On Target Contractor’s Blueprint Chart Your Course to Business Success
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Transcript of On Target Contractor’s Blueprint Chart Your Course to Business Success
On Target Contractor’s BlueprintChart Your Course to Business Success
On Target Business Intensive: Session 2
Oct
ober
3, 2
013
Advi
sors
On
Targ
et
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• Session 1• Create a working draft of your Mission Statement• Create a working draft of your 1 and 5 year Vision• Answer the questions on the handout
• Additional activities• Values Exercise• Business Diagnostic Assessment
Implementation Steps
• 3 Financial Indicators• Profits, Cash Flow, ROI
• Cost Behavior• Profit Improvement Planning• More Key Performance Indicators
• Liquidity, Solvency, Collections, Breakeven• Creating a Budget/Profit Plan
Effective Financial Management
• Accounting system is fully & accurately functioning• Controls are in place to ensure accuracy• A Realistic Workable Profit Plan (aka Budget) is in place• Financial Monitoring is being used effectively as a business tool• Key Metrics are being used to keep your finger on the financial
pulse of your business• Owner reviews Financial Data and Metrics at least monthly• An adequate credit line is in place • Company is profitable, solvent and able to finance its growth and
reward stakeholders
Best Practices: Finance
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• Put together a solid business plan• Be in the best position to obtain financing• Grow a sustainable business• Create a valuable company that you can later sell or otherwise
provide for your exit from the business
Sound Financial Management is critical if you wish to:
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Effective Financial Management
Key Financial Data For Business Survival
Business is about making moneyTo do this, it must simultaneously increase three things:• Net profit margin – Operating profit margin• Cash flow• Return on investment (ROI)
3 Key Financial Indicators Of Your Business’ State Of Health
Indicator 1: Profit Margins
• Net Profit = What’s left over after you deduct ALL expenses from the revenue your business generates
Net Profit = Total Income minus Total Expenses
• THE bottom line in your business
• Indicator of the overall management of the business
Gross Profit = What’s left over after you deduct direct job costs from the revenue your business generates
Gross Profit = Total Income minus Direct Expenses to Produce jobs
Indicator of the productivity of your field crews
Indicator of the accuracy of your estimator (and pricing)
• Gross Profit Margin (GP%) is profit derived from work produced divided by Gross Revenue
Gross Profit Margin = (Gross Profit/Revenue)%
• Net Profit Margin (NP%) is after-tax net profit divided by Gross Revenue
Net Profit Margin = (Net Profit/Revenue)%
How To Calculate Profit Margins
• Production / service delivery processes• Material Costs• Labor Costs• Customer relations• Team Skills and Development • Pricing & Estimating• Selling Skills
Improve The Gross Profit Margin by working on the drivers:
• Administrative operating processes• Variable Costs • Overhead Costs• Customer relations• Administrative Team Skills and Development • Marketing Activities and Costs
Improve the Net Profit Margin by managing:
Gross Profit Margin = (Gross Profit/Revenue)%
• Higher is better• 50% is goal • 45% is industry average** Residential and Commercial Contractors under
$10MM, depends on mix of work, and use of subcontractors
BEST PRACTICE GUIDE : Gross Profit %
Net Operating Profit Margin = (Net Operating Profit/Revenue)%
• Higher is better• 15% is goal (25% BEFORE Owner’s Compensation) • 5% is industry average**Residential and Commercial Contractors under $10MM** There is a distinction between Net Profit and Net Operating
Profit, which is Profit before taxes, and “other” income & expenses not related to operations of the business including financing costs (interest expense)
BEST PRACTICE GUIDE : Net Operating Profit %**
The three questions of measurement
• Is it Accurate?• Is it Acceptable• Is it Sustainable?
Indicator 2: Cash Flow
Obtain Cash
Purchase Materials
Bid & Sell ContractComplete
Project
• There will be occasions when money is flowing out faster than it is flowing in
• Virtually every business experiences times when there is a cash flow gap
• Managing cash flow so as to avoid any critical situation due to lack of cash when it is needed is a major responsibility of a business owner
What Does The Cash Flow Cycle Mean To Your Business Operations?
