Sharing Financial Information: Why Can t Everyone See What I See?

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1 Sharing Financial Information: Why Can t Everyone See What I See? Alex Freytag, Ownership Thinking, LLC Kevin Martin, S.G. Morris Company April 20, 2012

3 What does an Owner think about? Copyright Ownership ThinkingTM ,

4 Cost Control Owners think about Cash Flow Risk Revenue Growth Market share Competition Employee Retention

5 What does an Employee think about? Copyright Ownership ThinkingTM ,

6 Opportunity Employees think about Paycheck Benefits Doing my Work Security Friday Work Environment

7 Moving From Me to Us Owner Cash Flow Risk Revenue Growth Market share Competition Employee Retention Cost Control Employee Paycheck Benefits Doing my Work Security Friday Work Environment Opportunity Copyright Ownership ThinkingTM ,

8 Creating an Organization of Winners High ENTITLEMENT EARNING LET S GO FOR EXCELLENCE! FEAR I LIKE THINGS JUST THE WAY THEY ARE HAVE YOU THOUGHT IT THROUGH? SHOOT FOR THE BIG ONE! YOU CAN NEVER LET UP I HAVE IT COMING I DID THE BEST I COULD WATCH OUT! MAKE ME SAFE Low High

9 The Ownership Thinking Process The Right Incentives The Right Measures The Right Education The Right People Copyright Ownership ThinkingTM ,

10 Money Matters Financial Training Objectives To gain a basic understanding of financial statements, how they impact one another, and the difference between profit and cash. To discuss the key financial and operational key indicators, and how each team member impacts them. To develop entrepreneurship. To learn how to drive your incentive plan and ESOP value. To brainstorm ways you can participate in improving the financial performance at your company. To learn about Rapid Improvement Plan design, and to create some RIPs that will be immediately utilized to improve performance and fund your bonus plan as well as company value. Copyright Ownership ThinkingTM ,

12 The Right Education: Financial Acumen What your employees don t know will hurt you Copyright Ownership ThinkingTM ,

13 Sharing Financial Information CONs Competitors may get info Customers may get info Our employees are not smart enough Employees may freak out (if performance is bad) Employees will want more money PROs Employees make better decisions Employees are more engaged Employees are more accountable ESOPs who engage, outperform 15-30%; if not, underperform by 6% Copyright Ownership ThinkingTM ,

14 The Three Financial Statements The Income Statement The Cash Flow Statement The Balance Sheet Copyright Ownership ThinkingTM ,

15 The Three Financial Statements Income Statement Sales - Expenses Profit Before Tax Own Cash Flow Statement Cash In - Cash Out = Change in Cash Balance Sheet = Owe + Really Own INVENTORY EQUIPMENT RECEIVABLES DEBT Copyright Ownership ThinkingTM ,

16 The Income Statement DESCRIPTION $ HOW DO I CALCULATE IT? 1 Sales $1,050,000 2 Direct Expenses $825,000 3 Gross Profit Subtract Direct Expenses (2) from Sales (1) 4 Overhead Expenses $131,000 Subtract Total Overhead Expenses (4) from 5 Profit Before Taxes (PBT) Gross Profit (3) 6 Estimated Income Tax $20,000 7 Net Profit Subtract Income Tax (6) from PBT (5) Copyright Ownership ThinkingTM ,

17 The Income Statement DESCRIPTION $ HOW DO I CALCULATE IT? 1 Sales $1,050,000 2 Direct Expenses $825,000 3 Gross Profit $225,000 Subtract Direct Expenses (2) from Sales (1) 4 Overhead Expenses $131,000 Subtract Total Overhead Expenses (4) from 5 Profit Before Taxes (PBT) $94,000 Gross Profit (3) 6 Estimated Income Tax $44,000 7 Net Profit $50,000 Subtract Income Tax (6) from PBT (5) Copyright Ownership ThinkingTM ,

18 Everyone Can Create Profit SALES - EXPENSES = PROFIT Copyright Ownership ThinkingTM ,

19 Increasing Efficiencies (more for less) John Employee $2, Two Thousand Eighty Three &.00 $2,083 $2,083 Mortgage $940 Refinance Mortgage $825 Phone Bill $128 Change Provider $100 Food $420 Food Budget $380 Utilities $210 Car Expense $150 Conserve Utilities Maintenance $170 $130 Credit Cards $175 Pay Down Cards $228 $60 $250 Vacation Fund $100 Home Improvement $ 50 $60 $100 Copyright Ownership ThinkingTM ,

