Financially Speaking. Keys To Unlocking The Language of Business. Workbook

Transcription

1 Financially Speaking Keys To Unlocking The Language of Business Workbook Soul Canyon Training & Development / rob@soulcanyon.com (541)

2 Table of Contents Financial Foundations 3 Three Basic Equations Three Common Financial Statements Key Principles Debits and Credits Cost Behavior 8 Direct vs. Indirect Costs Variable vs. Fixed Costs Breakeven Analysis Depreciation The Financial Statements 16 Connecting The Key Financial Statements Variance Analysis Ratio Analysis Using The Numbers to Run Your Business 27 Monthly Performance Analysis Annual and Strategic Forecasting Extra Stuff 32 Your Action Plan Soul Canyon Training & Development Information Soul Canyon Signup 2

3 Financial Foundations 3

4 Financial Foundations -- Exercise Brainstorm with your group what you think financial statements should tell you about your business, what the key statements are, and what each of them tells you. You have 5 minutes. 4

5 Financial Foundations Equations and Statements The Three Equations: The Balance Sheet Equation The Profit Equation The Cash Flow Equation The Three Basic Financial Statements: The Balance Sheet The Income Statement (Operating Statement) The Statement of Cash Flow (Cash Flow Statement) 5

6 Financial Foundations Key Concepts GAAP Why do these rules and guidelines exist? The Matching Principle Cash Accounting Accrual Accounting 6

7 Financial Foundations The Accounting Cycle The General Ledger What is it? Journal Entries Adjusting Entries Closing Entries Asset Accounts Liability Accounts Equity Accounts Debit Credit Debit Credit Debit Credit Revenue Accounts Expense Accounts Debit Credit Debit Credit 7

8 Cost Behavior 8

9 Cost Behavior Product Costing When it comes to pricing your products or services, it is important that you identify cost elements appropriately to each product or service. As costs relate to product or service costing there are some key issues to consider. Direct Costs are costs that are easily identifiable as belonging to a particular product or service and can be charged directly to that product or service. Indirect Costs are more general in nature and must be allocated to products or services. What are some of the key issues associated with charging and allocating elements of cost to products or services? 9

10 Cost Behavior Forecasting Costs Predicting cost behavior under different operating levels (sales, production, etc.) is the Holy Grail of forecasting. Issues to consider: Fixed Costs remain the same over a relatively broad range of operating levels. Variable Costs increase or decrease proportionately with operating levels. Semi-variable Costs generally vary with operating levels, but not proportionately. 10

11 Cost Behavior Exercise Classify the following costs in their appropriate categories for Product/Service Costing purposes: Direct Costs Product Costing Indirect Costs Factory Rent Production Supervision Administrative Salaries Raw Materials Factory Supplies Depreciation Insurance Expense Payroll Taxes Property Taxes General Utilities Direct Materials Direct Labor Direct Overhead Indirect Materials Indirect Labor Indirect Overhead Now, classify these expenses based on their most probable cost behavior: Sales staff salaries Production Supervision Administrative Salaries Direct Labor (Piece Rate) Direct Materials (Raw Materials) Depreciation Supplies Rent -- Storage space Insurance Expense Payroll Taxes Property Taxes General Utilities Cost Behavior Fixed Variable Semi-variable 11

12 Total $ Cost Behavior Breakeven Analysis When you understand fixed and variable costs it s possible to calculate and analyze the breakeven point of your organization, product or service. Breakeven Point is defined as: The key variables in calculating Breakeven Point are: Unit Price (P) Variable Cost Per Unit (VC) Contribution Margin (CM) Per Unit = (P) (VC) Fixed Costs (FC) Basic Breakeven Equations: Breakeven Units Breakeven $ Sales Breakeven Price = / = X = / Units + VC Per Unit Breakeven Total Cost Fixed Cost Revenue Time 12

13 Cost Behavior Breakeven Exercise You make and sell birdhouses. Your average selling price is $10. Your direct labor and materials add up to $4 per birdhouse. Your total fixed operating expenses for the year are $13,000 in sales and marketing and $5,000 of administrative expense. 1) How many birdhouses do you have to sell to breakeven? 2) What will your total sales/revenue $ be at breakeven? 3) What will your total costs be at breakeven? 4) What is your breakeven price at: a) 3,000 units b) 6,000 units c) 9,000 units What basic simplification in cost behavior is required to use the breakeven tool? How is this tool useful? 13

