Financial ToolsFinancial Tools

The following slide presentation was presented at an The following slide presentation was presented at an Enterprising Non-Profits (Enterprising Non-Profits (enpenp) sponsored learning ) sponsored learning event in Vancouver for Social Enterprises on March 16, event in Vancouver for Social Enterprises on March 16, 2011, by Emily Beam (General Manager, Street Youth 2011, by Emily Beam (General Manager, Street Youth Job Action) and Rebecca Pearson (Investment Job Action) and Rebecca Pearson (Investment Manager, Vancity Community Capital).Manager, Vancity Community Capital).

EnpEnp thanks Emily and Rebecca for their presentation. thanks Emily and Rebecca for their presentation.

For more information on For more information on enpenp, go to , go to www.enterprisingnonprofits.ca www.enterprisingnonprofits.ca

Financial Tools

Enp Evening #3Wednesday, March 16th, 2011

AGENDA

Introductions

Making Financial Statements Useful (Emily)

Questions

How to Talk to Your Bank (Rebecca)

More Questions

Financial Statements – Balance Sheet

Assets

Current Assets- cash $ 6,000- accounts receivable $ 1,000- inventory $ 20,000

Long term Assets- leasehold

improvements $ 20,000- equipment $ 10,000

Total Assets $ 57,000 =

Liabilities and Equity

Current Liabilities - line of credit $ 20,000- accounts payable $ 5,000

Long Term Liabilities- equipment loan $ 5,000

Equity- retained earnings $27,000

Total Liabilities $30,000 + Equity $27,000

Financial Statements – Income Statement

Revenues $150,000

- Variable Costs $ 75,000

= Gross Margin $ 75,000

- Fixed Costs $100,000

= Net Business Income ($ 25,000)

+ Grants/Donations $ 35,000

= Net Income $ 10,000

Financial Statements – Cashflow

Operating activities - converts the items reported on the income statement from the accrual basis of accounting to cash.

Investing activities - purchase and sale of long-term investments and property, plant and equipment.

Financing activities - issuance and repurchase of the company's own bonds and stock and the payment of dividends.

→ Increase (decrease) in cash

Cash, beginning of the yearCash, end of the year

Cashflow Budget / Projections

Cash, beginning of the year

+ Receipts:cash sales

cash from receivablesloan disbursement

- Disbursements:cash expenses

inventoryfixed costsloan repayments

= Cash, end of the year

BALANCE SHEETAssetsCurrent Assets

- cash $ 6,000- accounts receivable $ 1,000- inventory $ 20,000

Long term Assets- leasehold

improvements $ 20,000- equipment $ 10,000

Total Assets $ 57,000

Liabilities and EquityCurrent Liabilities

- line of credit $ 20,000- accounts payable $ 5,000

Long Term Liabilities- equipment loan $ 5,000

Equity- retained earnings $ 27,000

Total Liabilities + Equity $ 57,000

INCOME STATEMENT

Revenues

$150,000

- Variable Costs $ 75,000

= Gross Margin $ 75,000

- Fixed Costs

$100,000

= Net Business Income ($

25,000)

+ Grants/Donations$ 35,000

= Net Income $

10,000

True Cost Accounting

Capture all costs of your social enterprise

Some considerations:

Classify and organize your accounts to suit your situations and needs

Distinguish between fixed and variable costs

Look for hidden costs and contributions

Distinguish your social costs from your business costs

Ratios

Profitability Ratios

Gross (Profit) Margin:

Gross Profit

Sales

Using our example:

Gross Margin = $ 75,000 = 50%

$150,000

Profitability Ratios

Total (or Net) Profit Margin: Net Income Sales

Sales Growth: Current Period Sales - Previous Period SalesPrevious Period Sales

Reliance on Revenue Source: Revenue SourceTotal Revenue

Operating Self-Sufficiency: Business RevenueTotal Expenses

Liquidity Ratios

Working Capital:

Current Assets

Current Liabilities

Using our example:

Working Capital = $27,000 = 1.08x

$25,000

Operating Efficiency Ratios

Inventory Turnover:

Cost of Goods Sold/Gross Margin

Average Inventory

Using our example:

Inventory Turnover = $ 75,000 = 3.75x

$ 20,000

Operating Efficiency Ratios

Days in Inventory: Average InventoryCOGS x 365

Accounts Payable Turnover & Days in AP is same calculation as Inventory

Accounts Receivable Turnover: Net SalesAverage Accounts Receivable

Days in Accounts Receivable: Average Accounts ReceivableSales x 365

Total Asset Turnover: RevenueAverage Total Assets

Leverage Ratios

Debt to Equity:

Short Term + Long Term Debt

Total Equity

Using our example:

Debt to Equity = $ 25,000 = 0.93x

$ 27,000

Leverage Ratios

Loan to Value:Debt associated with Project

Total Value of Project (potentially including “soft costs”)

(may also be based on “collateral value” – what could we get if we had to sell it fast)

Using our example:

Loan to Value = $ 5,000 = 50%

$10,000

Leverage Ratios

Debt Service Coverage:

EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization)

OR

Net Income + Depreciation / Amortization + Interest + Taxes

Principal and Interest payment associated with all debt

Using our example:

Debt Service Coverage = $10,000 = 4.11x

$ 2,436

Tools for Assessing Financial Risk

Understanding Your Cost Structure

Revenues

- COGS (Variable Costs)

= Gross Margin

- G&A Expenses (Fixed Costs, or O/H)

= Net Income

Break Even Analysis & Break Point

Break even is the level of sales required for Gross Profits to cover all Fixed Costs Sales – COGS = Fixed Costs (Unit price – Variable unit cost) * volume = Fixed Costs

