Financial Management for Growth Entrepreneurial Skills Training Workshop 10

Transcription

1 Financial Management for Growth Entrepreneurial Skills Training Workshop 10 1

2 Housekeeping

3 WIFI Username: Meeting Room G6 Password: 2016g6meeting

4 Welcome and Introductions 4

5 Introduction to SME Growth Support

6 Innovate UK SME Growth Support New offer for successful SMEs in Innovate UK competitions from 2015: Diagnosis of Business Needs Attend Growth Workshop, meet Growth Manager, develop Growth Plan Connecting to Business Support Participate in Coaching, Mentoring & Entrepreneurial Skills training Connecting to other Government Support Introductions to UKTI, IPO, KTN, EEN, Catapults Connecting to Investors Showcase face-to-face and online

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8 Entrepreneurial Skills Training Menu Workshop 1: Defining Your Value Proposition Workshop 2: Developing Your Business Model Workshop 3: Testing and Refining Your Business Model Workshop 4: Pricing Strategy and Tactics Workshop 5: Strategic Marketing Workshop 6: Web Fuelled Business Workshop 7: Selling & Negotiation Workshop 8: Building, Managing and Leading Winning Teams Workshop 9: Organisational Strategy and Development Workshop 10: Financial Management for Growth Workshop 11: Access to Finance for Growth Workshop 12: Mitigating and Managing Risk 8

9 Eileen Modral Insert image of trainer

10 Ground rules Support and challenge House Rules and confidentiality No such thing as a stupid question Phones on silent Socratic Method

11 Agenda Welcome and introductions 10:00 Financial Planning Basics 11:15 Break 11:30 Financial Planning 13:00 Lunch 13:45 Financial Management 15:15 Break 15:30 Financial Management Tips 16:30 Close 11

12 Learning objectives How to use financial data to assess risks and opportunities To be able to interpret and understand financial and economic data to support the key management tasks of planning, decision-making and creating value within the business. 12

13 Ice-breaker 13

14 This workshop will explore: Financial management at different stages of growth Cost structures and revenue streams The purpose of financial statements - profit and loss account, balance sheet and cash flow statements. Break-even analysis, margins and ratios Financial management tips 14

15 Financial Planning Basics 15

16 Why is it important to plan financially? Losing your investment in time and money (and the knock on effects of this) Losing others investment in time and money (and the implications that come with this) How can you mitigate against this? 16

17 Financial Management in UK Small Business Source: BIS 17

18 Financial Planning What does it mean? Assessing your current financial status, your financial future goals, when you want to achieve them by and strategies to meet those goals. 18

19 Financial Management for different stages of growth 19

20 Financial Management for Pre-Startup This can be the most critical stage in the success of a business idea. Researching the market and assessing potential demand for your product or service should be undertaken now. Each business should produce a business plan incorporating financial forecasts. Source: BIS 20

21 Financial Management for Startup Taking into account financial forecasts, this is the stage where a business plan is implemented. Cash management is key small businesses fail when they run out of cash. This is the stage where business owners will consider securing finance to grow their business strong financial management is vital for a good credit rating. Source: BIS 21

22 Financial Management for Small Business This is the stage where the business has overcome the startup stage. A small business should seek qualified independent financial advice before accessing finance to grow their business. Audit, assurance and management accounting might be helpful. Think about the information you provide. For example, a small company may file abbreviated accounts at Companies House. Abbreviated accounts do not provide credit reference agencies with the information they need to build up a picture of a business suitability for credit. Source: BIS 22

23 Costs and Revenues

24 Costs and your Business Model 24

25 Exercise: What costs does your business have? Make a list of the major costs in your business. How can these be grouped? 25

26 Definition of Costs There are three different types of cost: Variable costs the cost of producing the goods or services. Fixed costs the day to day running of the business. Fixed costs are those that do not not vary with sales e.g. salaries and office rent. Sunk costs one time historic costs, such as set up and equipment costs, patents or IP, research and development. 26

27 Simple definitions Cost structure refers to the types and relative proportions of fixed and variable costs that a business incurs. 27

