Business Financials in Plain English: a Focused Overview
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Business Financials in Plain English: a Focused Overview. Originally presented in Denver, Colorado, in 2011
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Business Financials in Plain English: a Focused Overview
- 1. Business Financials in Plain EnglishBusiness Financials in Plain English A Focused OverviewA Focused Overview
- 2. Former Executive with Fortune 500 Companies Licensed Clinical Social Worker Series 6 and other Financial Services Licenses Nationwide and International Speaker, Published Author Member of the Society for Neuroscience Certified Executive Business Coach Owner of an International Coaching Business Jonathan Jordan Just a Little Bit About Me…
- 3. The Sad Story of Tom…
- 4. Why Know Your Financial Numbers? Greater awareness of financial health of the business May reveal otherwise looming financial issues Greater day-to-day money management Knowing what is, and what isn’t, making a profit Data-based decisions and accurate projections Easier to value the business Increases the value Easier to sell/exit
- 6. 3 Basic Business Financial Reports Balance Sheet A financial snapshot of the business Cash Flow Statement The amount of money that flows into and out of the business Profit & Loss Statement (P&L) The amount of money earned or lost by the business
- 7. Balance Sheet Definition A financial record of a business, showing what it owns (assets), what it owes (liabilities) and what is left over for the owners (shareholders) after what it owes is deducted from what it owns (the net worth or equity).
- 8. Net-Worth Calculation Cash/Bank Funds Real Estate (full value) Furniture & Equipment (depreciated value) Intellectual Property & Other Intangible Assets Inventory Loans Mortgage/Rent Equipment Leases Business Credit Card Professional Memberships Taxes
- 10. Net Worth vs Cash Flow
- 11. Cash-Flow Calculation (Usually Monthly) Client Fees Product Sales Speaking Fees Book Royalties Rent (paid to you) Bank Loans Business Mortgage/Rent Utilities Payroll Supplies
- 12. Predictable Cash Flow is Critical Know your average monthly in-flow, and your average monthly out-flow
- 13. Cash In-Flow Tracking Example… Year: 2011 Actual $ Received YTD Average $ Monthly Yearly Goal Projected Yearly $ Projected Goal % Service Line 1 YTD 27,000 9,125 100,000 109,501 110% Service Line 2 YTD 11,000 3,718 53,000 44,612 84% Product Line 1 YTD 19,000 6,421 67,000 77,056 115% Product Line 2 YTD 34,000 11,491 130,000 137,890 106% Grand Total YTD 91,000 30,755 350,000 369,060 105%
- 14. Cash Flow vs Profit & Loss Depreciation: An expense recorded to allocate an asset's cost over its useful life. Because depreciation is a non-cash expense, it increases cash flow while decreasing reported profits
- 15. Cash Basis vs Accrual Basis Cash Basis: Records income when it is received, and expenses when they are paid Accrual Basis: Records income when it is earned and expenses when then are incurred - regardless of when the money for the transactions is actually received or paid For example, this M3 event on April 4, 2011… Under the accrual method, the expense will be recorded today (the day of the event) Under the cash method, the expense will be recorded on the date that you actually paid for the event
- 16. ABC Company Profit and Loss Statement Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sales Number of Units 10 15 20 20 20 30 40 50 60 60 60 60 Selling Price 800 800 800 800 800 800 800 800 800 800 800 800 Total Revenue 8,000 12,000 16,000 16,000 16,000 24,000 32,000 40,000 48,000 48,000 48,000 48,000 Cost of Goods Unit Price 500 465 465 465 465 465 465 448 448 448 448 448 Cost 5,000 6,975 9,300 9,300 9,300 13,950 18,600 22,400 26,880 26,880 26,880 26,880 Commissions - - - - - 2,250 3,000 3,750 4,500 4,500 4,500 4,500 Gross Profit 3,000 5,025 6,700 6,700 6,700 7,800 10,400 13,850 16,620 16,620 16,620 16,620 Expenses Telephone 200 40 40 40 40 40 40 40 40 40 40 40 Computer 120 120 120 120 120 120 120 120 120 120 120 120 Office Expense 200 30 30 30 30 30 30 30 30 30 30 30 Advertising 460 300 300 300 300 600 600 600 600 600 600 600 Travel - - - - - - - - - - - - Insurance 40 40 40 40 40 40 40 40 40 40 40 40 Professional Fees - - - - - - - - - - - 500 Depreciation 200 200 200 200 200 200 200 200 200 200 200 200 Auto Lease - - - - - - - - - - - - Misc. Expenses 20 20 20 20 20 20 20 20 20 20 20 20 Bank Charges 20 20 20 20 20 20 20 20 20 20 20 20 Interest - - - - - - - - - - - - Total Expenses 1,260 770 770 770 770 1,070 1,070 1,070 1,070 1,070 1,070 1,570 Profit 1,740 4,255 5,930 5,930 5,930 6,730 9,330 12,780 15,550 15,550 15,550 15,050 Sample P&L Statement
- 17. Profit & Break-Even Point Break Even
- 18. The Danger of Discounting… without knowing your profit margins
- 19. Presenter Contact Information Jonathan Jordan President, Global Change Management, Inc. Please feel free to contact me with any follow up questions or comments E-mail: Jonathan@MindfullyChange.com
Notes de l'éditeur
- New pod cast (3 mins) Introduce self Mention McDonald’s experience
