Financial Planning for Fishing Families

Transcription

1 Financial Planning for Fishing Families

2 A Financial Planning Workshop for Fishing Families Trade Adjustment Assistance Program Dedicated to helping Maine small business succeed. Maine Small Business Development Centers (Maine SBDC) Maine SBDC is a partnership program of the U. S. Small Business Administration (SBA) in association with the SBA/SBDC, the Maine Department of Economic and Community Development (DECD), the University of Southern Maine (USM), and leading economic and/or community development hosting organizations (Hosts), with support from the University of Maine (UMaine). Administered by USM's School of Business, Maine SBDC operates a network of service centers and outreach offices located conveniently throughout the State. Dedicated to helping Maine small business succeed. 2 1

3 In collaboration with: Who is SCORE and what does it do? Volunteers with broad background of business and professional experience, Provide business counseling at no charge, whenever you need it. Offers workshops at moderate cost on: Visit SCORE s website: to learn more 3 PO Box 268, Water Street Wiscasset, ME Phone: Fax:

4 David R. Hill Center Director and Certified Business Counselor Maine SBDC Coastal Enterprises, Inc Key issues for the lobster and shrimp industries? Price at the boat Cost of Fuel Cost of bait Status of market Fishing regulations (season, days at sea, etc.) Lack of financing for processors Availability of other purchasers Availability of financing to Maine fishermen 6 3

5 Whatever your problem might be, dealing with it requires you to plan If you don t know where you re going any route will get you there So, first you need to decide what it is you want to do and then develop a plan for achieving that goal 7 Success of your plan depends upon the data that forms it You need to know the key facts that surround the problem whether it is price at the boat, or the cost of fuel and bait Not just what those numbers are right now, but the forces that will move those numbers either up or down during the current season, and perhaps for several seasons to come If you don t know those numbers, and are not conscious of those forces you won t be able to plan ahead 8 4

6 Focus is absolutely essential On those aspects of your business that you can impact Don t be distracted by things you cannot fix This is why knowing your numbers is so vital. If a cost is out-of-line you may not know it, and therefore won t correct it. Sustained Effort also essential You work at pulling traps or dragging nets almost every day. You ve got to do the same with the details of your business. Look at them every day, figure out what you can do to improve. 9 Those are the basic reasons you need to develop a plan, but there are others. If you want or need to borrow money, the lender will want to see a business plan If several of you are going to establish a co-op, you will want a plan that includes all of you If you think you can afford a stern man, you best plan and project to be sure you can pay him, or her If you are considering a partner, the two of you will need a plan to be certain the business will achieve the goals for each and both of you If you are thinking about expanding your business a plan will help you do it, and guide you away from unnecessary pitfalls 10 5

7 Managing your finances will be covered later in this presentation, but we emphasize how important it is to maintain accurate, up-to-date financial records. You need: Balance sheet preferably monthly, at least quarterly Profit and loss statement preferably monthly Cash flow projections for any plan, 12 months minimum, 24 months better, 36 months best This means accounting support: QuickBooks (or comparable accounting software) A good accountant Probably both! 11 Preparing the Financial Projections The financial projections are a set of spreadsheets Need Microsoft Excel or equivalent software That provide key financial data about the business; and Should be supported with written statements of each critical assumption underlying the financial projections 12 6

8 Understanding the Terms There are four major financial statements needed: Cash Flow Projection Profit and Loss statement (P & L) Sources/Uses of cash Balance Sheet. Breakeven analysis may be added. Each projection serves a particular purpose Each relates one to another the numbers must not contradict one another 13 Each financial projection requires critical assumptions write them down so 1 st you know how you arrived at the numbers 2 nd a lender can see how you arrived at the numbers 3 rd when information changes you can adjust the assumptions 14 7

9 Financial Plan Cash Flow Projection Be sure to describe the critical assumptions that support this and future spreadsheets Profit/Loss Projection Pay particular attention to interest expense and non-cash expenses, such as amortization or depreciation Sources and Uses of Cash Pay particular attention to nonoperating uses of cash, for example owner s withdrawals, principal payments on debt 15 Financial Plan - continued Balance Sheet Snapshots at different points in time corresponding to cash flow and P & L projections Break-even analysis Shows minimum volume required to cover all expenses or new expenses Capital equipment requirements Determine how much will you need, for what will it be used, with particular attention to on-going working capital needs 16 8