Break point is when a business reaches capacity within their fixed costs (facilities, staff, etc.) Therefore a new investment is required to expand capacity and

continue growth

Map some of the most important areas of

risk and uncertainty

Sensitivity Analysis

Ongoing Monitoring

Identify the key risk areas and track them closely

Use benchmarks

Resources

Demonstrating Value Tools & Resources http://www.demonstratingvalue.org/what-we-offer/our-solutions/tools-and-resources

Triodos Balancing Risk www.sayervincent.co.uk/Asp/.../File/Balancing%20risk%20guide.pdf

Vancity Financial Fitness toolkit series https://www.vancity.com/MyCommunity/Library/NotForProfit/

Learning to Speak "Banker"

Keys to a Happy Relationship with your Investors

Understand your business Know when you need investment Understand your investors’ needs Communicate your strategy to investors Gain investment and grow your enterprise!

Community planning activities including

establishing community priorities

Development of actual project

options to realize these community priorities

Confirm sources of

funding and financing –

finalize terms and

conditions

Monitor and support these

relationships and their

involvement once the project is

operational

Traditional Point of Investor/Lender Involvement

When to Involve Potential Investorsor The Sources of Funding and Financing

Developing a Relationship Approach

What to Bring to A Lender

outline for use of funds 4 years of reviewed or audited statements current budget list of directors & key management constitution & bylaws

Working with Investors: it’s a partnership

Understanding the Conventional Capital Market

Pricing capital in Conventional Markets

Investors want

High returns on investment (ROI)Safety / Security (Mitigated Risk)Liquidity / ExitConvenience / Low Transaction Costs

Conventional Investment Intermediaries (i.e. Banks)

Must match deposits with loans (ie investor expectations with fund performance)

Look for low risk, low cost, convenient transactions Preference for large, more liquid deals

Costs as much to do a small deal as a large one No room for patience / judgment / tailoring

– especially on smaller scale transactions

May compare a deal to every other on the planet

Senior Debt (Op. credit, secured term,

etc)Fully Secured & Proven

Earnings

Subordinated Debt (VCC, CFDC)

Unsecured & Proven Earnings

Venture CapitalUnsecured &

Unproven Earnings

Borrowing Cost

7.5%

35%

15%

Borrowing Cost & Risk to Investor

High

Med.

Low

Risk Level

Repayable Capital : In Context

Enterprise Development Path

SEED/ PLANNING

START-UPLaunch

START-UPSurvival

GROWTH Profitability

MATURITY

Idea/Readiness

Feasibility assessment

Business Planning

Raising Capital

Launch Prep

Enterprise begins operations

Revise strategy / business plan

Build enterprise & mgmt capacity

Move to \profitability

Stability/success in initial market

Expand to new market/products

Equipment, facilities, HR

Sustainability

Geographic or product growth

Spin-off or new enterprises

Source: enterprising nonprofits

Convenience/Transaction Costs

Simplicity Legal costs Hand-holding Monitoring Unusual elements

Exit Strategy

How will the investor get her money back? How long will she have to wait? Is there a back-up plan?

Loan Decision Model

Per

sona

lE

nvironment

Policy

Management Repayment Equity Security

•Experience

•Skills

•Education

•Capabilities

•Cash

•Contributions

•Past performance

•Forecasts

•Stability

•Flexibility

•Buildings

•Equipment, etc. at liquidity value

Has run this kind of business before

Has three years of successful performance

Average one third equity

100% covered on liquidation value

From Sunrich Management

Sources of Money

Bank Loans (Secured, Market Rates) – pure debtfacilitated by co-signers and collateral security

Vendor Take-back or Seller Financing Past Surpluses – pure equity Grants (Foundations, Government) – can also

be equity Donations (fundraising & in-kind contributions) Sponsorships Partnerships (Public / Private / Voluntary Sector) Tax Credits / Benefits

Sources of Money

“Love Money” – members and related organizations

Program Related Investments

Working Capital (buyers and suppliers)

Volunteers & Staff (knowledge & energy)

Relationships and Social Capital

Risk Capital (e.g. subordinated debt / preferred shares)

Social Venture Capital

Government Sources

Federal Government• WD - Community Futures• HRSDC• Natural Sciences and Engineering Research Council

– Industrial Research Assistance Program (IRAP)– National Research Council (NRC)

• CMHC (Mortgage Insurance, RRAP Grants)• Canada Council• INAC• BDC• Tax Credits and Incentives

(RRSP, Charitable Deductions)

Gov’t Sources cont’d

Provincial / Territorial governments

Community Venture Capital Corporations Employee Share Ownership Plans Green Energy support Tax credits / incentives Ministerial spending

Municipal / Regional Entities Density allowances Tax policy Local participation / contribution Green Municipal Fund - FCM

Institutional Sources

Institutional Columbia Basin Trust Northern Trust Coast Opportunities Funds Renewal Partners, TIDES Canada Vancouver Foundation McConnell Foundation (incl. CEDTAP) ABC Canada, ACCs, Peace Hills Trust

Also non-institutional, private investors, members of co-ops, etcwith different investment objectives

Keys to a Happy Relationship with your Investors

Understand your business Know when you need investment Understand your investors’ needs Communicate your strategy to investors Gain investment and grow your enterprise!

Final Questions?

Emily Beam

General Manager

Street Youth Job Action

ebeam@fsgv.ca

Rebecca Pearson

Investment Manager

Vancity Community Capital

Rebecca_pearson@vancity.com