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Financial ManagementFOR
Non-Financial Entrepreneurs/Managers
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Agenda
• Welcome & Introduction• The Business Plan• Record Keeping• Financial Statements
Cash Flow Income (Profit/Loss) Balance Sheet
• Importance of Cash Flow• Analyzing the Business• Conclusions
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General Management Functions
• Planning
• Organizing
• Leading/Staffing
• Controlling
• Reviewing/Re-evaluation
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• Obtain funds (cash/loans) for the company at the lowest possible cost.
• Use obtained funds to maximize profits.
Financial Management Functions
• Plan & control the finances of the company to achieve its objectives.
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OR
An Overview
The Business Plan
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Business Plan ElementsProduct/ServiceMarket
LocationCompetition
Risks & Contingency
Plans
Market Opportunity
Mission of the Enterprise
Major Goals
Ownership
Management& Personnel
Plans
Legal Structure
KeySuccessFactors
DEPARTMENTPLANS
Logistics
Operations
Marketing
Admin
Sales
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Financial Parts of the Business Plan:
Financial Planning
• Product Costs & Pricing
• Profitability
• Plan Operating Costs
• Determine Cash Flow Cycle− Operational Cash Flow− Asset Purchases
• Determine Capital Needs (Cash)− Owner Contributions− Borrowings
• Metric Measurementsnwoscore.org
•Starts with the Business Owner.
•Owner needs good records to:− Run the business.
− Help with budgets & planning.− Prepare, review & analyze the 3 key monthly financial
statements.
− Understand trends through standardized metrics.
− Prepare Income Tax returns.
Good Recordkeeping (a must)
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• Consistency—well defined General Ledger/Chart of Accounts.
• Owner must retain oversight for all cash transactions & banking
relationships.
• Pay all expenditures by check—except petty cash.
• Keep a petty cash fund (locked cashbox) for small expenses.
• Match vendor invoices against each check.
• Reconcile monthly banking statements for all checking accounts.
• Use of an outside professional accountant strongly advised.
Good Recordkeeping (a must)
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THE BUSINESS OWNER’S “GOLDEN RULE”:
Good Recordkeeping (a must)
DO NOT CO-MINGLE (MIX) BUSINESS &
PERSONAL FUNDS!!!
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• Measures performance:
− This month/year vs. last month/year vs. same month last year, Actual vs. Budget, Plan, Forecast or Projection.
− Ratio Analysis—compares relationships between line items.
− Against Industry standards.
− Helps recognize red flags; becomes a diagnostic tool.
• Helps determine cash needs.
• Helps control inventories & accounts receivable.
• Allows you to take advantage of cash discounts.
Good financial records allows an owner to analyze & evaluate his/her business.
Good Recordkeeping (a must)
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Financial Statements
• Cash Flow Statement• Income Statement (Profit & Loss)• Balance Sheet
In order of importance:
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Inter-Relationship of Key Financial Statements
Balance SheetFinancial condition at a point in time
Balance SheetFinancial condition at a point in time
Income StatementSummary of activity for a period of time
Statement of Cash Flows
Summary of activity for a period of time
Reporting ofBusiness Activity
End of YearBeginning of Year
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Balance Sheet
See Handout Number 1 for Detailed Example of a Balance Sheet.
The Balance Sheet represents the Financial position (strength) of a company at one point in time—usually at the end of each month or for the year (12/31/xx).
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Balance Sheet
• Resources of the Business
LiabilitiesAssets
• What is owed to outside creditors
Owner’s Equity• ASSETS - LIABILITIES = NET
WORTH• Positive means solvent
Liabilities & Equity show how the Assets are currently funded.
Liabilities are what is owed to other people.
Equity refers to Owners’ stake in the business.
A = L + O.E.
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Balance Sheet
• Assets− Current Assets
Cash Inventories Accounts Receivable Prepaid Expenses.
− Long term assets Land Buildings Equipment
Generally, assets require the use of cash—but not always.
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Balance Sheet
Generally, Liabilities will consume cash—but not always.