10 Cash Accounting versus Accrual Accounting It is important to understand difference between cash accounting and accrual accounting For purposes of the Cash Flow Forecast what you want to know and project is the actual cash on hand at various points of time. Cash is king! But for the P&L, revenues sales made are what count, whether you have received the cash or not 17 Cash Accounting Stated simply, cash accounting only measures cash in and cash out during the time period covered Sales for which payment not yet received, or bills not yet paid, are NOT included Sales made in one time period (month of June for example) but payment not received until July or even August are not included until the check is deposited Purchases of supplies made in one month, but not paid for until the next month are not included in the cash flow projection until payment actually made 18 9

11 Accrual Accounting Stated simply, accrual accounting recognizes sales and expenses when they are made, not necessarily when they re received or paid for Sales are booked when the sale is made even though payment may not be received for weeks or months Likewise, expenses are booked when they are incurred, not when they are paid, which could be much later in the future 19 Cash Flow Forecast This is difficult because it rests on assumptions, particularly about sales and revenues Should cover a minimum of 12 months, better 24 months, best 36 months. Readers will understand the further out in time the projection the less certain it can be The cash flow forecasts: Revenues received in cash from all sales Costs actually paid during time period covered And calculates the cash produced/used during period 20 10

12 FIRST RULE OF A SUCCESSFUL BUSINESS: POSITIVE CASH FLOW (more cash in than cash out) Get this one right and most of the rest takes care of itself! 21 How do you project revenues? Narrative portion of plan should establish the following: How many pounds of lobster or shrimp you think you can harvest and sell during the time period Price per pound you believe will prevail over time period If prices fluctuate, estimate monthly prices based on past history and Kentucky windage 22 11

13 The world is awash in data, it takes judgment to develop useful information Your assumptions must be based on information developed by experience and research Test your assumptions with information you obtain from others and your own experience Write down/record your assumptions to support projections Do NOT be reluctant to change assumptions as new/better information is obtained 23 Profit and Loss Statement (Income) Measures business performance over a specified time period; e.g., monthly, quarterly, semi-annually and annually Intended to determine taxable income (losses) and is governed by specific accounting and tax principles Includes non-cash operating expenses, such as depreciation and amortization, for example, depreciation on your boat 24 12

14 Profit and Loss Statement (continued) Includes all sales made or purchases contracted during period, even if payment not received or made until after end of period (accrual accounting) Excludes non-tax deductible cash uses, such as principal payments on debt, owner s withdrawal of funds It is NOT the same as a cash flow forecast, although looks much the same 25 Sources and Uses of Funds This combines data developed in Cash Flow Forecast, Profit & Loss and Balance Sheet Includes all sources of funds: such as Owner contributions to capital Proceeds from loans Earnings from operations Includes all uses of funds such as: Payments of loan principal Distributions of earnings to owners/investors Tax payments or distributions 26 13

15 Balance Sheet The balance sheet is a snapshot of financial condition of the business at specific moments; i.e., end of month, end of quarter, end of year The balance sheet includes: Assets: Current cash, bank balances, accounts receivable, inventory Fixed land, buildings, machinery & equipment Liabilities: Current accounts payable, debts payable within one year Long term loans/mortgages payable over more than 1 year 27 Balance Sheet (continued) Owner s Equity: Original capital paid in, added since beginning Accumulated earnings or losses over period since last balance sheet (i.e., last 3 months, 6 months or 12 months) It balances because the sum of the Total Liabilities and the Owner s Equity MUST equal the Total Assets The Owner s Equity is the plug figure 28 14

16 The balance sheet is where the differences between cash accounting and accrual accounting are reconciled Sales for which the revenue has not yet been received will be included in Accounts Receivable. They constitute an asset Expenses which have not yet been paid will be included in Accounts Payable. They constitute a liability. 29 ASSETS = Liabilities + Owner s Equity If assets are less than liabilities, Owner s Equity will be LESS than zero 30 15

17 Market Value vs. Bank Balance Sheet The Bank Balance Sheet traditionally reports assets at their original value adjusted by their accumulated depreciation The Market Value Balance Sheet reports assets at their current market value They are not necessarily the same! The Bank Balance Sheet is used for tax purposes while the Market Value Balance Sheet presents a more realistic picture, but it is more difficult to maintain To keep this presentation simple, however, we ll assume that the asset values would be the same under either method 31 Let s develop a simple Cash Flow forecast for a lobsterman who shrimps in the winter Along with a Profit and Loss Statement for a oneyear period A Balance Sheet showing the beginning of the year and the end of the year, and A Sources and Uses of Cash for that year 32 16