- 8:44 – 8:46 So what are the benefits of knowing our numbers Trent, you might ask. Great question! Understanding your numbers leads to; Greater confidence in decisions – once you know the numbers, decisions are easy because you are not guessing, but knowing! Better business decisions – you know what you want and what it is going to take, so you make it happen by taking positive action Logic based implications of choices – it is no longer emotions deciding, it is the scorecard helping us with the choices which is great support Greater awareness of one’s ability – it motivates you to get it and work smarter Proper examinations of issues within the business – you see clearly the holes and gold in your business More effective billing, collecting, tracking, and paying – you are more professional and hence reduce your debts Ultimately the most important – improved cash flow – a great way to give you flexibility in business so you can make more PROFIT
- 8:50 – 8:52 There are 2 different types of accounting practices and there are 2 types of basic reports in business, does anyone know what they are? (Let them answer)........................... Balance sheet and P+L Many business owners only look at their financial statements just once a year. They go straight to the bottom line and see whether they made a profit or not and the next question is ‘how much tax do I have to pay?’ Your financial statements actually contain a wealth of information, and with the right tools, you can quickly determine how ‘healthy’ your business is. The Profit and Loss Statement shows a lot more than whether you made a profit or not; and the The Balance Sheet gives you a snapshot of the businesses health So lets look at what makes up each of these …
- 8:52 – 8:56 (4 Minutes) Hand out sample balance sheet The balance sheet is the least understood of all the financial forms but is one of the 2 most important. The balance sheet provides a snapshot of the overall health of the business. It is called a balance sheet because it balances assets with liabilities plus equity. It represents the overall financial worth of the company and shows the value of the business for that particular day it is created. This is an important point because profit and loss displays the results of a period e.g. a week, a month, etc. The balance sheet tells you the story for just that day because generally cash, inventory and supplier invoices will change on a regular basis, hence effect the balance of assets and debts. The 3 key parts to a balance sheet: 1. Assets – these are things of value that you own (eg. plant, equipment, land, cash). 2. Liabilities – this is what you owe (eg loans, overdraft, notes). 3. Equity or Net worth – this is the owners stake in the business (eg capital shares, retained earnings). You will notice there is current and non current assets and liabilities. The difference between current and non-current is; Current assets are assets which are not held on a continuing basis, they are expected to be consumed within the next 12 months. Looking at the example you can see this in the form of cash and inventory which naturally follows this rule and is easy to understand. Non current assets are held with the intention of being used to generate wealth rather than held for resale. Your equipment and furniture within your business (and in the example) will be used to generate the wealth aren’t they? Current Liabilities represent amounts due and payable to outside parties within 12 months like your taxes, GST and supplier invoices. Non current liabilities are not liable for repayment within 12 months after the balance sheet like business loans or shareholders loans. You can see where all these variables fit in the balance sheet
- 8:46 – 8:50 (4 Minutes) We have just been talking about the types of accountants and bookkeepers you need to have. Another aspect you need to be aware of is that there are also two types of accounting practices for businesses and they are; Cash basis accounting and accrual basis accounting! So what is the difference? Cash basis accounting is used when income and expenses are entered into your financials at the time the money actually changes hands, so it is very easy to look at your sales and determine whether you can pay the bills or not. This type of accounting forces you to manage your money very effectively. It forces discipline. So, if you have no cash, you’re out of business! An example of this would be if you made $5000.00 of sales in January, but the payments were not received until March. You actually indicate in the book keeping that the income was in March, not January. Accrual basis accounting, income and expenses are counted at the time they are transacted. Thus in the previous example, the $5000.00 sales would show up in January. This form of accounting is generally seen in larger businesses. Smaller businesses tend to use the cash basis accounting system. The assumption with accrual accounting is, yes you have money, but you really do not physically. Businesses of your size generally should be on the cash system, but check this with your accountant. If you do not know which system you use for your business, this is a great opportunity to learn which your are on and if on the accrual, find out why! When you are on a cash basis system, you can quite easily check in with your profit and loss, bank balance and budget as they will all speak the same language and be accurate. This is why small businesses use this system, because it is easier to manage your money and resources. Whereas larger businesses have their own finance departments who look after all creditors, debtors, invoicing, etc. So make sure you know which one you are on!
