Chart Your Course to Business Success - Advisors On Target

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10 Νοε 2013 (πριν από 3 χρόνια και 7 μήνες)

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On Target

Contractor’s Blueprint

Chart Your Course to Business Success

On Target Business Intensive: Session 2

October 3, 2013

Advisors On Target

1


Session 1


Create a working draft of your Mission Statement


Create a working draft of your 1 and 5 year Vision


Answer the questions on the handout





Additional activities


Values Exercise


Business Diagnostic Assessment


Implementation Steps


3 Financial Indicators


Profits, Cash Flow, ROI


Cost Behavior


Profit Improvement Planning


More Key Performance Indicators


Liquidity, Solvency, Collections, Breakeven


Creating a Budget/Profit Plan

Effective Financial Management


Accounting system is fully & accurately functioning


Controls are in place to ensure accuracy


A Realistic Workable Profit Plan (aka Budget) is in place


Financial Monitoring is being used effectively as a business tool


Key Metrics are being used to keep your finger on the financial
pulse of your business


Owner reviews Financial Data and Metrics at least monthly


An adequate credit line is in place


Company is profitable, solvent and able to finance its growth and
reward stakeholders

Best Practices: Finance


4


Put together a solid business plan


Be in the best position to obtain financing


Grow a sustainable business


Create a valuable company that you can later sell or otherwise
provide for your exit from the business


Sound Financial Management
is critical if you wish to:

5

Effective Financial
Management

Key Financial Data For Business Survival

Business is about making money

To do this, it must simultaneously increase three things:


Net profit margin


Operating profit margin


Cash flow


Return on investment (ROI)


3 Key Financial Indicators

Of Your
Business’ State Of Health

Indicator 1: Profit Margins


Net Profit = What’s left over
after you deduct ALL expenses
from the revenue your business
generates

Net Profit = Total Income
minus
Total Expenses


THE bottom line in your
business


Indicator of the overall
management of the business


Gross Profit = What’s left
over after you deduct direct
job costs from the revenue
your business generates

Gross Profit = Total Income
minus

Direct Expenses
to Produce jobs


Indicator of the productivity
of your field crews


Indicator of the accuracy of
your estimator (and pricing)


Gross Profit Margin (GP%) is profit derived from work produced
divided by Gross Revenue

Gross Profit Margin = (Gross Profit/Revenue)%



Net Profit Margin (NP%) is after
-
tax net profit divided by Gross
Revenue


Net Profit Margin = (Net Profit/Revenue)%

How To Calculate Profit
Margins


Production / service delivery processes


Material Costs


Labor Costs


Customer relations


Team Skills and Development


Pricing & Estimating


Selling Skills

Improve The Gross Profit Margin by
working on the drivers:


Administrative operating processes


Variable Costs


Overhead Costs


Customer relations


Administrative Team Skills and Development


Marketing Activities and Costs


Improve the Net Profit Margin by
managing:

Gross Profit Margin = (Gross
Profit/Revenue)%


Higher is better


50% is goal


45% is industry average*

* Residential and Commercial Contractors under
$10MM, depends on mix of work, and use of
subcontractors


BEST PRACTICE GUIDE : Gross
Profit %

Net Operating Profit Margin = (Net Operating
Profit/Revenue)%


Higher is better


15% is goal (25% BEFORE Owner’s Compensation)


5% is industry average*

*Residential and Commercial Contractors under $10MM

** There is a distinction between Net Profit and Net Operating
Profit, which is Profit before taxes, and “other” income &
expenses not related to operations of the business including
financing costs (interest expense)

BEST PRACTICE GUIDE :

Net Operating Profit %**

The three questions of
measurement


Is it Accurate?


Is it Acceptable


Is it Sustainable?

Indicator 2: Cash Flow

Obtain Cash

Purchase
Materials

Bid & Sell
Contract

Complete
Project


T
here will be occasions when money is flowing out faster than
it is flowing in


Virtually e
very business experiences times when there is a
cash flow gap


Managing cash flow so as to avoid any critical situation due to
lack of cash when it is needed is a major responsibility of a
business owner


What Does The Cash Flow Cycle Mean
To Your Business Operations?