• Liabilities− Current Liabilities
Accounts Payables Short term debt due within 1 year. Taxes Payable Accrued Expenses
− Other Liabilities Long term Debt—due in future years Deferred Income Taxes.
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Balance Sheet
Owners’ or Stockholders’ Equity provides cash resources.
• Owners’ Investment or Capital infusion from stockholders (common).
• Retained Earnings—net of income/losses accumulated from current & prior periods.
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Income/(Loss) Statement
See Handout Number 2 for Detailed Example of an Income/(Loss) Statement
The Income/(Loss) Statement shows Revenue & Expense activity over a period of time—usually a month or year.
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Income/(Loss) Statement
• Includes both cash & non-cash items of revenues & expenses.
• Revenues typically represent the sales of the business.
• Expenses are broken down in pre-determined categories (accounts) to aid in the controlling/evaluation of the costs to generate the above mentioned sales.
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Cash Flow Statement
See Handout Number 3 for Detailed Example of a Cash Flow Statement
• The Cash Flow Statement shows cash activity (in & out) over a period of time—usually for a month or year.
• This Statement also brings together the cash effects of the Balance Sheet & Income Statement.
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Cash Flow Statement
• Avoid Confusion in Terms. Cash provided/(used for). Sources/(uses). From/(used for). Sources/(Applications). Cash in/(Cash out).
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• Operating Activities. Income/(Loss). Depreciation—a
non-cash expense. Inventories. Accounts
Receivable. Accounts Payable.
Cash Flow StatementKey parts of the statement—cash
provided/(used for):• Investing Activities. Purchase property &
equipment. Purchase Investments.
• Financing Activities. Increase long term Debt. Debt Retirement. Issue Capital
Stock/increase ownership.
Dividends paid.nwoscore.org
• What it is & what it is not.
• How is CASH FLOW different from profit?
• Understanding & Analyzing a Business’s CASH FLOW.
• How does CASH FLOW impact your business?
• What is a CASH FLOW projection & why is it important?
• What can be done short term to improve CASH FLOW?
The keys to business success:
CASH FLOW
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CASH COMING
IN
Cash Flow
CASHGOINGOUT
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Simply speaking, Cash Flow is:
CASHCOMING
IN
Cash Flow
• Cash sales• Collections on
accounts receivable• Borrowed funds• Investment/ interest
income• Cash invested by
you/other investors
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CASH
GOING
OUT
Cash Flow
• Inventory purchases• Payroll & payroll tax
liabilities• Other operating costs• Loan payments• Owner distributions• Income tax liabilities
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When the movement of cash takes place over a
period of time.
Revenues minus expenses over a period
of time.
PROFIT
CASH FLOW versus PROFIT
CASH FLOW
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WHEN the movement of cash takes place over a period of
time
Revenues minus expenses over a period
of time
PROFIT
CASH FLOW versus PROFIT
CASH FLOW
Making a Profit is nice—CASH FLOW is necessaryCASH FLOW Management is key to Business Success!!!
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Cash Flow
PROFIT
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Non-Cash Expenses Depreciation—Fixed Assets Amortization—Software Goodwill
Change in Working Capital Inventories—(increase)/decrease Accounts Receivable—(inc.)/dec. Accounts Payable—inc./(dec.)
ANSWER:CASH FLOW The missing key.
Cash Flow Confusion
I HAVE NO CASH& I CAN’T PAY MY BILLS!!!
HOW CAN THAT BE?
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My Income Statement Says I Made Money (a Profit), BUT. . .
Analyzing your business’s CASH FLOW will provide a much better understanding of the “timing” of CASH FLOW.
• Credit terms & Policies
• Accounts receivable (e.g.—aging)
• Inventory (e.g.—turns)
• Accounts payable (e.g.—aging)
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Understanding CASH FLOW
Analyzing your business’s CASH FLOW will give you better control of CASH FLOW.
IMPLEMENT INTERNAL CONTROLS:
• Accounts payable process requiring authorization for payment.
