foundation for success using financial management- chase morrison

Valley Economic Development Center & Resource Planning Solutions

How to Build a Foundation for Success Using Financial Management

http://www.chasemorrisoncfo.com | ã 2012 Chase Morrison, Inc | [email protected]

What should you expect to learn?

• How to establish processes that will provide you with a foundation for business growth

• Methods for better understanding the factors that impact your business performance

• Ways to improve your ability to foresee opportunities and issues as well as react to them sooner

• Gain an understanding of benchmarks and how they can help your business

• How you can acquire business intelligence from your accounting data


Agenda• Use Excel to create a P&L, Balance Sheet and Cash Flow plan

based on QuickBooks data• Review some important performance metrics• Review the performance management cycle• Define critical success factors (CSF) explore how to create them• Look at how Key Performance Indicators support CSFs • Review a sample set of KPIs• Define dashboards and describe the relationship between KPIs

and dashboards• Learn how to create dashboard• Define benchmarks and why are they important• Summarize keys to foundation for success


Reasons why is planning important

• Need a yardstick to measure progress• Need feedback to either validate or refute critical

assumptions• Helps to identify deviations that should be

addressed• Provides intelligence on future opportunities and

threats• Sets long-term strategic priorities• Provides basis to communicate and align

objectives across the business http://www.chasemorrisoncfo.com | ã 2012 Chase Morrison, Inc | [email protected]

Step #1 – Build a Profit & Loss (P&L) Plan

• Start with prior year actual results

• Revenue planning is most critical

• Detail level is discretionary

• Example at right is pulled from Quickbooks

• Used escalation factors to produce monthly budget


Profit & Loss Plan (Excel Workbook)

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Net Sales

Cost of Goods

Variable Expense

Fixed Expenses

Net Income

Prior-Year Results from QB

2012 Budget By Month

Escalation Factors

Key objective is validation of your business model, as in “Income is > Expense”


Step #2 – Build a Balance Sheet Plan • Start with prior year actual • Cash basis vs. accrual

accounting• Balance sheet plan is a bit

more complex• Significant items are A/R,

inventory, fixed assets.• Use efficiency factors to

forecast A/R, inventory and Accts Payable.

• Fixed assets require analysis of new purchases & depreciationhttp://www.chasemorrisoncfo.com | ã 2012 Chase Morrison, Inc | [email protected]

Balance Sheet PlanSummary of what a company owns and what it owes

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Prior-Year Results from QB

2012 Budget By Month

Assets (This is what the company owns)

Liabilities (This is what the company owes to vendors, creditor & employees)

Equity (This is what is owned by stakeholders, investors and owners.)


Step #3 – Statement of Cash Flow

• Calculated using both the P&L and balance sheet.

• There is no budget vs. actual CF report in QB.

• Cash Flow is:+ AssetsPriorPeriod – AssetsCurrentPeriod

+ LiabilitiesCurrentPeriod – LiabilitiesPriorPeriod

+ EquityCurrentPeriod – EquityPriorPeriod

+ Net Income or (Loss)- Depreciation= Cash Flow


Cash Flow Plan

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Operating CF

Investing CF

Financing CF

Change in CF position for year

Metrics used to generate balance sheet• Days Sales Receivables – Measure of days of AR outstanding (70 days as of YE) • Days Inventory On Hand (OH) – Days of inventory outstanding (196 days as of YE)• Days Payable Outstanding – Days of Accounts Payable outstanding (99 days as of YE)• Note improvement as year progresses (DSR 70 to 66, DIOH 196 to 180)