Businesses can make a profit but have negative cash flow


Failing businesses can have positive cash flow, possibly due to
large asset sales


Business start
-
ups require large cash outlays to build the asset
base = cash flow risk


Cash Flow


More Than Just
Profit


Over

the

longer

term,

you

have

to

manage

your

cash

flow

to

fund

your

business

growth


You

can

grow

your

business

in

the

short

term

by

‘borrowing’

credit

through

late

payment

of

suppliers


Eventually,

however,

everything

evens

out

and

such

strategies

are

not

sustainable


With

that

in

mind,

projected

growth

should

be

managed

within

known

cash

flow

constraints

and

if

external

funds

are

required,

this

needs

planning

in

advance


Cash flow Over The Longer
Term


Shorten the Cash Flow Cycle



Understand the difference between Cash Flow and Profit


Plan in advance for business growth and/or downturns

Improve Cash Flow


Prepare a Cash Flow Projection


Manage Your Spending on a monthly, if not
weekly basis


Invoice Promptly


Develop a systematized approach to receivables
and collections


Obtain a line of credit

BEST PRACTICE GUIDE :

Cash Flow


Return

On

Investment

is

net

profit

expressed

as

a

percentage

of

the

value

of

the

total

assets

you

have

tied

up

in

the

business


ROI = (Net Profit/Total Assets)%


ROI

is

a

profitability

ratio



it

is

the

true

measure

of

the

financial

productivity

of

a

business



Indicator 3: Return On
Investment

Return on Investment =

(Net Profit/Total Assets)%


Higher is better


Should be at least 10%


25% or higher is a goal

BEST PRACTICE GUIDE : ROI

ROI: An Example


YEAR 1

YEAR 2

YEAR3

NET PROFITS

10,000


11,000

12,100

TOTAL ASSETS

100,000


112,000

125,400

ROI

10%


9.8%

9.6%

ADDITIONAL ASSETS



12,000

13,440

NET PROFIT
RETAINED


11,000

12,100

ADDITIONAL CAPITAL



1,000

1,340




Increase sales revenue by increasing price and/or volume


Keep variable costs down (equal or below the rate of increase
in revenue)


Achieve greater productivity from resources which are
financed through overhead


Ensure that tight control is exercised over assets

SO THAT


Cash flow increases simultaneously with the increase in net
profit


The Function of Management:


High tangible net worth (equity)


Consistent profitability


High cash flow from operations


Cash balances representing 30
-
45 days of operating
expenses


AR representing less than 30 days sales


A ratio of current assets to current liabilities (“current
ratio”) in excess of 3:1


A high level of working capital


A ratio of liabilities to assets of 1.0 or less (debt ratio)




Characteristics of

Financial Health

25


Starts with Financial Statements:


Profit & Loss Statement (Income Statement)


Balance Sheet

How do we find out where we
stand?

26


Accuracy is Essential


GIGO


Accrual vs. Cash Basis


Accrual Basis


Day to Day operations


Enter Invoices and Bills as they are incurred


not as they are paid


Cash Basis


Paying Tax


Enter data on Accrual Basis/Click of a button will show reports in
either format (in QuickBooks)


Regarding Your Financial
Statements…

27


Good Structure


Sufficient detail to analyze data


Use sub accounts where more detail is needed


Consider using classes if appropriate


Group Expense accounts appropriately


All direct costs in COGS


Non Operational Income and Expenses in “Other Income & Expense”
section


Group Balance Sheet Liabilities appropriately


Loans that will not be repaid this year in Long Term Liability section

Chart of Accounts Tips

28

Profit and Loss Statement

Income

Direct Costs (Cost of Goods Sold)

Gross Profit

Variable Expenses

Overhead Expenses

Net Operating Profit

Other Income & Expenses

Net Profit


29

Definition: Profit Margins


Net
Profit

=

What’s left over
after you deduct ALL expenses
from the revenue your business
generates

Net Profit = Total Income


Total
Expenses


THE

bottom

line

in

your

business


Indicator

of

the

overall

management

of

the

business

30


Gross Profit =

What’s left
over after you deduct direct job
costs from the revenue your
business generates

