1. Understanding Your Financial Performance By Mike Mallaro CFO, The VGM Group

2. Steps To Understanding Financial Performance 1.Benchmark Past Results 2.Plan Your Future Success 3.Manage Your Liquidity 4.Understand Your Profitability

3. Steps To Understanding Financial Performance 1.Benchmark Past Results 2.Plan Your Future Success 3.Manage Your Liquidity 4.Understand Your Profitability

4. Benchmark Past Results  Identify Key Performance Indicators Up to 10 key drivers Measure in Comparable Units  Compute Your Historical Results  Compare to Peer Data  Make Decision on Action Plan

5. Key Performance Indicators  Profitability  Sales  Asset Management  Cash Flow & Liquidity

6. Key Performance Indicators Profitability  Revenue per Employee  Gross Margin Percentage  Net Profit Percentage  Operating Expenses as a percentage of revenues  Operating Income  Net Income Sales  Percentage increase in sales  Comparable unit sales increase

7. Key Performance Indicators Asset Management  Days Sales Outstanding (DSO) Billed Billed Unbilled Unbilled  Inventory Turnover Cash Flow & Liquidity  Availability of Cash  Cash Flow from Operations  Working Capital  Cash Balance

8. Measure in Comparable Units Use These...  DSO  Revenue per employee  Expenses as a % of sales  Days Sales held in Inventory Instead of These...  Ageing Percentages  FTEs  Percentage change in expenses  Inventory balance

9. Computing Historical Results  DSO  Gross Margin Percentage  Net Profit (Margin) Percentage  Revenue per Employee  Availability of Cash

10. DSO Accounts Receivable Divided by Ave Sales per Day Equals Days Sales Outstanding -------------- Sales for a period Divided by Number of days in the Period Equals Ave Sales per Day

11. DSO - continued RevenuesDaysAve Sales/Day Annual $2,000,000 360 $5,555 Quarterly $575,000 90 $6,388 Example – Ave Sales per Day Example – DSO calculation ReceivablesAve Sales/day DSO Annual $470,000 $5,555 85 days Quarterly $470,000 $6,388 74 days

12. Gross Margin Percentage Revenues Minus Cost of Goods Sold Equals Gross Margin Dollars -------------- Gross Margin Dollars Divided by Revenues Equals Gross Margin Percentage

13. Gross margin Percentage – cont’ Revenues $2,000,000 Cost of Goods Sold $850,000 Gross margin dollars $1,150,000 Gross Margin Percentage 57.5% Example

14. Net Profit (Margin) Percentage Revenues Minus Cost of Goods Sold & Expenses Equals Income Before Taxes -------------- Income Before Taxes Divided by Revenues Equals Net Profit (Margin) Percentage

15. Revenues $2,000,000 Cost of Goods Sold $850,000 Gross margin dollars $1,150,000 Operating Expenses $1,000,000 Pre-Tax Profit $150,000 Net Profit (Margin) % 7.5% Example

16. Revenue per Employee Revenue Divided by Ave Number of Full-Time Employees Equals Revenue per Employee -------------- For Full-Time Employees Consider Full-Time & Fractional for Part-Time

17. Revenue per Employee BeginningEndingAverage Full-time 8109 ¾ time 222 ½ time 687 Total 172018.5 FTEs 9 1.5 3.5 14 RevenuesAve FTEsRevenue/Employee $2,000,00014$142,857

18. Available Cash Cash and Deposits Plus Existing Lines of Credit Less Existing Borrowings on Lines of Credit Equals Available Cash

19. Benchmarking Example - DSO  You vs. AA Homecare Survey

20. Benchmarking Example - DSO  Results in a different light?  You over time vs. AA Homecare Survey

21. Benchmarking Example - DSO  Full Picture  You over time vs. AA Homecare Survey and Industry Leaders

22. Determine Plan of Action  Use Benchmarking to shine the light on areas of the business  Where the results show signs of possible trouble, dig deeper and devote attention

23. Steps To Understanding Financial Performance 1.Benchmark Past Results 2.Plan Your Future Success 3.Manage Your Liquidity 4.Understand Your Profitability

24. Plan for Success Those who fail to plan are planning to fail

25. Plan for Success  Establish Goals  Develop Action Steps Needed to Reach Goals  Build Financial Plans (Pro-forma statements)

26. Establish Goals  Be specific and measurable  Exercise your right to dream – The goal should be substantial enough that, if achieved, it really matters

27. Identify Action Steps Necessary to Achieve Goal  Build a catalog of actions needed to achieve larger goal.  Action steps are interdependent  Assign individual responsibility  Hold individuals accountable

