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Uncovering Your Client’s Financial BlindspotsAlan MiltzDirector Pearl Financial ServicesEmail: alan.miltz@pearlfinance.com.auWebsite: www.pearlfinance.com.auPH +61 412 300 401

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22 Countries+1500 Accountants

Optimist

A

BC‘000s of Companies +200 Banks

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Equity is the most expensive source of funding

Have you ever tried to get equity funding?

Approx 2 to 5% of companies are successful in attaining equity finance

What does an investor look for?

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Obtaining Equity Finance

A Prospective Investor will look at:

ManagementOpportunitiesValuation Exit StrategyROI

Is your client a MOVER?

Smorgon Way

• Two heads are better than one• Everyone has the right to be heard in a non-threatening way• The truth will be told• Our word is our bond• The needs of the customer come first• There will be no surprises - put the uncomfortable issues on the table• Promote teamwork and leadership• Be proactive corporate citizens

Smorgon Factors for Success

1. If you aim for the moon you might make the sky, keep trying.

2. Write things down in Black and White (The Dream) Business Plan

3. Get the right people into the Organisation, the backbone people not the high flyers.

4. Hard work - No substitute for hard work and persistence, never give up.

5. Always back your own judgement

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Gary’s Furniture

B-91

• Gary’s Furniture was founded in 2001

• Gary is a furniture importer and manufacturer and distributes to 500 stores including majors and independents

• Gary believes he is doing fantastically

We are going to use a case study based on a company Gary’s Furniture.

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Gary’s Furniture

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Gary’s net cash flow

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Gary’s Furniture

• On a scale of 1 to 10 how would you rate Gary's Furniture’s financial performance?

• On a Scale of 1 to 10 how do you think the Bank rates Gary's Furniture’s financial performance?

• What is Gary's cash flow for 2009?

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Net cash flow

On the 1st of January 2010 I have $10,000 in the bank.

On the 31st of December 2010 I have $1,000 in the bank.

What is my net cash flow?

$9,000 outflow

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Net cash flow

Why can’t we apply this logic to the company?

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The funnel analogy

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Plotting your Critical Success Factors

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How does finance measure SCA?

• Profit?

• Revenue Growth?

• Cash Flow?

• Market Share?

• Return?

• Dividends?

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How does finance measure your SCA?

• Profit

• Revenue Growth

• Cash Flow

• Market Share

• Return

• Dividends

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The balance sheet

Funding (E +ND)9.5 +17.3

OperationsNOA26.8

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The management accounting equation – the balance sheet

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Why go into business?

Return On Capital Employed (ROCE)

OR

Return On Net Assets (RONA)

ROCE = RONA(The Dupont Theory of Financial Analysis)

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Financial analysis – the theory

XEBIT $4.6M

Revenue $42M

Revenue $42M

NOA $26M

OR

ROCE = EBIT/Net Operating Assets

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The ROCE equation

As management it is mission critical that over time we ensure that our EBIT is growing at a faster rate than our investment in our Net Operating Assets.

EBIT

NOA

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KEY POINTS

• Clear understanding of what the business is doing

• Which quadrant is the business in now, where is it heading and why?

• What are the opportunities for the business?

• What will the outcomes be for the business

• There are options and the answer is ‘it depends’

• This provides a powerful partnership tool

Optimizing Growth

8m

7m

6m

5m

4m

3m

2m

1m

24m 25m 26m 27m 28m 29m

EB

IT

A

B

C

D

E

NET ASSETS

Corporate stress?

Fast growth?

Declining Growth?

Re-engineering Working Investment?

Optimising growth?

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Marketing – understanding your customers

Most companies operate under the 80/20 rule –

80% of their customers account for 20% of the revenue.

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What do we want to work with?

1 2

3 4

We want a relationship

We don’t want a relationship

They want a relationship

They don’t want a relationship

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1 2

What do we do with the 3 and 4s?

Increase priceEnforce strict terms

We want a relationship

We don’t want a relationship

They want a relationship

They don’t want a relationship

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What do we do with the 1 and 2s?

The goal is to identify blind spots with 1 and 2 clients and lock them into the business.

Ask these key clients for a wish list (i.e. what do we need to do to at least be equal with your best supplier?)

Provide these clients with your wish list (i.e. what we want from them)

Document a supply chain agreement.

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The role of Finance

Finance’s role is to measure the company from a business and banking perspective.

