real-world finance101 for small business (with professor frank)
DESCRIPTION
If you’re not a finance expert but you need the Finance 101 tips and best practices, join Professor Frank for an hour and learn what can make the biggest impact to your business --from goal-setting, tracking and learning how to spot a collision course.TRANSCRIPT
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Real-World Finance 101for Small BusinessA few basics and a few things you probably didn’t know
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Agenda• Performance analysis• Accounting vs. Finance• Accounting cycle• Roles• Software• Chart of accounts• Accrual accounting• Management cycle• Financial management
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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
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Trends to Watch
Revenue
Expense
Unhealthy
Time
$
Revenue
Expense
Time
$
Revenue
Expense
Time
$
Healthy
Revenue
Expense
Time
$
Revenue
Expense
Time
$
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Trends to Watch
Revenue
Industry Benchmark
Unhealthy
Time
$
Healthy
Revenue
Time
$Industry Benchmark
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Trends to Watch
Revenue
Cash
Unhealthy
Time
$
Revenue
Cash
Time
$
Healthy
Revenue
Cash
Time
$
Revenue
Cash
Time
$
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Trends to Watch
RevenueCOGS
Unhealthy
Time
$
Healthy
$
Overheads
RevenueCOGS
Time
$
Overheads
Revenue
COGS
Time
$
Overheads
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Trends to Watch
Revenue
Unhealthy
Time
$
Healthy
Revenue
Time
$
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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
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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
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Accounting Cycle
1. Daily posting
2. Monthly closing1. Reconciliations (balance against bank
statements)
2. Adjustments (accruals and
3. Reporting
3. Annual closing
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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
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Accounting Software
Selection Checklist:
Is it easy to use & get help? Does it interface with my
operations management system? Association or peer network
preferences Cost of systems & ops Is there a hosted version?
Regional leaders:
US and Canada: 1. QuickBooks Pro2. Microsoft Dynamics
Europe3. Sage Peachtree4. MAS
India5. Tally
Australia and Pacific Rim6. MYOB7. Zero
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Chart of Accounts & LOBsChart 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 management2. Granular enough for visibility on financial
performance by LOB.
Where is your revenue coming from?
Where is your profit coming from?
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Chart of Accounts
Two categories of accounts:
1. Balance Sheet accountsRunning totals; account balances as of the end of a reporting period.
2. Income Statement accountsPeriod activity totals; total amount of activity during a reporting period.
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Chart of Accounts
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
Balance Sheet
Assets = Liabilities + Equity
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Chart of Accounts
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
Income Statement(a.k.a., P&L; profit & loss)
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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
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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
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Accrual Accounting
Your choices:A. Accrual Basis B. Cash BasisC. 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
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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
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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
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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
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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
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Performance Analysis
Trends
Goals Benchmarks
Ratios
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Performance AnalysisCombined Business Analysis: growth, profitability
Line of Business (LOB) Analysis: growth, profitability
Services
GrowthGM
Profitability
Product Sales
GrowthGM
Profitability
Other
GrowthGM
Profitability
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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.
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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
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Getting your Team on the Same Page
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How do you know when you’ve “got it?”
Checklist for success: Taxes submitted on time
(not too much, not too little)
Goals are set & tracked Routine monitoring BI shared with team Course-corrections Tools to monitor
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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
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Don’t live on an island!
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Free Financial Health Check
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