20 Finding the Money (find the 8% falling through the cracks) Break your team into groups of four or five, and have them come up with a list of the cracks in the table. These are defined as inefficiencies (waste) or missed opportunities. Go from group to group, getting one thing from each one, until you ve filled up a flip chart sheet. Once you ve done this, ask them how much money they think is on the piece of paper. $100k? $200k? $500k? Once they have stopped at a number, divide it by your company s profit % to see how much revenue it would take to bring that much money to the profit line. Copyright Ownership ThinkingTM ,

21 The Income Statement DESCRIPTION $ HOW DO I CALCULATE IT? 1 Sales $ Gross Profit 2 Material Cost $ Labor Cost $0.30 Direct Expenses Subtract Direct Expenses (2 & 3) from Sales 5 Overhead Expenses $0.45 Subtract Total Overhead Expenses (5) from 6 Profit Before Taxes (PBT) Gross Profit (4) Copyright Ownership ThinkingTM ,

22 Blank Income Statement Exercise 2008 % of Sales Sales $ % Labor $ % Materials $ % Gross Profit $ % Operating Expenses $ % Net Operating Profit $ % Taxes $ % Net Profit (loss) $ % Copyright Ownership ThinkingTM ,

23 Where does $1 in Sales Go? Profit Taxes Operating Expenses Labor Materials Copyright Ownership ThinkingTM ,

24 The Cash Flow Statement CASH IN - CASH OUT = IN CASH Cash Flow Statements Reflect Actual Cash Inflows and Outflows Collections Sale of Assets Loans Expense Payments Loan Payments Capital Expenditures Our Change in Cash is Determined by the Difference Between Cash Inflows and Cash Outflows Copyright Ownership ThinkingTM ,

25 Case Study: Collection Days Average collection days are running around 55 (meaning customers pay after an average of 55 days after invoicing). Questions for Consideration: How do average collection days impact our Income Statement? How do they impact our Cash Flow? What departments have an impact on average collection days?

26 Case Study: Collection Days If average collection days could be reduced from 55 to 40, approximately how much cash would this bring into the business? Monthly Sales $2,700,000 Divided by Days in the month 30 Equals daily Potential Collections $90,000 X 15 (55-40) $1,350,000 What could this cash be used for? Could this impact the Income Statement? What actions can be taken to improve this situation?

27 Will Buying Something Affect Our Incentive? CASH IN - CASH OUT = IN CASH SALES - DEPRECIATION - INTEREST -EXPENSES =PROFIT (LOSS) ASSETS = LIABILITIES + EQUITY (OWN) (OWE) (REALLY OWN) DEBT Revenue improvement or cost savings should more than offset the cost of interest and depreciation! Ownership Thinking 2012

28 Inventory Turns WHY IS INVENTORY MANAGEMENT IMPORTANT? Think of inventory as money sitting on shelves. Money that is tied up and can t be used for other purposes such as paying down debt, making early payments to suppliers to take advantage of discounts, or making capital expenditures for growth. It has a tremendous impact on Cash Flow. Inventory Turns refers to how many times we sell our inventory in a year. The more times we can sell it, the less we keep on hand. If we had $3,000,000 Cost of Goods Sold over the year and turned our inventory 3 times, we would have $1,000,000 sitting on our shelves ($3,000,000/3). If we turned our inventory 4 times, how much cash would be have freed up? Obsolete Inventory refers to inventory that isn t moving at all. Perhaps it was from a bad purchase, or is no longer used in our products. Discuss some of the ways to better manage inventory. Copyright Ownership ThinkingTM ,

29 The Ownership Thinking Process The Right Incentives The Right Measures The Right Education The Right People Copyright Ownership ThinkingTM ,

30 CASE STUDY: FINANCIAL PERFORMANCE, ESOP & COMPANY Update All information contained in this presentation should be treated as Company Confidential. Please refrain from discussing the information from this meeting, with other employees, until all the other meetings have been concluded. FISCAL YEAR ENDED MAY 31, 2011

Presentation CONTENTS Current Booking Activity & Backlog Fiscal xxxx Income Statement Review and Comparison Fiscal xxxx Year End Balance Sheet S. G.