14 Cost Behavior Depreciation The GAAP Matching Principle says that costs should be lined up and timed to match the revenue or sales they create. Some large expenditures for items like buildings, vehicles, and manufacturing equipment represent investments in assets that will last for years. In order to match these expenditures to the revenue they create, they need to capitalized and then depreciated. Capitalize: Key Components of Depreciation: Cost of Asset: Useful Life Includes: Purchase price, installation, shipping, sales tax Does not include: Service contracts, routine maintenance, training, startup supplies Salvage Value 14

15 Cost Behavior Depreciation Exercise You purchase $1,000 worth of specialized jigs to make your birdhouses. You live in Oregon, so there is no sales tax but shipping is $50. You hire a carpenter to create a space and install the jigs in your garage for $150. You enroll in a webinar for $150 to learn how to use the jigs. After taking the class, you practice with $100 of material to learn how to use them. The jigs are estimated to have a useful life of 5 years with no salvage value at the end of life. What is the total amount you will capitalize and depreciate? What is the annual depreciation amount? 15

16 The Financial Statements 16

17 Balance Sheet Equation: Tells Us: Crazy Birdhouses, LLC. Balance Sheet As of Dec. 31, Current Assets Cash 30,000 40,000 Short Term Investments (Marketable Securities) 60,000 80,000 Short Term Notes Receivable 37,000 49,000 Accounts Receivable 280, ,000 Inventory 370, ,000 Total Current Assets 777, ,000 Fixed Assets Properties 261, ,000 Fixtures and Equipment 246, ,000 Accumulated Depreciation (163,000) (197,000) Total Fixed Assets 344, ,000 Total Assets 1,121,000 1,367,000 Current Liabilities Operating Line of Credit 15,000 13,000 Accounts Payable 108, ,000 Accrued Expenses 125, ,000 Total Current Liabilities 248, ,000 Long Term Liabilities Long Term Notes Payable 24,000 28,000 Total Long Term Liabilities 24,000 28,000 Total Liabilities 272, ,000 Investor Paid In Capital 353, ,000 Retained Earnnings 496, ,000 Total Equity 849,000 1,007,000 Total Liabilities & Equity 1,121,000 1,367,000 17

18 Income Statement, a.k.a: Equation: Tells Us: Crazy Birdhouses, LLC. Income Statement January - December Revenue/Sales/Income Unit Sales (Units) 132,500 Average Price $ Total Revenue $ 1,325,000 Cost of Goods Sold Direct Materials & Direct Labor ($4/Unit) 530,000 Misc. Mfg Costs 52,000 Total Cost of Goods Sold (COGS) 582,000 Gross Margin (Gross Profit) 743,000 Operating Expenses Supplies 29,000 Sales Staff 56,000 Administrative Staff 34,000 Heat, Lights and other Utilities 125,000 Communication Expenses 35,000 Repairs and Maintenance 112,000 Marketing Expense 109,000 Insurance 24,000 Travel Per Diem and Mileage 15,000 Interest 10,500 Vehicle Expense 26,500 Commissions 15,000 Accounting & Legal Services 22,000 Depreciation 34,000 Total Operating Expenses 647,000 Operating Margin (Operating Profit) 96,000 Other Income/Expense 8,000 Net Profit 104,000 18

19 Statement of Retained Earnings Tells Us: Crazy Birdhouses, LLC. Statement of Retained Earnings As of Dec. 31, Balance January 1st 515, ,000 Prior Period Adjustment 35,000 94,000 Adjusted Balance January 1st 550, ,000 Net Profit for the year 102, ,000 Total 652, ,000 Distributions Preferred Stock (10,000) (10,000) Common Stock (30,000) (30,000) Total Distributions (40,000) (40,000) Plant Expansion (116,000) Balance Dec , ,000 Facts 5,000 birdhouses, $10 each Birdhouses direct cost of $4 each Operating expenses of $13,000 selling and $5,000 administrative costs Income Statement Revenue/Sales Cost of Goods Sold (COGS) Gross Margin (Gross Profit) Operating Costs (Selling & Overhead) Operating Margin (Operating Profit) Tax (30%) Profit After Tax (Net Income) 19