Helpful Ratios & Tests For Maintaining Optimum PerformanceP&L Return on Sales % Net Profit / Sales Gross Margin % Gross Profit / SalesBalance Sheet Days Sales Outstanding AR / Avg Daily Sales Days Inventory Outstanding Inventory / Average CO Cash Cycle DIOH + DSO Return on Assets % Net Profit / Total Assets Return on Equity % Net Profit / Equity Debt To Equity Debt /EquityOperating CF OCF is positive If not, need to understand why OCF > Net Profit If not, need to understand why

unable to convert NP to cash

OCF > Fixed Asset Investment Shows ability to fund fixed assets internally


The Performance Management Cycle

Establish Plan & Assumptions

Establish Critical Success

Factors

Identify Key Performance

Indicators

Create Dashboards

Measure Performance

Gain New Insight & React

To Changes


Critical Success Factors

• CSF = What things absolutely need to be accomplished for a business to succeed

• Questions that you can use to get at your CSFs:– My business is better than my competitors because…– My customers always say that they like it when…– If I stopped ______________ my customers would start to

go elsewhere– Our products are highly sought after because…– Because of our __________ customers perceive us to be

______________.– We need to achieve _____________ to establish the

necessary __________ resources from ___________.


CSFs for Example Company

• Service levels need to improve 25% over prior year– Maintain order responsiveness

• Customer Service response lead times need to decrease 10%– Be attentive to customer complaints and order issues

• Internally fund all cash requirements for 2012, including those relating to new product launch– Do not incur additional debt in 2012

• Managing CSFs requires measuring and managing their associated key performance indicators.


Key Performance Indicators (KPI)

• KPIs are used measure CSF performance and ensure we are on target

• KPIs should tell you what corrective action is required, if any.

• KPIs are typically not financial• Tie performance responsibility to a specific group

or person• Measured regularly• Are typically the source for dashboard measures.


KPIs for Example Company• Service levels need to improve 25% over prior year– KPI #1: Backorders cannot exceed $7.5K (‘11 Avg=$10K)

• Customer Service response times need to decrease 10%– KPI #2: Average call waiting time reduced from 180 seconds to

160 seconds• Internally fund cash flow requirements relating to new

product:– KPI #3: Accounts Receivable needs to go from 70 days to 66 by

year end 2012– KPI #4: Inventory days on hand have to drop from 196 days to

180 days– Gross Margin needs to increase 1% over prior year (from 41% to

42%)KPI #5: Reduce scrap cost 25%KPI #6: Reduce direct labor hours 5%http://www.chasemorrisoncfo.com | ã 2012 Chase Morrison, Inc | [email protected]

Creating Dashboards

• Use Excel charting capability to create dashboards• This example leverages a six panel layout• Display includes prior year as column and current

year trend as line.• Each graph uses two Y axes because of the

column-line combination• Plan and actual data are input in space to left of

graphs• Month cell at A2 for month number


Using A KPI Graph (Backorders)

Note prior-year average for perspective

Feb, Mar, Apr trend calls out for attention.

Target set a 75% of PY ($7.5K)

Legend helps identify Favorable vs Unfavorabletrends

Looks as though Feb, Mar, Apr issue was resolved in May


Six-Panel Dashboard• Summarizes KPIs

primary KPIs that drive CSFs

• Updating is function of business importance

• Significantly more impactful when linked to compensation

• Provides insight on current as well as future performance


Benchmarking

• Is a process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries.

• Differences between one’s own processes and the target’s, highlights areas for improvement

• Relevant performance metrics include balance sheet metrics (e.g. DSO, DIOH, etc.), profitability metrics (GM %, ROA, etc.).

• Can also compare resources used to perform a function, such as Finance (as in % revenue dedicated function).

• Benchmarking against targets in other industries can also provide valuable insight.

• Objective is to identify weaknesses and then adapt best practices to one’s own business.


Benchmarking Example


Keys to foundation for success

1. Establish plans for your P&L, balance sheet and cash flow2. Regularly generate and review plan vs. actual results3. Identify performance deviations and determine root cause of

variance4. Keep an eye on important ratios (ROA, GM %, etc.)5. Utilize CSFs and KPIs to identify root causes of variances to plan

and ensure business is “on track”6. Take action to correct unfavorable trends7. Implement simple dashboards to help identify trends and

stimulate review of threats and opportunities8. Find and utilize relevant benchmarks and adapt best practices9. Create close linkages between financial reporting and financial

planning


foundation for success using financial management- chase morrison

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