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Scaling Up Cash Presentation V1 - simplenumbers.me · Scaling Up Cash Presentation V1.pptx Author:...
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ScalingUpCashApplyingtheCashDecisionQues6onsto:• ScaleUpCash• Profitability• TheWealthBuilding
Capacityofyourbusiness
Presentedby:GregCrabtree,CPA,Authorof“SimpleNumbers,StraightTalk,BigProfits”andcontributortoScalingUp(Chapter13)
CashDecisionQues6ons
1. Thebusinessisstructuredandoperatedasifitwerebeingsoldtomorrowtomaximizemarketvalue.
2. Profitabilityisrunningat3xindustryaverage.3. Cashflowisahighpriorityi.e.we’refocused
oncon6nuallyimprovingthebusinessmodeltogeneratemorecashasthebusinessscales.
CashDecisionQues6ons
4. Wereceive6melyandaccuraterepor6ngofkeydataforourdaily,weekly,monthly,andquarterlymee6ngrhythms.
5. Weknowprofitability,grossmargin,andrevenuebycustomer,project,loca6on,lineofbusiness,teamand/oremployeewhereapplicable
CashDecisionQues6ons
6. IndividuallineitemsontheP&LandBalanceSheethavepeoplespecificallyaccountableforeach.
7. Wehavearollingforecastlookingforward12to18monthsupdatedatleastmonthly.
8. Wehave3xto10xthecashreservescomparedtoourcompe6tors.
CASHDECISION#1THEBUSINESSISSTRUCTUREDANDOPERATEDASIFITWEREBEINGSOLDTOMORROWTOMAXIMIZEMARKETVALUE.
UnderstandingROIC
• ROIC(ReturnonInvestedCapital)– AnnualPre-taxProfitdividedbyyourinvestment
• YourInvestment– Cashandpropertyyoucontribute– SweatEquity
• Doesnotincludeterminalvalueonasale
TypicalSelfFundedEntrepreneurStartup
ThePowerofCompounding
ROICTakeaways
• Economyisgrowingmuchfasterthanwethink
• PrivateCompaniesnowdominatetheeconomy
• Cashisnottheinhibitortogrow.Themaininhibitorsare:– Unabletobuildcapacity– Notconfidentingrowth– Desiretoconsumeprofitsinsteadofgrowth
Runninga“ReadytoSell”Business
• Effec6veBusinessStructure(legalandtax)toeitherkeeporsell
• Opera6onalexcellencewithdocumentedprocessesthatbeingfollowed
• Knowingandmonitoringwhatdrivesmarketvalueforyourbusiness
• Regularlyscrubinternalfinancialsfor“dealadjustments”
3Essen6alBusinessValueDataPoints
• EconomicValue–Whatisthebusinessworthtoyouonacashflow/ROEbasiswithoutselling
• CurrentMarketValuesimilarbusinessesinsizeandindustryaresellingfor
• ReplacementReturnneededifyousoldatMarketValue
EconomicValue
• SeeChapter9of“SimpleNumbers,StraightTalk,BigProfits”byGregCrabtree
• Developedtomanageshareholderormanagementbuyoutconceptsbasedonalertaxcashflowandareasonable6meframeforpurchase
• 5yearstobuyouta50%owner,10to14yearsdependingoninterestratefora100%sale
• Formula–36mesNetIncomePlusEquity
CurrentMarketValue
• Canbeamul6pleofEBITDA(alerdealadjustments)(5isgenerallyconsideredneutral)
• Canbeamul6plierofRevenue,GrossMarginorValueperqualifiedcustomer
• Ifyouarecarryingdebt,yougenerallyhavetopayoffdebtfromproceedsoradjustpriceiftheykeepthedebt
ReplacementReturnNeeded
• Calculate“NetAlerTaxProceeds”(useanaverage25%taxrateforillustra6on)
• DivideNetIncome(alerdealadjustments)bytheNetAlerTaxproceeds
• Ifreplacementreturnneededisabove15%,reconsiderwhethersellingisthebestdecisionorareyouatapointinlifewhereyouwillnotneedtoconsumemorethantheannualearningsofthereplacementinvestment
CASHDECISION#2PROFITABILITYISRUNNINGAT3XINDUSTRYAVERAGE.