28 More simple definitions Revenue Streams are the lifeblood of a company, they represent the money coming into the business (not the profit) from each customer segment. Some may be one time revenues and others may be recurring. 28

29 Revenue streams and the Business Model Canvas 29

30 A question to consider: Do you know much each Revenue Stream contributes to a) your overall revenue and b) your profits? 30

31 Financial Forecasts 31

32 Profit and Loss, Balance Sheet and Cash Flow statements Balance Sheet Profit and Loss Cash Flow A snap shot of a particular point in time The video of what happened between two snap shots The script - story of how it was all financed 32

33 What is profit? A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. 33

34 Profit & Loss Forecasting The P&L forecast will show whether you are likely to achieve your first key financial requirement: making a profit. Put together all estimates of sales & costs to assess what s needed to make a profit (higher sales, lower costs) 34

35 Are all profits the same? Gross Profit Operating Profit (P-Bit) Profit before Tax Profit after Tax Retained Profit 35

36 Financial Forecasts - Examples 36

37 Break 37

38 Break even 38

39 A typical SME scenario I forecast a good turnover and healthy margins then everything is OK? What is your margin? Can you cover your overheads? You need to know your breakeven point! 39

40 Break-even analysis DEFINITION of 'Break-Even Analysis' To determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. 40

41 Break-even analysis the basics This is an essential part of your business plan Your break-even point is the point at which your business is producing enough revenue each month to cover all your fixed and variable costs. Once you reach this point, any additional income generated each month is profit. Calculating the break-even point will give you an excellent idea of the costs involved in your business and the level of sales you will need to generate to cover your costs, which in turn will affect your overall business strategy. 41

42 B/E point calculation Fixed Costs (sales price variable cost) 42

43 Break-even Quiz For each statement, decide whether or not you think it is TRUE of FALSE. 1. Fixed Expenses do not change in total when there is a modest change in sales. 2. An example of a fixed expense would be a 5% sales commission. 3. Variable expenses change in total as volume changes. 4. An example of a variable expense is an office manager's monthly salary. 5. A retailer's cost of goods sold is an example of a variable expense. 6. Contribution margin is defined as sales (or revenues) minus variable expenses. 7. Break-even point is the point where revenues equal the total of all expenses including the cost of goods sold. 8. The break-even point in pounds of revenues is equal to the total of the fixed expenses divided by the contribution margin per unit. 9. The contribution margin per unit is the selling price per unit minus the fixed expenses per unit. 10. Decreasing a company's fixed expenses should reduce the break-even point. 43

44 Ratios and Margins 44

45 Debt to equity ratios The debt-to-equity ratio, is a quantification of a firm s financial leverage estimated by dividing the total liabilities by stockholders equity. This ratio indicates the proportion of equity and debt used by the company to finance its assets. The formula used to compute this ratio is: Debt to equity ratio = Total Liabilities Shareholders Equity 45

46 Current Ratio The current ratio is a liquidity ratio which estimates the ability of a company to pay back short-term obligations. This ratio is also known as cash asset ratio, cash ratio, and liquidity ratio. A higher current ratio indicates the higher capability of a company to pay back its debts. The formula used for computing current ratio is: Current ratio = Current Assets Current Liabilities 46

47 Quick Ratio The quick ratio, also referred as the acid test ratio or the quick assets ratio, this ratio is a gauge of the short term liquidity of a firm. The quick ratio is helpful in measuring a company s short term debts with its most liquid assets. The formula used for computing quick ratio is: Quick ratio = (Current Assets Inventories) Current Liabilities A higher quick ratio indicates the better position of a company. 47

48 Return on Equity Ratio The return on equity ratio is also referred as return on net worth (RONW). The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the return on equity ratio shows how much profit each pound of common stockholders' equity generates. Return on equity ratio = Net income Shareholder s equity 48

