Debt) - Non Current Liabs (excluding LongTerm Debt)

Net Profit % Net Profit / Revenue x 100

Non Current Operating Assets (NCOA) Non Current Assets - Non Current Liabilities (excluding Long Term Debt)

Operating Expenses Operating Exps are the costs that are incurred in the day to day operations of a business. These costs may includeadministration, marketing, selling or distribution costs.

Price Is a driver which increases or decreases Revenue without impacting COGS or Operating Exps.

Profitability % EBIT / Revenue x 100

Revenue Revenue is the entity's primary source of income.

Retained Earnings % Retained Earnings / Revenue x 100ROCE % EBIT / Net Operating Assets x 100Small Business, Inc. - Profit Doctor Sample 3 year-to-year.opt Page 13


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Sustainable Cash Flow Net Change in Borrowings - Total Waste or Gain. It is the cash flow the business could have generated if they had notexperienced the Waste or Gain.

Volume Is a driver indicating the change in the number of units sold, thereby impacting Revenue, and also COGS and OperatingExps.

Working Capital % [(Account Receivable + Inventory - Account Payable) / Revenue x 100] x 365 / Number of Days Period

Working Capital Cycle Days Inventory + Days Receivable - Days Payable



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