ProfitabilityKeys
• HaveyourP&Lspeak“truth”byelimina6ngdistor6ons
• SetProfitTargetsonyour“TrueTopLine”– CompanieswithGrossMarginbelow40%shoulduseGrossMarginasthe“TrueTopLine”
• LaborProduc6vityisthe#1KeytoProfitability– Op6mizedManagementLaborproduc6vitysetsthestageforDirectLabortobeefficient
ProfitabilityKeys-Con6nued
• Becarefulcomparingto“industry”datathathasnotbeennormalizedfordistor6ons
• Compareyourperformancetobusinesseswithsimilarmodelsthatmaynotbeinthesameindustry(contrac6ng,staffing,retail,manufacturing,etc)
• IsolateexpensespendingthatisforfutureyearsandconsiderdisplayingitbelowNetOpera6ngIncometonotdistortcurrentopera6onalperformance.
CASHDECISION#3CASHFLOWISAHIGHPRIORITYI.E.WE’REFOCUSEDONCONTINUALLYIMPROVINGTHEBUSINESSMODELTOGENERATEMORECASHASTHEBUSINESSSCALES.
CashFlowKeys• Understandthe6melagbetweenprofitandcashflow– U6lizeAlanMiltz’sPowerofOneandCashFlowStorytoolsorcustomprojec6onmodelwww.cashflowstory.com
• 5Compe6ngForcesforCashFlow– R&Dorreinvestmentforgrowth– Taxes– DebtService– CoreCapitaliza6on– ProfitDistribu6ons
FiveCompe6ngForcesforCash
Prioritized in order:
1. Make Reinvestments into Business at 50% ROI
2. Set Aside Tax Liability (Quarterly)
3. Repay Line of Credit (LOC) Debt
4. Core Capital Target in Reserves – 2 months of operating expenses and Direct Labor in cash with nothing drawn on Line of Credit (LOC)
5. Pay Dividends (Distributions)
CASHDECISION#4WERECEIVETIMELYANDACCURATEREPORTINGOFKEYDATAFOROURDAILY,WEEKLY,MONTHLY,ANDQUARTERLYMEETINGRHYTHMS.
Repor6ngRhythms
• BreakfreefromtheCalendar!– Embracetheweeklyaccoun6ngrhythm– AdoptRolling12dataastheperformancemeasurementGoldStandard
– Gooddatafastisbererthanperfectdatalate– “Accoun6ng”doesnothavetobedoneby“Accountants”,imbedaccoun6ngintoopera6onalprocesseswherethegreatestknowledgeofthetransac6onisclosesttothetransac6on
RecommendedReports
• Daily– CashandLineofCreditBalances
• Weekly– 2WeekCashFlowForecast– Revenue,GrossMargin,DirectLabor&Contribu6onMargin(Reportshows,week,trailing4week,trailing13weekandtrailing52weekdata)alongwithanyotherkeyac6vitymetrics
RecommendedReports
• Monthly– FullFinancialModel(BalanceSheet,P&L&CashFlowandbusinesssegments)
– StartwithRolling12P&L,movetoRolling3P&LandthentoMonthlyP&Ltoavoidshorttermdatabias
– Specificallyreforecastnext3monthsandusetrendstoforecastoutto12to18months
– Reviewotherkeyra6osandmodelcashflowtrends
RecommendedReports
• Quarterly– Reviewspecialtysegmentreports• ByCustomer• ByProject• ByProduct(GMROIforinventoriedgoods)• Anyothersegmentthatrequiresextraefforttocreateandisnottotallyautomated
– Closerreviewoflongertermforecast
CASHDECISION#5WEKNOWPROFITABILITY,GROSSMARGIN,ANDREVENUEBYCUSTOMER,PROJECT,LOCATION,LINEOFBUSINESS,TEAMAND/OREMPLOYEEWHEREAPPLICABLE
ProfitCube–Effec6veSegmentRepor6ng
• Keepsegmentrepor6ngsimplebytracking– Revenue– DirectCosts• GrossMargin(RevenueminusDirectCosts)
– DirectLabor• Contribu6onMargin(GrossMarginminusDirectLabor)• DirectLER(GrossMargindividedbyDirectLabor)
ProfitCube–Effec6veSegmentRepor6ng-Con6nued
• Recommendtoavoidalloca6ngOverheadorPayrollTaxesandBenefits
• FocusonContribu6onMarginbysegmentandcompareDirectLERtosearchforwhichparernisthemostefficientwithlaborbutalsoyieldshigherContribu6onMargin$
• HighRatesofperformancearenogoodifyoucannotgetenoughvolume,conversely,volumeisnogoodifitisatabadrate
MarginbyCustomer
CASHDECISION#6INDIVIDUALLINEITEMSONTHEP&LANDBALANCESHEETHAVEPEOPLESPECIFICALLYACCOUNTABLEFOREACH.