• Businesses can make a profit but have negative cash flow • Failing businesses can have positive cash flow, possibly due to
large asset sales • Business start-ups require large cash outlays to build the asset
base = cash flow risk
Cash Flow – More Than Just Profit
• Over the longer term, you have to manage your cash flow to fund your business growth
• You can grow your business in the short term by ‘borrowing’ credit through late payment of suppliers
• Eventually, however, everything evens out and such strategies are not sustainable
• With that in mind, projected growth should be managed within known cash flow constraints…and if external funds are required, this needs planning in advance
Cash flow Over The Longer Term
• Shorten the Cash Flow Cycle • Understand the difference between Cash Flow and Profit• Plan in advance for business growth and/or downturns
Improve Cash Flow
• Prepare a Cash Flow Projection• Manage Your Spending on a monthly, if not
weekly basis• Invoice Promptly• Develop a systematized approach to receivables
and collections • Obtain a line of credit
BEST PRACTICE GUIDE : Cash Flow
• Return On Investment is net profit expressed as a percentage of the value of the total assets you have tied up in the business
ROI = (Net Profit/Total Assets)%• ROI is a profitability ratio – it is the true measure of the
financial productivity of a business
Indicator 3: Return On Investment
Return on Investment = (Net Profit/Total Assets)%
• Higher is better• Should be at least 10%• 25% or higher is a goal
BEST PRACTICE GUIDE : ROI
ROI: An Example YEAR 1 YEAR 2 YEAR3
NET PROFITS 10,000
11,000 12,100
TOTAL ASSETS 100,000
112,000 125,400
ROI 10%
9.8% 9.6%
ADDITIONAL ASSETS
12,000 13,440
NET PROFIT RETAINED
11,000 12,100
ADDITIONAL CAPITAL
1,000 1,340
• Increase sales revenue by increasing price and/or volume• Keep variable costs down (equal or below the rate of increase
in revenue)• Achieve greater productivity from resources which are
financed through overhead• Ensure that tight control is exercised over assetsSO THAT• Cash flow increases simultaneously with the increase in net
profit
The Function of Management:
• High tangible net worth (equity)• Consistent profitability• High cash flow from operations• Cash balances representing 30-45 days of operating
expenses• AR representing less than 30 days sales• A ratio of current assets to current liabilities (“current
ratio”) in excess of 3:1• A high level of working capital• A ratio of liabilities to assets of 1.0 or less (debt ratio)
Characteristics of Financial Health
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• Starts with Financial Statements: • Profit & Loss Statement (Income Statement)• Balance Sheet
How do we find out where we stand?
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• Accuracy is Essential• GIGO
• Accrual vs. Cash Basis• Accrual Basis – Day to Day operations
• Enter Invoices and Bills as they are incurred – not as they are paid• Cash Basis – Paying Tax• Enter data on Accrual Basis/Click of a button will show reports in
either format (in QuickBooks)
Regarding Your Financial Statements…
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• Good Structure• Sufficient detail to analyze data
• Use sub accounts where more detail is needed• Consider using classes if appropriate
• Group Expense accounts appropriately • All direct costs in COGS• Non Operational Income and Expenses in “Other Income & Expense”
section• Group Balance Sheet Liabilities appropriately
• Loans that will not be repaid this year in Long Term Liability section
Chart of Accounts Tips
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Profit and Loss Statement
IncomeDirect Costs (Cost of Goods Sold)Gross ProfitVariable ExpensesOverhead ExpensesNet Operating Profit
Other Income & ExpensesNet Profit
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Definition: Profit Margins
• Net Profit = What’s left over after you deduct ALL expenses from the revenue your business generates
Net Profit = Total Income – Total Expenses
• THE bottom line in your business
• Indicator of the overall management of the business
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Gross Profit = What’s left over after you deduct direct job costs from the revenue your business generates
Gross Profit = Total Income – Direct Expenses to Produce jobs
Indicator of the productivity of your field crews
Indicator of the accuracy of your estimator (and pricing)
Profit and Loss Statement
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Balance SheetDescription
Cash Checking, Savings, Petty Cash
Accounts Receivable Amounts Due from Customers
Other Current Assets Prepaid Expenses, Amounts due from others
Total Current Assets
Fixed Assets Equipment, Vehicles, Property, Depreciation
Other Assets Startup expenses, Goodwill from purchase, Company deposits, Long term loans made to others
Total Assets
Accounts Payable Amounts owed to Vendors
Credit Cards
Other Current Liabilities Payroll Taxes Payable, Customer Deposits, Short Term Lines of Credit
Total Current Liabilities
Long Term Liabilities Loans, Lines of Credit that will not be paid off in one year
Equity Contributions, withdrawals, Retained Earnings, Net Income
Total Liabilities & Equity Must equal Total Assets to Balance32
Balance Sheet
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Key Performance IndicatorsFactors that indicate the current and future performance of a business in areas that are critical to the company's success.