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The Financial Health Check

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The quality of your client’s cash flow

Cash FlowFunding

Fixed Assets

Working Capital

Profit

Next PeriodWeaknessStrengths

impact on cash flow

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For each measure let’s look at…

Profitability Ideal Profile G A B

Sales 100

GM% 30 >30 28 – 30 <28

OH% 20 < 20 20 – 22 <22

EBIT% 10 >10 8 – 10 <8

Working Capital

AR Days 60 <60 60 – 70 >70

Inv/WIP Days 90 <90 90 – 100 >100

AP Days 60 45 – 60 60 – 70 <45 >70

Working Capital % 22 <22 22 – 25 >25

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Gary’s numbers

Profitability Ideal Profile G A B

Sales 100

GM% 30 31

OH% 20 20

EBIT% 10 11

Working Capital

AR Days 60 75

Inv/WIP Days 90 180

AP Days 60 (70)

Working Capital% 22 41

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The Power of One

It is essential to know the cash flow sensitivities of a 1% or 1 day change in: • Price %

• Volume %

• COGS %

• OH %

• AR

• INV/WIP

• AP

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The Power of One - sensitivity

Change Effect on Net Cash Flow

COGS % - 1% 406,000

Price % +1% 187,000

AR days -1 118,000

OH % -1 84,000

INV/WIP days -1 81,000

AP days +1 81,000

Volume % +1% -123,000

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Marginal cash flow

The additional cash that will be generated or used up if we sell $1 more of our product or services.

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Marginal cash flow for the next $1 of sales

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Marginal cash flow for the next $1 of sales

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Marginal cash flow for the next $1 of sales

What does this tell us?

For each additional $1 of sales the business will require 10.34c of funding

If the existing relationships stay the same

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Your client’s Credit Officer

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Your client’s Credit Officer

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Your client’s Credit Officer

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Your client’s Credit Officer

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A big picture for credit management

Understanding the customer

Person – managementAmount – FinancialRepayment- FinancialSecurity – securityExpediency – managementRemuneration – servicingServices

Basic approach to assessing SME performance –PARSERS

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Key Measures

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Profitability

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Assets

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Working Capital

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Cash Wastage

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Strategy

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RONA %

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Credit Submission

Credit Assessment looks at 3 things

1. Management Capability and Integrity

2. Serviceability – the first way out

3. Security – the second way out

Bank Pricing is a combination of risk and volume

• Banks price for risk. • Risk analysis for pricing is standardised using risk grade model. • Risk Grading allows the bank to predict

– Probability of default– Loss given default

• Inputs are a mixture of Mgt info, Financial info, Industry and credit bureau Info and Security detail

• Bank profitability is enhanced by extending further services:– Transaction accounts– Merchant Facilities– Personal A/cs– Superannuation– General insurance

Risk grading

The key elements in a risk grade model are:• New Customer vs Existing Customer • Longevity of business (Mgt)• Experience of Management (Mgt) *• Industry (Servicing)• Historical account performance (Servicing)• Historical servicing ratios (Servicing)• Future servicing ratios (Servicing) *• Security Cover ratios (Security) *• Equity vs Debt (Security) *

* Management can influence the outcome

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Cash Performance

Debt Servicing

Exciting Financial

Future

Improving Debt to Equity

• Enhanced cash after operations• Improved cash flow quality• Debt purpose for growth, not wastage

• Interest Cover >1.5x (EBIT/Interest Expense)• Debt Service Cover >1.25x (NCAO/(Interest + Principle)• Business can meet all commitments incl. tax, CAPEX, drawings and

bank

• Strategy translated into financial performance• Bank will get money back• Opportunity to grow lending to invest

• Bank is not the only investor in the business• Business leadership will back the proposition financially

Things we needed to fix for Gary.....

10 ideas to better manage your bank

1. Explain your financials2. Share your exciting future using numbers3. Focus your team on cash4. Borrow for growth, not wastage5. Always give the bank an exit opportunity6. Be the best in your industry7. Provide updates on industry issues (+ & -)8. Present high level but know the detail9. Have a 2nd bank ready to steal you10. Be profitable for them – they’ll do more to keep you!

Next steps

If you would like help to uncover your client’s financial blindspots then why not look us up?

Pearl Financial Services Pty LtdWebsite: www.pearlfinance.com.au

Or contact Alan directly:Email: alan.miltz@pearlfinance.com.au

Or click here and complete the enquiry form and we will contact you for an obligation free chat about your cash performance