LineAccountability
• BalanceSheet– Allthe“deadbodies”areonthebalancesheet– Avoidimmaterialadjus6ngforprepaidexpensesandaccrualsunlesstheyarematerial
– Usebookdeprecia6oninsteadoftaxformanagementstatements
– ConsiderRelatedPartyReceivablesasareduc6onofequityinsteadofanassetsincetheyarenotlikelytoberepaidany6mesoon
LineAccountability
• P&L– Assignresponsibilityattherolleduplevel(SimpleNumbersformat)
– Responsibilitywillbetoreviewpastperformanceaswellatforecaster(avoid“budgetthinking”)
– Rolling12trendismostauthorita6vedata– Keeptotalmodelinperspec6ve• Nocostsaretrulyfixedandnocostsaretrulyvariable• Bemindfulofcostcharacteris6csandsearchfor“unproduc6ve”coststhatproducelirletonovalue
CASHDECISION#7WEHAVEAROLLINGFORECASTLOOKINGFORWARD12TO18MONTHSUPDATEDATLEASTMONTHLY.
ArtofForecas6ng
• “Amanwhoaimsatnothinghitsitwithamazingaccuracy”
• Rolling12dataisusuallyabletopredict3tosixmonthsoutjustfromtrendparerns
• TopDownmethod– Determineexpectedrevenue– Predictcostsneededtosupportac6vity
ArtofForecas6ng
• BoromUpMethod– Iden6fyManagementLabor– Mul6plyManagementLaborbymLERtargettogettheContribu6onMargintarget
– Iden6fydLERratetargetedtocalculateDirectLabor(CM/(dLER-1))
– SumofDirectLaborandContribu6onMarginisGrossMarginTarget
– DivideGrossMarginbyGM%toes6mateRevenue
Step#1ManagementLabor6mesmLER
=Contribu6onMargin
Step#2Contribu6onMargin/(dLER-1)
=DirectLabor
Step#3Contribu6onMargin+DirectLabor
=Grossmargin
Step#4–GM/GM%=Revenue
CASHDECISION#8WEHAVE3XTO10XTHECASHRESERVESCOMPAREDTOOURCOMPETITORS.
CoreCapitalTarget
• Whenismybusinessfullycapitalized?– Whenyouhave:• 2monthsofopera6ngexpenses(includingdirectlabor)incash(essen6ally,anythingyoudonothavetermson)• Nothingdrawnonalineofcredit(wouldincludelinesthathavebeentermedout)• Currenttaxeshavebeensetasideandarenotinthecashreservenumber
• AllotherBSra6osaresecondaryifyouhitthislevelofcash
CoreCapitalTarget&ROE
• Ifyouachievethe2monthscashandhave10%netprofit
• Youshouldhaveaminimumofa50%Returnonequityyearoveryearwithoutsellingthebusiness.Mostbusinesseshave75%to100%thatdonotrequireheavycapitaliza6on
• YoucanachieveahigherROEwithdebt,butyouaretakingaddedrisktodoit