20 Statement of Cash Flow Equation: Tells Us: Crazy Birdhouses, LLC. Statement of Cash Flow January - December Cash Balance Dec. 31, ,000 Operating Activities Net Income 104,000 Depreciation Expense 34,000 Change in Operating Balance Sheet Accounts: Short Term Investments (20,000) Short Term Notes Receivable (12,000) Accounts Receivable (50,000) Inventory 10,000 Operating Line of Credit (2,000) Accounts Payable 63,000 Accrued Expenses 23,000 Prior Period Adjustment 94,000 Cash Provided by Operating Activities 244,000 Investing Activities Properties (114,000) Fixtures and Equipment (84,000) Net Cash Provided by Investing Activities (198,000) Financing Activities Increase in Long Term Notes Payable 4,000 Cash Paid for Dividend (40,000) Net Cash Provided by Financing Activities (36,000) Net Increase/(Decrease) in Cash Balance 10,000 Cash Balance Dec. 31, ,000 20

21 Financial Statements -- Analysis There are many tools to guide you in determining whether the financial numbers are good or bad: Trend Analysis Competitive and Industry Benchmarking Variance Analysis Ratio Analysis 21

22 Financial Statements Variance Analysis Here is a typical Variance Report: Crazy Birdhouses, LLC. Monthly Report of Operations October 2010 $ Variance to Budget Variance to Prior Year Actual Budget Prior Year $ % $ % Hours Billed 1,000 1, (95) -8.7% % Revenue (Billed) $ 61,500 $ 65,700 $ 59,160 $ (4,200) -6.4% $ 2, % Average Billing Rate/Hr $ $ $ Expense Salaries $ 29,500 $ 28,540 $ 27,773 $ % $ 1, % Benefits $ 6,785 $ 6,564 $ 6,388 $ % $ % Supplies $ 450 $ 405 $ 360 $ % $ % Insurance $ 1,250 $ 1,000 $ 750 $ % $ % Auto Expense $ 380 $ 380 $ 515 $ - 0.0% $ (135) -26.2% Advertising $ 800 $ 3,160 $ 4,500 $ (2,360) -74.7% $ (3,700) -82.2% Postage $ 38 $ 60 $ 42 $ (22) -36.7% $ (4) -9.5% Rents & Leases $ 7,800 $ 7,800 $ 7,800 $ - 0.0% $ - 0.0% Repairs & Maintenance $ - $ 125 $ 200 $ (125) % $ (200) % Phones $ 150 $ 150 $ 150 $ - 0.0% $ - 0.0% Utilities $ 650 $ 650 $ 600 $ - 0.0% $ % Consulting Services $ 1,500 $ - $ - $ 1,500 NA $ 1,500 NA Total Expenses $ 49,303 $ 48,834 $ 49,078 $ % $ % Gross Profit / (Loss) $ 12,197 $ 16,866 $ 10,082 $ (4,669) -27.7% $ 2, % October YTD 2010 $ Variance to Budget Variance to Prior Year Actual Budget Prior Year $ % $ % Hours Billed 9,600 10,000 9,000 (400) -4.0% % Revenue (Billed) $ 563,520 $ 600,000 $ 526,500 $ (36,480) -6.1% $ 37, % Billing Rate/Hr $ $ $ Expense Salaries $ 320,000 $ 290,000 $ 277,500 $ 30, % $ 42, % Benefits $ 68,782 $ 66,564 $ 63,908 $ 2, % $ 4, % Supplies $ 4,000 $ 4,500 $ 4,200 $ (500) -11.1% $ (200) -4.8% Insurance $ 10,000 $ 10,000 $ 7,500 $ - 0.0% $ 2, % Auto Expense $ 380 $ 380 $ 515 $ - 0.0% $ (135) -26.2% Advertising $ 10,000 $ 32,000 $ 50,000 $ (22,000) -68.8% $ (40,000) -80.0% Postage $ 400 $ 600 $ 450 $ (200) -33.3% $ (50) -11.1% Rents & Leases $ 78,000 $ 78,000 $ 78,000 $ - 0.0% $ - 0.0% Repairs & Maintenance $ 1,500 $ 1,250 $ 2,000 $ % $ (500) -25.0% Phones $ 1,500 $ 1,500 $ 1,500 $ - 0.0% $ - 0.0% Utilities $ 8,000 $ 8,500 $ 7,200 $ (500) -5.9% $ % Consulting Services $ 15,000 $ - $ - $ 15,000 NA $ 15,000 NA Total Expenses $ 517,562 $ 493,294 $ 492,773 $ 24, % $ 24, % Gross Profit / (Loss) $ 45,958 $ 106,706 $ 33,727 $ (60,748) -56.9% $ 12, % 22