18 First the critical assumptions that underlay the projected cash flow statement: This lobsterman works by himself, except during the months June through October He does work 12 months each year, at least on the days when he can He goes for shrimp between December 1 and April 15 He does not have his own wharf, so he has to pay wharf fees for access to the water He does NOT have any debt at the moment. The existence of debt service obviously would change the numbers materially. 33 Second, what information is important enough to be included? The number of pounds of lobster or shrimp landed each month. The amount he is paid per pound at the wharf The gallons of fuel he is using What he is paying per gallon for fuel How much lobster bait he is using What he is paying for the bait How much he is using the stern man And what the stern man costs 34 17

19 Why are these important? These are the things most within his control The number of pounds he lands, however, is limited by the number of traps he can set and handle, the number of hours in a day, and the weather For shrimp and, in some areas, lobster the season may vary Are there ways to increase the number of pounds landed for each gallon of fuel, or each barrel of bait used? Could enough more pounds be landed to pay for a stern man for more of the year? Tracking these numbers over time helps to improve the management of the business from year to year 35 What does having a cash flow projection do to help? It is essential if you want to borrow money. It shows the lender you will (or will not) be able to pay the money back. Understanding the numbers helps you decide on ways to improve or strengthen the business for example Set more traps Invest in better equipment Maybe try shrimp traps Use a stern man more of the year Search for new markets and buyers Let s look a sample cash flow projection 36 18

20 Item Jan Feb March April May June July August Sept October Nov Dec Year Cash On Hand $4, $4, $5, $5, $6, $6, $7, $7, $7, $8, $8, $8, $4, Income # lbs landed ,600 Net Price/pound $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 $3.75 Total Dollars $12, $12, $12, $13, $15, $16, $16, $16, $16, $15, $15, $13, $178, Variable Operating Expenses Boat Fuel: # gals ,200 Price/gallon $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 $2.75 Total Dollars $1, $1, $1, $2, $2, $2, $2, $2, $2, $2, $2, $2, $25, Bait: # drums price/drum $ $ $ $ $ $ $ $ $ $ $ $ $ Total Bait Expense $4, $4, $4, $4, $5, $5, $5, $5, $5, $5, $5, $4, $60, Miscellaneous Expenses Main. & Repair Boat $ $ $ $ $ $ $ $ $ $ $ $ $6, Main. & Repair Equip $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $ Replace Equip & gear $ $ $ $ $ $ $ $ $ $ $ $ $6, Misc. Supplies $ $ $ $ $ $ $ $ $ $ $ $ $1, Licenses & permits $0.00 $0.00 $0.00 $0.00 $ $ $0.00 $0.00 $0.00 $0.00 $0.00 $75.00 $ Total Misc Expense $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $14, Stern Man - share $ - $ - $ - $ - $ - $ 1, $ 1, $ 1, $ 1, $ 1, $ - $ - $8, Total Var Oper Exps $7, $7, $7, $7, $8, $10, $10, $10, $10, $10, $8, $7, $108, General & Administrative Expenses Owners Withdrawal $4, $4, $4, $5, $6, $5, $5, $5, $6, $5, $6, $5, $60, Wharf Fees , Property Insurance $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ Liability Insurance $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $ Membership Dues $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ $ Tax & accounting $ $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ Property taxes $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $1, Total G & A Expense $4, $4, $4, $5, $6, $5, $5, $5, $6, $5, $6, $5, $64, TOTAL ALL EXPS $11, $12, $12, $13, $14, $16, $16, $16, $16, $15, $14, $13, $173, Net Cash Flow $ $ $ $ $ $ $ $ $ $ $ $ $4, Cash Position $4, $5, $5, $6, $6, $7, $7, $7, $8, $8, $8, $9, $9, NOTES Pounds landed and boat price These are estimates based on information from several sources. Your experience may be materially different. Fuel used and price These are estimates based on information from several sources. Your experience may be materially different. Bait: # drums and price These are estimates based on information from several sources. Your experience may be materially different. Stern Man - share Assumes 20% of the receipts, less 20% of the variable costs, excluding General & Administrative costs Wharf Fees Assumes boat $150/month Cash Flow Statement 37 Let s look at the Profit and Loss Statement: What are the principal differences? Amount of revenues reported each month may not be the same as shown on Cash Flow Projection Some Expense items may reflect different amounts than shown on Cash Flow Projection Two new expenses not seen on Cash Flow: Amortization and Depreciation both NON-CASH expenses Reported taxable income less than actual net cash generated Note how much less taxable income there is versus net cash generated Let s look for these things as we examine a P & L 38 19