• Revenue to Budget• Gross Profit• Net Profit• Break Even Sales• Liquidity - Current Ratio• Solvency - Debt Ratio• Collections (Days Sales Outstanding)
Financial KPIs
Gross Profit Margin = (Gross Profit/Revenue)%
• Higher is better• 50% is goal • 45% is industry average** Residential and Commercial Contractors under
$10MM, depends on mix of work, and use of subcontractors
BEST PRACTICE GUIDE : Gross Profit %
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Net Operating Profit Margin = (Net Operating Profit/Revenue)%
• Higher is better• 15% is goal (25% BEFORE Owner’s
Compensation) • 5% is industry average**Residential and Commercial Contractors under $10MM** There is a distinction between Net Profit and Net Operating Profit,
which is Profit before taxes, and “other” income & expenses not related to operations of the business
BEST PRACTICE GUIDE : Net Operating Profit %**
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Current Ratio = Current AssetsCurrent Liabilities
Should be a minimum of 1.5 or higher (3.0 or greater is better)
Quick Ratio = Cash + Equivalents Current Liabilities
Should be at least 1.0Higher is better for both
BEST PRACTICE GUIDE : Liquidity Ratios
Debt Ratio = Total Liabilities Total Assets
Should be less than 1.0
Debt to Equity Ratio = Long Term Debt Stockholder’s Equity
Should be less than 1.5 or 150%
BEST PRACTICE GUIDE : Debt Ratios
Days Sales Outstanding =Accounts Receivable x 365
Annual Revenue (previous 12 months rolling revenue)
• Should be 30 days or less
BEST PRACTICE GUIDE : Days Sales Outstanding (Collections)
Cash in Bank = Overhead Expenses* (next month)
Gross Profit MarginPlus: Fixed expenses for months 2 & 3Or – just think 3 months fixed expenses for a quicker
calculation*Include Variable Costs and Overhead Costs
BEST PRACTICE GUIDE : Cash in Bank – Ideal
Cash in Bank = Overhead Expenses* (next month)/Gross Profit %Plus: Fixed expenses for months 2 & 3
Or – just think 3 months fixed expenses for a quicker calculation
*Include Variable Costs and Overhead Costs
BEST PRACTICE GUIDE : Cash in Bank – Ideal
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Return on Investment = (Net Profit/Total Assets)%
• Higher is better• Should be at least 10%• 25% or higher is a goal
BEST PRACTICE GUIDE : ROI
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• Session 1• Create a working draft of your Mission Statement• Create a working draft of your 1 and 5 year Vision• Answer the 10 questions on the handout
• Session 2• Review your own Profit and Loss and Balance Sheet and compare
to what you learned in Session 2
• Additional activities• Values Exercise• Business Diagnostic Assessment (link forthcoming)
Implementation Steps
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