23 Financial Statements Ratio Analysis Looking at key Balance Sheet and Income Statement numbers in comparison to each other in specific ways can lead you to a more in depth understanding of where you are doing well and where you need improvement. Liquidity Ratios answer the question: Can we meet our short term obligations with liquid Current Assets? Activity Ratios answer the question: Are we effectively using our investments in Operating Assets particularly Accounts Receivable and Inventory? Leverage Ratios tell us whether or not we have too much debt. Profitability Ratios tell us if we are making enough money relative to our Revenue, Assets and Investors Equity. 23

24 Financial Statements Ratio Analysis Key Ratios By Category: Liquidity Current = Current Assets / Current Liabilities -- Should be 2.0 or higher Quick/Acid Test = Cash + Marketable Securities / Current Liabilities -- Should be 1.0 or higher Activity DSO (Days Sales Outstanding) = Accounts Receivable / Sales Per Day DSI (Days Sales of Inventory) = Inventory / COGS Per Day DPO (Days Payable Outstanding) = Accounts Payable / COGS Per Day Leverage Debt to Total Assets = Total Liabilities / Total Assets -- Should be less than 50% Profitability Gross Profit (Margin) % = Gross Profit (Margin) / Net Revenue Operating Profit (Margin) % = Operating Profit (Margin) / Net Revenue Return on Sales (Revenue) % = Profit After Tax / Net Revenue Return on Assets % = Profit After Tax / Total Assets Return on Equity % = Profit After Tax / Total Owners Equity 24

25 Financial Statements Ratio Analysis Exercise Crazy Birdhouses, LLC knows the following about their business, industry and competitors: 1) Credit terms to most customers are 30 days from Date of Invoice. 2) They aim to have 30 to 45 days of inventory. 3) Their suppliers have terms of 45 days from Date of Invoice with them. 4) The overall industry average Net Income % is 5%. Using the numbers from the Crazy Birdhouses, LLC Balance Sheet and Income Statement, calculate the following ratios: Liquidity Quick Ratio Cash + Marketable Sec. / Current Liabilities Activity DSO Accounts Receivable / Revenue Per Day Days DSI Inventory / COGS Per Day Days DPO Accounts Payable / COGS Per Day Days Leverage Debt To Total Assets Total Liabilities / Total Assets % Profitability Return on Sales Net Profit / Total Revenue (Sales) % Return On Assets Net Profit / Total Assets % Return On Equity Net Profit / Total Equity % 25

26 Financial Statements Ratio Analysis Exercise Discussion: Where is Crazy Birdhouses, LLC doing well? Where does Crazy Birdhouses, LLC need to improve? 26

27 Using the Numbers to Run Your Business 27

28 Using The Numbers Monthly Analysis Finance and Accounting intimidates many business owners and managers so they don t give priority to rigorously analyzing performance on a monthly, quarterly, and annual basis. This is the major reason 85% of small businesses fail within the first year of operation. Doing a few key financial tracking tasks well improves your chances of business success. Let s start with Monthly Performance Analysis: 1) Close the Books 2) Produce The Financial Reports 3) Analyze and Explain Key Variances 4) Identify New Factors 5) Make Key Operational Adjustments/Decisions 6) Update the Forecast for the Rest Of The Year (ROY) What can you do within your role to improve the process of looking at the numbers and adjusting your activities each month? 28

