Financial Tools for Social Enterprise (Enp Evening Presentation)
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Transcript of Financial Tools for Social Enterprise (Enp Evening Presentation)
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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
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Financial Tools
Enp Evening #3Wednesday, March 16th, 2011
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AGENDA
Introductions
Making Financial Statements Useful (Emily)
Questions
How to Talk to Your Bank (Rebecca)
More Questions
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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
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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
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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
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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
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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
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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
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Ratios
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Profitability Ratios
Gross (Profit) Margin:
Gross Profit
Sales
Using our example:
Gross Margin = $ 75,000 = 50%
$150,000
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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
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Liquidity Ratios
Working Capital:
Current Assets
Current Liabilities
Using our example:
Working Capital = $27,000 = 1.08x
$25,000
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Operating Efficiency Ratios
Inventory Turnover:
Cost of Goods Sold/Gross Margin
Average Inventory
Using our example:
Inventory Turnover = $ 75,000 = 3.75x
$ 20,000
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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
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Leverage Ratios
Debt to Equity:
Short Term + Long Term Debt
Total Equity
Using our example:
Debt to Equity = $ 25,000 = 0.93x
$ 27,000
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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
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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
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Tools for Assessing Financial Risk
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Understanding Your Cost Structure
Revenues
- COGS (Variable Costs)
= Gross Margin
- G&A Expenses (Fixed Costs, or O/H)
= Net Income
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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
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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
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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/
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Learning to Speak "Banker"
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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!
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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
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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
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Working with Investors: it’s a partnership
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Understanding the Conventional Capital Market
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Pricing capital in Conventional Markets
Investors want
High returns on investment (ROI)Safety / Security (Mitigated Risk)Liquidity / ExitConvenience / Low Transaction Costs
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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
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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
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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
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Convenience/Transaction Costs
Simplicity Legal costs Hand-holding Monitoring Unusual elements
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Exit Strategy
How will the investor get her money back? How long will she have to wait? Is there a back-up plan?
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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
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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
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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
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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)
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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
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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
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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!
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Final Questions?
Emily Beam
General Manager
Street Youth Job Action
Rebecca Pearson
Investment Manager
Vancity Community Capital