31 Presentation CONTENTS Current Booking Activity & Backlog Fiscal xxxx Income Statement Review and Comparison Fiscal xxxx Year End Balance Sheet S. G. Morris Company ESOP 5/31/xx Value and Review of Factors affecting Share Value Current Fiscal Year Year-to-Date Financial Results General Financial Outlook for the Year Operational Plans and Budget and Earnings Targets Questions & Discussion

32 Last 3 Years - Income Statement Comparison For the Fiscal Years Ended 5/31/2011 5/31/2010 5/31/2009 TOTAL SALES XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX LESS COST OF SALES XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX GROSS MARGIN ON SALES XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX DIRECT COMMISSION XXX,XXX XXX,XXX XXX,XXX TOTAL GROSS MARGIN XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX GROSS MARGIN % XX.X % XX.X % XX.X % TOTAL OPERATING EXPENSES XX,XXX,XXX XX,XXX,XXX XX,XXX,XXX NET PROFIT ON SALES X,XXX,XXX X,XXX,XXX X,XXX,XXX TOTAL OTHER INCOME & EXP. XXX,XXX XXX,XXX XXX,XXX NET PROFIT FOR THE YEAR X,XXX,XXX X,XXX,XXX X,XXX,XXX

33 Income Statement Year over Year Sales increase Overall Gross Margin $ increase Gross Margin % up

34 Income Statement: Plan vs. Actual PLAN ACTUAL For the Year Ended 5/31/2011 5/31/2011 TOTAL SALES XX,XXX,XXX XX,XXX,XXX LESS COST OF SALES XX,XXX,XXX XX,XXX,XXX GROSS MARGIN ON SALES X,XXX,XXX X,XXX,XXX DIRECT COMMISSION XXX,XXX XXX,XXX TOTAL GROSS MARGIN XX,XXX,XXX XX,XXX,XXX TOTAL OPERATING EXPENSES XX,XXX,XXX XX,XXX,XXX NET PROFIT ON SALES XX,XXX,XXX XX,XXX,XXX TOTAL OTHER INCOME & EXP. XXX,XXX XXX,XXX NET PROFIT / <LOSS> XX,XXX,XXX XX,XXX,XXX

35 Year-to-Year Balance Sheet Comparison ASSETS CASH AND INVESTMENTS (MARKET VALUE) ACCOUNTS RECEIVABLE (NET OF ALLOWANCE) INVENTORIES (NET OF ALLOWANCE) TOTAL CURRENT ASSETS PROPERTY & EQUIPMENT - NET OTHER ASSETS TOTAL ASSETS LIABILITIES ACCOUNTS PAYABLE ACCRUED COMPENSATION TAXES PAYABLE TOTAL CURRENT LIABILITIES NET WORTH CAPITAL STOCK RETAINED EARNINGS TOTAL NET WORTH TOTAL LIABILITIES & NET WORTH 5/31/2011 5/31/2010

36 S.G. Morris ESOP Value of Company: $ XXX,XXX,XXX 5/31/XX STOCK VALUE: XX,XXX SHARES Outstanding: $ XXX / Share ESOP Contribution $ : $ X,XXX,XXX

37 S.G. Morris ESOP Performance (con t) SGM ESOP SHARES** DOW JONES NASDAQ S&P , , , , , , , , , , , , , , YEAR CHANGE% 2 YEAR CHANGE% 3 YEAR CHANGE% 4 YEAR CHANGE%

38 S.G. Morris ESOP Factors Affecting Value Shares were redeemed by Company; Share price without redemption: Balance Sheet Strength External Markets- Comparable Companies: What are they trading at? How are we doing in comparison? Looking Forward Our Forecast

39 FY 2012 Operating Target / Budget Operating Plan for the Year Ended 5/31/2012 % Change from FY 2011 TOTAL SALES LESS COST OF SALES GROSS MARGIN ON SALES DIRECT COMMISSION TOTAL GROSS MARGIN TOTAL OPERATING EXPENSES NET PROFIT ON SALES TOTAL OTHER INCOME & EXP. (NET) NET PROFIT / <LOSS>

40 Example of Plans & Initiatives Rollout of Updated Updated Look Easier Navigation

Questions? Alex Freytag, Ownership Thinking LLC Tel: 614-571-8826 Email: alex@ownershipthinking.

41 Questions? Alex Freytag, Ownership Thinking LLC Tel: Columbus, OH Kevin Martin, S.G. Morris Tel: Cleveland, OH

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