49 Net Profit Margin The net profit margin is a number which indicates the efficiency of a company at its cost control. A higher net profit margin shows more efficiency of the company at converting its revenue into actual profit. This ratio is a good way of making comparisons between companies in the same industry, for such companies are often subject to similar business conditions. The formula for computing the Net Profit Margin is: Net profit margin = Net Profit Net Sales 49

50 Financial Planning

51 Financial Planning This involves extracting detailed financial goals from your business model canvas e.g. around sales, cash flow and P&L forecasting. 51

52 The Business Model Canvas Key Partners Key Activities Value Propositions Customer Relationships Customer segments Key Resources Channels Costs Structure Revenue Streams 52

53 Exercise: Financial goals and your Business Model Canvas (BMC) Exercise What are your Financial goals as a company? How does this affect your Business Model. Annotate your BMC template and consider the relationship to your Value Proposition, Customer Segments and Key Activities.

54 Lunch

55 Sales Forecasts 55

56 Sales forecasting is essential. If you don't plan, you can't know where you're heading. And if you don't know where you're heading, you shouldn't be surprised if you end up nowhere. Geoff Hurst, Marketing Director at the Chartered Institute of Marketing 56

57 What is a Sales Forecast? Projection of achievable sales revenue, based on historical sales data, analysis of market surveys and trends, and salespersons' estimates. Also called sales budget, it forms the basis of a business plan because the level of sales revenue affects practically every aspect of a business 57

58 Exercise: Constructing a Sales Forecast How do/would you construct a Sales Forecast for your company? What assumptions are you making? Is it thorough and realistic? 58

59 Financial management 59

60 Importance of cash to a company Why do we need to have enough cash in the business? 60

61 Cash Flow Management How important is it that you remain aware of your cash position? What are the classic signs of cash flow problems?

62 How to manage your cash flow? The cardinal rules Do: Focus on receiving payment for sales. Keep cash flow budgets up to date. Avoid unnecessary or excessive expenditure. Arrange appropriate financing before you need it. Don't: Assume payments will be received on time. Tie up excessive cash in working capital. Overtrade by accepting orders you cannot finance.

63 Group Exercise 63

64 Group Exercise Financial Planning Get into groups. Open your envelope. Attempt to complete the template provided. Prepare to present back and take questions from the CEO!

65 Risk Assessment Financial risk defined as the risk connected with the company s financing decisions is one of the most important determinants of company s condition. The three components of financial risk - capital structure risk, - liquidity risk - and insolvency risk.

66 Financial Risk Several other potential risks can be identified: The threat of potential loss. The threat of not taking an opportunity, The risk of the possibility of obtaining results different than expected. 66

67 Investment Valuations 67

68 Investment valuation Value = Opportunity Risk

69 Investment Valuation - The P/E Ratio The most well-known investment valuation ratio is the Price to Earnings ratio, which compares the current price of company's shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each 1 of earnings. And with one simplified ratio, you can easily compare the P/E ratio of one company to its competition and to the market. 69

70 Financial Management Tips 70

71 Financial Management Tips 1. Have a plan. This should be backed up by financial targets, budgets, profit and loss and cash flow forecasts. 2. Know your financial position and monitor the progress of your business regularly. 3. Cash is king. Even the most profitable companies can grind to a halt if there isn't enough cash to cover your day-to-day costs such as rents and wages. 4. Meet tax deadlines and get professional advice around tax liabilities. 5. Don't let unpaid debts lay idle. Source: Forum Private Business 71

72 Financial Management Tips 6. Become more efficient, save money. Look at where you could possibly make cost savings by reviewing your bills. 7. Control your stock - buying in only the stock you need, it ensures that your working capital is not tied up unnecessarily. 8. Get the right kind of funding - are you relying on business overdrafts and personal funding? Find out more about alternative sources of finance. (There is an Access to Finance workshop). 9. Spread your risk. Don't rely on a small number of customers too heavily. 10. Don't bury your head in the sand If your business is heading towards financial crisis. Seek professional advice as soon as possible. Source: Forum Private Business 72

73 Key learning and actions What are your key takeaways? What actions will you take once back in the business?

74 Thank you 74

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