28. Build a Pro-Forma Financial Statement  Start with 2 years of historical results  Lay out columns for each of next 3 years  Draft amounts for years 1-2-3 using history and general assumptions  Fill in goals for year 3, which is presumably better than initial draft  Work backwards to determine what is necessary on individual line items to achieve goal  Work multiple iterations until you get to the optimal path to achievement of goal

29. Financial Pro-Forma – Goals View 20012002200320042005 Oxygen 280335 Rehab 310315 Total Revenue 590650 Equipment 180195 Payroll 280310 Occupancy 6570 Marketing 2540 Net Income 4035100

30. Financial Pro-Forma – Next Round 20012002200320042005 Oxygen 280335600 Rehab 310315400 Total Revenue 5906501,000 Equipment 180195290 Payroll 280310425 Occupancy 6570100 Marketing 254095 Net Income 4035100

31. Financial Pro-Forma – Final Round 20012002200320042005 Oxygen 280335400500600 Rehab 310315340375400 Total Revenue 5906507408751,000 Equipment 180195225260290 Payroll 280310320360425 Occupancy 65708090100 Marketing 25406012095 Net Income 40355545100

32. Business Planning  Match operational objectives to numbers  Be aggressive, but reasonable  Use it as a roadmap  The process is as important as the end product  Always keep plan out three years

33. Steps To Understanding Financial Performance 1.Benchmark Past Results 2.Plan Your Future Success 3.Manage Your Liquidity 4.Understand Your Profitability

34. Liquidity  Available cash is the most important KPI for liquidity  Liquidity = Financial Flexibility

35. Liquidity Choices  CPA View – Make lowest cost choices (i.e. do not borrow if you have the money!)  Experienced View – Trade away current income for the financial flexibility of better liquidity.

36. When Would Extra Liquidity Help?  Loss of major referral source  Health problem removes owner from the business  Ugly divorce  Medicare messes up  Medicare changes the rules  Medicare conducts an unfair audit  Flood, fire, tornado, hurricane, earthquake, etc  Severe bad publicity  Competitor price war

37. Paths to Optimal Liquidity  Decrease receivable DSO  Finance equipment purchases so that payments are matched to receipt of revenues  Lease rather than own  Increase the size of credit lines  Seek dating from suppliers  Increase inventory turns

38. Steps To Understanding Financial Performance 1.Benchmark Past Results 2.Plan Your Future Success 3.Manage Your Liquidity 4.Understand Your Profitability

39. Understand Your Profitability  The Power of The Incremental Dollar  Expense Management  Segment Performance

40. The Power of the Incremental Sales Dollar The most profitable sales in your business are incremental sales

41. The Power of Incremental Sales Existing P&L Sales $600 Cost of sales$300 Personnel$160 Occupancy $50 Marketing $30 Pre-tax income $60 % of sales 10%

42. Impact of Additional Referral Source ExistingIncremental Sales $600 $30 Cost of sales $300 $15 Personnel $160 Occupancy $50 Marketing $30 ___ Pre-tax income $60 $15 % of sales 10% 50%

43. Additional Referral Source at a Discount ExistingIncremental @ 20% discount Sales $600 $24 Cost of sales $300 $15 Personnel $160 Occupancy $50 Marketing $30 ___ Pre-tax income $60 $9 % of sales 10%37.5%

44. Before & After ExistingIncremental After Sales $600 $24 $624 +4% Cost of sales $300 $15 $315 Personnel $160 $160 Occupancy $50 $50 Marketing $30 ___ $30 Pre-tax income $60 $9 $69 +15% % of sales 10% 11%

45. What this means to you...  Look at net profit margin, not just gross profit margin  Consider the lifetime value of the customer  The incremental sales dollar is virtually always your most profitable sales dollar.

46. Expense Management  “People are your most important asset.”  People-related costs are by far the largest controllable expense in an HME business

47. Expense Management  Having the appropriate headcount is the single most important thing you can do to responsibly manage your expenses.  Revenue per FTE is the key performance indicator to utilize.  Drive to the targeted revenue per employee.

48. Segment performance Drill down to profitability by segment.

49. Segment Analysis Consider some of these segmentations:  Respiratory vs. HME vs. Rehab  Medicare vs. Medicaid vs. Private Insurance  Referral Source A vs. Referral Source B  Branch A vs. Branch B

50. Conclusion 1.Analyze Existing Performance 2.Plan Your Future Success 3.Leverage Your Assets 4.Understand Your Profitability

51. Understanding Your Financial Performance By Mike Mallaro CFO, The VGM Group