29 Using The Numbers Annual Budget/Forecast Once you have your fingers on the pulse of your business based on rigorous monthly analysis, you are in a better position to forecast. A good forecast starts at the top with basic business direction discussions and concludes with the key numerical calculations. Jan-Dec July-June Management Plan Mission Vision Key Annual Objectives Economic Assumptions Competitive/Technology/Industry Assumptions Operating Plan (Produces Income Statement) Revenue/Sales Units (Hours/Units) Price ($/Hour/$/Unit) COGS Units Material Cost ($/Unit) Labor/Payroll $/Hr with increases by person/position Benefits rate components Other Operating Costs Financial Plan Income Statement (from above) Balance Sheet Cash Flow Forecast (Including Capital Budget) Does the annual budget/forecasting process need to be improved in your organization? What needs to be done and how can you be part of doing it? 29

30 Using The Numbers Key Financial Management Steps What can you do to gradually help your organization improve the way you use the numbers to manage the business? 1) Rigorous monthly review cycle 2) Broad participation 3) Document key issues and assumptions 4) Adequate development and review time make it a priority 5) Risks and contingency plans 6) Constantly seek Action Result ; Cause Effect 30

31 Notes 31

32 Your Action Plan If you are going to retain any of these new skills you ve learned here today, you need to do it in a SMART way: Specific Measureable Achievable Realistic Time-bound Write down two or three things you ve learned today that you would like to practice and apply Write down a time during the day when you can take 5 or 10 minutes to practice these skills. Finally, write down the date that is 30 days from today Put this date in your calendar as a reminder. Word it: Speaking Finance Workshop Goals. When that reminder pops up, write down ONLY THE THINGS THAT ACTUALLY STUCK AND THAT YOU ARE USING from the workshop. Pat yourself on the back. Set another 30 day goal. Congratulations! This is how learning happens. 32

33 Soul Canyon Training & Development Programs Located in beautiful Grants Pass, Oregon but serving clients throughout North America, Soul Canyon offers over 50 program titles that can be customized to fit any group or budget. Our most popular programs: Adapting & Connecting For Greater Success Colorful Stress Management Colorful Communications Colorful Conflict Resolution Dealing with Difficult People Creative Problem Solving Skills What s Your Mission? What s Your Vision? Setting and Achieving Meaningful Goals Leadership Essentials Using The Law of Attraction Training & Development Manifest Your Dreams Competency Based Interviewing Microsoft Excel Basic to Advanced 2003 & 2007 Versions Microsoft PowerPoint Basic to Advanced 2003 & 2007 Versions Finance & Accounting for Non-financial People Custom Workshops We can also help you put together proactive Personal, Team and Organizational Development Plans so you can make the most of your training investment. Please give us a call and we ll get together and explore how we can help you. Rob & Mary Hambleton Soul Canyon Training & Development 168 Oakmont Drive Grants Pass, Oregon (541)

34 Meet Rob Hambleton Rob Hambleton graduated from the University of Utah with his MBA in From 1984 to 2001 Rob worked for Ford Motor, Eastman Kodak and Dell Computer in the areas of manufacturing, product design, logistics, and sales and marketing primarily in the capacity of Finance Director and later in the role of Project Manager. In 2001, Rob left Dell to start his own training, coaching and consulting business Soul Canyon Training & Development, LLC -- in Austin, Texas. In 2002, Rob moved his business to Oregon to be closer to family and work on a project to start an organic farmers cooperative in the Applegate Valley a project that became Siskiyou Sustainable Cooperative, which is still in operation today. In 2003, Rob took on the role of Project Manager for the Williams Education Coalition a rural community development project as well as functioning as SOASTC s Business Manager from 2004 to Rob currently teaches over 15 Fred Pryor/CareerTrack seminar titles including Excel, PowerPoint, Finance, Communication, Leadership and Personal Development topics. Rob currently resides in Merlin s Colonial Valley with his wife, Mary, and son, Wesley. 34

35 Let s stay in touch We would love to stay connected touch with you and, if you found the workshop valuable, we d love your referrals. You can sign up for our list at Periodically, we put out helpful information, tips, tricks, great books we ve read. Both Mary and Rob are on Facebook, so look us up and we ll be your friends! Training & Development If you would like us to sign you up for our newsletter, provide your information here: Name: Address: Tear off this last page at the dotted line and leave it with us and we ll get you signed up. It was wonderful having you in our workshop today! 35