- 9:00 – 9:02 Lets take a look at the difference between gross margins and net margins, even though I just gave you some very strong clues through that example P+L. A gross margin is the margin between the total revenue and the cost of the goods, which is highlighted in that P+L we just looked through. You can see it actually states the gross margin or gross profit quite clearly and in March for example it is $16,000 - $9,300 = $6,700 What is the gross margin/profit for September? A net margin is the margin between the gross margin/profit and the expenses (or many people refer to them as overheads) , which you might recall is the fixed costs. When margin is referred to in discussion it is often expressed as a percentage. Therefore if you have a net margin of 10% and your revenue is $240,000 p/a, your net profit is $24,000. You must have a very clear understanding of this difference especially when you are looking to have stock clearance sales or packaging your stock to increase your average dollar sale. If you do not know this, you might be cutting your nose off to spite your face. So often we hear business owners DISCOUNTING (which by the way is a swear word here in Action International), which is really a business owner giving away its profit. I will show you this difference in a couple of slides time.
- 8:46 – 8:50 (4 Minutes) We have just been talking about the types of accountants and bookkeepers you need to have. Another aspect you need to be aware of is that there are also two types of accounting practices for businesses and they are; Cash basis accounting and accrual basis accounting! So what is the difference? Cash basis accounting is used when income and expenses are entered into your financials at the time the money actually changes hands, so it is very easy to look at your sales and determine whether you can pay the bills or not. This type of accounting forces you to manage your money very effectively. It forces discipline. So, if you have no cash, you’re out of business! An example of this would be if you made $5000.00 of sales in January, but the payments were not received until March. You actually indicate in the book keeping that the income was in March, not January. Accrual basis accounting, income and expenses are counted at the time they are transacted. Thus in the previous example, the $5000.00 sales would show up in January. This form of accounting is generally seen in larger businesses. Smaller businesses tend to use the cash basis accounting system. The assumption with accrual accounting is, yes you have money, but you really do not physically. Businesses of your size generally should be on the cash system, but check this with your accountant. If you do not know which system you use for your business, this is a great opportunity to learn which your are on and if on the accrual, find out why! When you are on a cash basis system, you can quite easily check in with your profit and loss, bank balance and budget as they will all speak the same language and be accurate. This is why small businesses use this system, because it is easier to manage your money and resources. Whereas larger businesses have their own finance departments who look after all creditors, debtors, invoicing, etc. So make sure you know which one you are on!
- 9:00 – 9:02 Lets take a look at the difference between gross margins and net margins, even though I just gave you some very strong clues through that example P+L. A gross margin is the margin between the total revenue and the cost of the goods, which is highlighted in that P+L we just looked through. You can see it actually states the gross margin or gross profit quite clearly and in March for example it is $16,000 - $9,300 = $6,700 What is the gross margin/profit for September? A net margin is the margin between the gross margin/profit and the expenses (or many people refer to them as overheads) , which you might recall is the fixed costs. When margin is referred to in discussion it is often expressed as a percentage. Therefore if you have a net margin of 10% and your revenue is $240,000 p/a, your net profit is $24,000. You must have a very clear understanding of this difference especially when you are looking to have stock clearance sales or packaging your stock to increase your average dollar sale. If you do not know this, you might be cutting your nose off to spite your face. So often we hear business owners DISCOUNTING (which by the way is a swear word here in Action International), which is really a business owner giving away its profit. I will show you this difference in a couple of slides time.
- 8:58 – 9:00 This slide is an illustration of a sample of profit and loss for the XYZ company. Lets look at this example to see in reality where the sales revenue is, variable costs, fixed costs and profit or loss are found. Total revenue on this example is what the sales turnover is, for example in Jan it is 8000. Variable costs on this example is the cost of goods section and it clearly demonstrates the cost of different amounts of stock that was sold. Once you take the cost of goods from the sales, you have the gross profit. In order to get the net profit we must account for our overheads. In Jan you can see it $5,000 Fixed costs is also referred to as overheads in many cases and these are clearly demonstrated in the expenses column in this example. In Jan you can see it is $1,260 Profit or Loss is demonstrated naturally at the bottom of the document as it is the result of the previous amounts and calculations. If the figure in the profit section is in red or is surrounded by brackets, it implies it is a loss rather than a profit. In Jan it is a profit of $1,740 If a loss does occur, this is when we need to refer to the Five Ways Chart for setting new profit objectives
- 9:06 – 9:07 Hand out the “Price Increase/Decrease” spreadsheet for other gross margins Let me show you very clearly why we do not discount to reinforce the point of pricing on margin by using a very basic example. In the first column on the left, the item is sold for $100 and total costs are $60, hence a mark up of $40. If you discount it 10%, your markup is now only $30, but your margin has reduced by 25%. If you plug these numbers into the formula from the sheet we just gave you, you will come to the amount you need to increase your sales by to retain your initial margin. Do this example on the flip chart with numbers Markup = (100-60)/60 = 66% (remember markup is divided with the cost) Margin = (100-60)/100 = 40% (remember markup is divided with the sales price) With a 10% discount of selling price the figures change to; Markup = (90-60)/60 = 50% Margin = (90-60)/90 = 33% The $7 drop in profit ($40-$33) is 17.5% and therefore you will need to increase your sales by 17.5% when you 10% discount to retain your 40% margin. Explain how this works and show them this specific example. Have them look through this for homework!