Gross Profit = Total Income


Direct Expenses to Produce
jobs


Indicator

of

the

productivity

of

your

field

crews



Indicator

of

the

accuracy

of

your

estimator

(and

pricing)

Profit and Loss Statement

31

Balance Sheet

Description

Cash

Checking,

Savings, Petty Cash

Accounts Receivable

Amounts Due from Customers

Other Current

Assets

Prepaid Expenses, Amounts due from others

Total Current Assets

Fixed Assets

Equipment,

Vehicles, Property, Depreciation

Other Assets

Startup expenses,

Goodwill from purchase, Company deposits,
Long term loans made to others

Total Assets

Accounts Payable

Amounts owed to

Vendors

Credit Cards

Other

Current Liabilities

Payroll Taxes Payable, Customer Deposits,

Short Term Lines of
Credit

Total

Current Liabilities

Long

Term Liabilities

Loans, Lines of Credit that will not be paid off in one year

Equity

Contributions, withdrawals, Retained Earnings, Net Income

Total Liabilities

& Equity

Must equal Total

Assets to Balance

32

Balance Sheet

33

Key Performance
Indicators

Factors that indicate the current and future
performance of a business in areas that are
critical to the company's success.



Revenue to Budget


Gross Profit


Net Profit


Break Even Sales


Liquidity
-

Current Ratio


Solvency
-

Debt Ratio


Collections (Days Sales Outstanding)

Financial KPIs

Gross Profit Margin =

(Gross Profit/Revenue)%


Higher is better


50% is goal


45% is industry average*

* Residential and Commercial Contractors under
$10MM, depends on mix of work, and use of
subcontractors


BEST PRACTICE GUIDE : Gross
Profit %

36

Net Operating Profit Margin =

(Net Operating Profit/Revenue)%


Higher is better


15% is goal (25% BEFORE Owner’s
Compensation)


5% is industry average*

*Residential and Commercial Contractors under $10MM

** There is a distinction between Net Profit and Net Operating Profit,
which is Profit before taxes, and “other” income & expenses not related
to operations of the business

BEST PRACTICE GUIDE :

Net Operating Profit %**

37

Current Ratio =

Current Assets





Current Liabilities

Should be a
minimum

of 1.5 or higher (3.0 or greater is
better)


Quick Ratio =


Cash + Equivalents






Current Liabilities

Should be at least 1.0

Higher is better for both


BEST PRACTICE GUIDE :

Liquidity Ratios


Debt Ratio =



Total Liabilities






Total Assets

Should be less than 1.0


Debt to Equity Ratio =
Long Term Debt





Stockholder’s Equity

Should be less than 1.5 or 150%


BEST PRACTICE GUIDE :

Debt Ratios


Days Sales Outstanding =

Accounts Receivable x 365



Annual Revenue

(previous 12 months rolling revenue)


Should be 30 days or less

BEST PRACTICE GUIDE :

Days Sales Outstanding (Collections)





Cash in Bank =



Overhead Expenses*
(next month)

Gross Profit Margin

Plus: Fixed expenses for months 2 & 3

Or


just think 3 months fixed expenses for a quicker
calculation

*Include Variable Costs and Overhead Costs

BEST PRACTICE GUIDE :

Cash in Bank


Ideal





Cash
in Bank
=

Overhead Expenses* (next month)/Gross
Profit
%

Plus: Fixed expenses for months 2 &
3


Or


just think 3 months fixed expenses for a quicker
calculation


*Include Variable Costs and Overhead Costs

BEST PRACTICE GUIDE :

Cash in Bank


Ideal

42

Return on Investment =

(Net Profit/Total Assets)%


Higher is better


Should be at least 10%


25% or higher is a goal

BEST PRACTICE GUIDE : ROI

43


Session 1


Create a working draft of your Mission Statement


Create a working draft of your 1 and 5 year Vision


Answer the 10 questions on the handout


Session 2


Review your own Profit and Loss and Balance Sheet and compare
to what you learned in Session 2




Additional activities


Values Exercise


Business Diagnostic Assessment (link forthcoming)


Implementation Steps

44