1. Click to edit Master title style Financial Management FOR Non-Financial Entrepreneurs/Managers nwoscore.org

2. 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 nwoscore.org

3. General Management Functions Planning Organizing Leading/Staffing Controlling Reviewing/Re-evaluation nwoscore.org

4. 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. nwoscore.org OR

5. An Overview The Business Plan nwoscore.org

6. Business Plan Elements Product/ServiceMarketLocationCompetition Risks & Contingency Plans Market Opportunity Mission of the Enterprise Major Goals Market Opportunity Mission of the Enterprise Major Goals Ownership Management & Personnel Plans Legal Structure KeySuccessFactors DEPARTMENTPLANS Logistics Operations Marketing Admin Sales Finance nwoscore.org

7. 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 Measurements nwoscore.org

8. 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) nwoscore.org

9. 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) nwoscore.org

10. THE BUSINESS OWNER’S “GOLDEN RULE”: Good Recordkeeping (a must) DO NOT CO-MINGLE (MIX) BUSINESS & PERSONAL FUNDS!!! nwoscore.org

11. 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) nwoscore.org

12. Financial Statements Cash Flow Statement Income Statement (Profit & Loss) Balance Sheet In order of importance: nwoscore.org

13. Inter-Relationship of Key Financial Statements Balance Sheet Financial condition at a point in time Balance Sheet Financial condition at a point in time Balance Sheet Financial condition at a point in time Balance Sheet Financial condition at a point in time Income Statement Summary of activity for a period of time Income Statement Summary of activity for a period of time Statement of Cash Flows Summary of activity for a period of time Statement of Cash Flows Summary of activity for a period of time Reporting of Business Activity End of Year Beginning of Year nwoscore.org

14. 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). nwoscore.org

15. Balance Sheet Resources of the Business What is owed to outside creditors 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. nwoscore.org

16. 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. nwoscore.org

17. 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. nwoscore.org

18. 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. nwoscore.org

19. 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. nwoscore.org

20. 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. nwoscore.org

21. 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. nwoscore.org

22. Cash Flow Statement Avoid Confusion in Terms. Cash provided/(used for). Sources/(uses). From/(used for). Sources/(Applications). Cash in/(Cash out). nwoscore.org

23. Operating Activities. Income/(Loss). Depreciation—a non- cash expense. Inventories. Accounts Receivable. Accounts Payable. Cash Flow Statement Key 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

24. 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 nwoscore.org

25. CASH COMING IN Cash Flow CASH GOING OUT nwoscore.org Simply speaking, Cash Flow is:

26. CASH COMING IN Cash Flow Cash sales Collections on accounts receivable Borrowed funds Investment/ interest income Cash invested by you/other investors nwoscore.org

27. CASH GOING OUT Cash Flow Inventory purchases Payroll & payroll tax liabilities Other operating costs Loan payments Owner distributions Income tax liabilities nwoscore.org

28. 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 nwoscore.org

29. 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 necessary CASH FLOW Management is key to Business Success!!! nwoscore.org

30. Cash Flow PROFIT nwoscore.org  Non-Cash Expenses Depreciation—Fixed Assets Amortization—Software Goodwill  Change in Working Capital Inventories—(increase)/decrease Accounts Receivable—(inc.)/dec. Accounts Payable—inc./(dec.)

31. ANSWER: CASH FLOW The missing key. Cash Flow Confusion I HAVE NO CASH & I CAN’T PAY MY BILLS!!! HOW CAN THAT BE? nwoscore.org My Income Statement Says I Made Money (a Profit), BUT...

32. 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 ) nwoscore.org Understanding CASH FLOW

33. 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. nwoscore.org Understanding CASH FLOW

34. 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 nwoscore.org Understanding CASH FLOW

35. 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. nwoscore.org

36. 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! nwoscore.org

37. 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. nwoscore.org

38. 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? nwoscore.org

39. 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? nwoscore.org

40. 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

41. 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. nwoscore.org

42. 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. nwoscore.org

43. 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. nwoscore.org

44. 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 nwoscore.org

45. 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.org nwoscore.org

46. NWO SCORE Sponsors nwoscore.org

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