• Hand sign all checks.
• Use a payroll service.
• Open & review monthly bank statements.
• Keep personal & business accounts separate.
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Understanding CASH FLOW
Analyzing your business’s CASH FLOW will help you predict your CASH FLOW needs.
CASH FLOW PROJECTIONS:• Prepare cash flow projection (weekly or monthly).
• Compare actual CASH FLOW performance to the projection/forecast.
• Track quarterly, annual & periodic payments
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Understanding CASH FLOW
What is a CASH FLOW Projection?
• A CASH FLOW Projection is a budget (estimate) of the cash flowing in & out of your business over a period of time in the future (monthly, quarterly, etc.).
• A CASH FLOW Projection is a plan.
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Why Do a CASH FLOW Projection?
• A business that fails to plan… plans to fail (by default).
• Surveys of failed businesses indicate that 60% failed due to CASH FLOW problems.
• Don’t be one of them!
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Preparing a CASH FLOW Projection
1. Prepare a sales forecast.
2. Project anticipated cash inflows.
3. Project anticipated cash outflows.
4. Combine 1-3 into a net cash flow projection for a week, month, quarter, or year.
Sample CASH FLOW Projection template included in your packet—see Handout Number 4.
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Action Steps to Improve CASH FLOW
• Prepare a CASH FLOW Projection.• Review accounts receivables.
− Increase collection efforts on past due accounts.− Revise credit policy to encourage prompt
payment.• Evaluate current inventory & market demand.
− Sell slow moving & obsolete items.− Reduce inventory levels.
What can be done short term?
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Action Steps to Improve CASH FLOW
• Negotiate extended payment terms with vendors.
• Seek a short-term loan from outside sources—Line of Credit (LOC).
• Renegotiate long-term loans.• Decrease owners’ distributions.• Implement a Cost Reduction Program.
‒ Layoffs, wage freezes, reduce employee benefits, other cost reductions.
What can be done short term?
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Reviewing Financial Statements
• Traditional Financial Statements.
Handouts 1, 2 & 3.
• Trend Financial Statements. Handout No. 5—12 month Income/(Loss)
Statement. Handout No. 6—12 month Sales/Adm.
Expenses. Handout No. 7—12 month Balance Sheet. Handout No. 8—12 month Cash Flow
Statement.nwoscore.org
Trend Financial Statements
• Allows viewing multiple periods (months) at one time.
• Much easier to see (seasonal) trends.• Unusual events—expenses, account
balances also easier to see.• Can be tailored to your company
needs/operations.• Makes for more meaningful graphic
representations.
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Ratios--Analyzing Financial Statements
Refer to Handout: Reading & Understanding Financial Statements—pages 13 – 14:
• Measuring Return on Investment.Return on Equity.Return on Assets.
• Measuring Safety & Liquidity. Net Working Capital. Current Ratio. Liabilities to Equity Ratio. Times Interest Earned. Debt Service Ratio.
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Ratios--Analyzing Financial Statements
Refer to Handout: Reading & Understanding Financial Statements—page 15:
• Measuring Operating Efficiency. Average Collection Period. Receivables Turnover. Number of Days’ Sales Inventory. Inventory Turnover.
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Conclusions• It all starts with pro-active Planning.• When you’re out of cash, you’re out of
business!• Analyze your cash flow & business
performance—establish measurable metrics.• More inventory turns means more cash/profit!• Faster collections means more cash/profit!• Keep good (excellent) records.• Banks look for the 5 C’s: Capacity, Capital,
Credit, Collateral, Character
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Conclusions• Select an accountant that specializes in
small business.• Build & use meaningful financial
statements (e.g., QuickBooks)—every month!
• Work with a financial resource that understands you & your business.
• Set up an Advisory Board to mentor you.
• Use NWO SCORE resources.Nwoscore.orgnwoscore.org
NWO SCORE Sponsors
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NW OHIO SCORE wants: To help you Live your DreamYour Support Your Client ReferralsYour Partnership
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