RealWorld Finance 101 for Small Business A few

Real-World Finance 101 for Small Business A few basics and a few things you probably didn’t know

Agenda • • • Performance analysis Accounting vs. Finance Accounting cycle Roles Software Chart of accounts Accrual accounting Management cycle Financial management

What are your numbers telling you about your biz? • Too fast when margins are shrinking • Too slow when not keeping pace with markets • Fat when there is no leverage • Vulnerable when revenues are erratic

Trends to Watch Unhealthy $ Revenue Expense Healthy $ Revenue Expense Time Revenue $ Expense Time

Trends to Watch Unhealthy Healthy Industry Benchmark $ Revenue Time $ Revenue Industry Benchmark Time

Trends to Watch Unhealthy $ Revenue Cash Healthy $ Cash Time $ Revenue Cash Time Revenue $ Cash Time

Trends to Watch Unhealthy Healthy Revenue COGS $ Overheads Time COGS Overheads Time Revenue $ $

Trends to Watch Unhealthy Healthy Revenue $ $ Time Revenue Time

Benchmarks What we see financially is that… • Business owners don’t know when they are off track • Opportunities go unnoticed • Markets fluctuate – its hard to ride a wave when you aren’t looking

Accounting vs. Finance Accounting • Looks back • Tax driven • Transactions • Internal data • Cycles – mo/qtr/yr Finance • • • Looks forward Plan driven Models / scenarios Internal plus external data Management cycles Finance is about combining accounting information with business intelligence

Accounting Cycle 1. Daily posting 2. Monthly closing 1. Reconciliations (balance against bank statements) 2. Adjustments (accruals and 3. Reporting 3. Annual closing

Role of Bookkeeper • • Posting Reconciliation Billing Basic financial reporting Principle of “Separation of Duties” One person should not manage the books and handle receipts and deposits

Accounting Software Selection Checklist: Regional leaders: q Is it easy to use & get help? q Does it interface with my operations management system? q Association or peer network preferences q Cost of systems & ops q Is there a hosted version? US and Canada: 1. Quick. Books Pro 2. Microsoft Dynamics Europe 1. Sage Peachtree 2. MAS India 1. Tally Australia and Pacific Rim 1. MYOB 2. Zero

Chart of Accounts & LOBs Chart of Accounts: The naming convention for grouping accounting activity. Lines of Business (LOB): are the tributaries to group the sources of revenue and expenses. Example: • Products • Services • Special projects Achieve a balance between: 1. Minimal detail for easier management 2. Granular enough for visibility on financial performance by LOB. Where is your revenue coming from? Where is your profit coming from?

Chart of Accounts Two categories of accounts: 1. Balance Sheet accounts Running totals; account balances as of the end of a reporting period. 2. Income Statement accounts Period activity totals; total amount of activity during a reporting period.

Chart of Accounts Balance Sheet Assets Current assets Cash/checking Accounts receivable Inventory Long-term assets Furniture/equipment Organization costs Liabilities Short-term liabilities Credit cards Accounts payable Long-term liabilities Long-term loans Equity Capital stock Retained earnings Assets = Liabilities + Equity

Chart of Accounts Income Statement (a. k. a. , P&L; profit & loss) Sales Cost of goods sold (COGS) Product costs Service costs Gross Profit (Gross Margin% = gross profit/sales) Expenses (a. k. a. , SG&A, sales, general and admin) Salaries Benefits Incentives / bonuses Rent Legal Operating Income Other Income Net Income Profit% = net income/sales

Principle of Revenue and Expense Recognition (GAAP) • Revenue received before it is earned should be booked as a prepaid asset and not recognized as income until it has been earned. • Expenses owed but not paid should be recorded as expenses in the period incurred regardless of when they are paid

Accrual Accounting • Accrual-Basis Accounting: revenues and expenses that have been received and paid in cash plus revenues and expenses that have been earned and incurred • Accounts payable or receivable, depreciation • Cash-Basis Accounting: revenues and expenses that have been received and paid in cash • Cash payments and receipts

Accrual Accounting Your choices: A. Accrual Basis B. Cash Basis C. Combination Most small businesses choose “combination” – Pay taxes based on “Cash Basis” – Management reporting based on “Accrued Revenue” and “Cash-based Expenses” – Financial analysis based on Full Accruals

Adjustments • Depreciation and amortization – Recognizing expense in the period where you use it. Can impact analysis if not reflected. • Accrued earnings – e. g. Multi-month projects • Accrued expenses – e. g. prepaid software license, contractor payments

Maybe you didn’t know… • Balance Sheet doesn’t reveal the market value of a business – If you were looking to buy or sell a business, assets and liabilities don’t tell the story. Value is driven by trends, future potential, market comparables, ability to generate “free cash”. • Income Statement (P&L) does not reveal where your business is headed – Trend analysis tells the bigger story – Performance analysis tells the detailed story

Financial Management • • • Business planning Goal setting Budgeting Progress analysis Communications to management team – Goals – Actual performance – Collaboration on needed improvements • Monthly, quarterly and annual cycles

Financial Management Resources • Professional association standards or recommendations • Integrated systems (financial and operations) • Financial dashboard (“business intelligence”) • Business advisor / consultant • Board of directors or advisory board

Performance Analysis Trends Ratios Goals Benchmarks

Performance Analysis Combined Business Analysis: growth, profitability Line of Business (LOB) Analysis: growth, profitability Services Product Sales Other Growth GM Profitability

KPIs (key performance indicators) • Ties operating data to financial data • Example – product sales and service – Revenue or Expense per employee – Quick Ratio (Current Assets / Liabilities) – Support calls per sale – etc.

The Process • Need to do it every month • Don’t let it take too much time (30 min monthly management) • Use analyzed data to find “the big 3 priorities” • Share with your team – get everyone on the same page

Getting your Team on the Same Page

How do you know when you’ve “got it? ” Checklist for success: q Taxes submitted on time (not too much, not too little) q q q Goals are set & tracked Routine monitoring BI shared with team Course-corrections Tools to monitor

Long Term Goals • • Sustainability Long-term growth Market position Owner’s return on investment (ROI) Equity value Liquidity event (sell, acquire, investment) A good night’s sleep

Don’t live on an island!

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