21 Profit and Loss Statement Item Jan Feb March April May June July August Sept October Nov Dec Year Income Revenues $12,375 $12,750 $12,938 $13,500 $15,000 $16,875 $16,875 $16,875 $16,875 $15,938 $15,000 $13,500 $ 178, Operating Expenses Boat fuel $1, $1, $1, $2, $2, $2, $2, $2, $2, $2, $2, $2, $ 25, Bait $4, $4, $4, $4, $5, $5, $5, $5, $5, $5, $5, $4, $ 60, Main & Repair Boat $ $ $ $ $ $ $ $ $ $ $ $ $ 6, Main & Repair Equip $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $ Replace Equip & Gear $ $ $ $ $ $ $ $ $ $ $ $ $ 6, Misc Supplies $ $ $ $ $ $ $ $ $ $ $ $ $ 1, Licenses & Permits $0.00 $0.00 $0.00 $0.00 $ $ $0.00 $0.00 $0.00 $0.00 $0.00 $75.00 $ Stern Man Share $0.00 $0.00 $0.00 $0.00 $0.00 $1, $1, $1, $1, $1, $0.00 $0.00 $ 8, Wharf Fees $ $ $ $ $ $ $ $ $ $ $ $ $ 1, Property Insurance $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ Liability Insurance $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $ Membership Dues $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ $ Tax & Accounting $ $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $ Property Taxes $0.00 $ $0.00 $0.00 $0.00 $0.00 $0.00 $ $0.00 $0.00 $0.00 $0.00 $ 1, Depreciation Expense $ $ $ $ $ $ $ $ $ $ $ $ $ 3, Amortization Expense $90.83 $90.84 $90.83 $90.84 $90.83 $90.84 $90.83 $90.84 $90.83 $90.83 $90.83 $90.83 $ 1, TOTAL ALL EXPS $8, $8, $8, $8, $9, $11, $11, $11, $11, $10, $9, $8, $117, Net Taxable Income $4, $3, $4, $4, $5, $5, $5, $4, $5, $5, $5, $5, $60, NOTES Same assumptions as Cash Flow Projection Assumes annual boat maintenance, equipment maintenance and trap replacement expense averaged over year Boat being depreciated over 15 $3,000/year; traps and gear depreciated over 5 $500/year amortization of all licenses and permits over 12-month period; would be the same if expensed rather than amortized. 39 The Profit and Loss Statement is what determines income tax liability Cash Flow is what determines survival of business and ability to pay for non-tax deductible items, such as principal payments on debt, purchase of new gear and equipment, and accumulation of what you need for a new boat Cash Flow will be the first spreadsheet a lender will look at, Profit and Loss next, and finally the Balance Sheet Now let s look at the Balance Sheet

22 Balance Sheet Item 12/31 12/31 Assets Cash on hand $4, , Accounts Receiveable $ Subtotal $4, , Fixed Assets Traps and gear $2, , less accumulated depreciation -$1, , Net Value Traps & Gear $1, Boat $45, , less accumulated depreciation -$15, , Net Value Boat $29, , Licenses & Permits $ less amortization -$ Net Value licenses & permits $ TOTAL ASSETS $35, , Liabilities Accounts Payable $0.00 2, Notes and mortgages $ Total Liabilities $0.00 2, Owner's Equity - Original investment $10, , Accumulated Earnings $25, , Owner withdrawals during year $ , Total Owner's Equity $35, $36, TOTAL LIABILITIES AND EQUITY $35, $38, Balance Sheet If you had accrued income or expenses (i.e., not yet received or paid) note where would you put those numbers? Note depreciation schedule traps and gear over 5 years, boat over 15 years. These create significant non-cash expenses reducing taxable income, but get reflected in the net value of assets. Note the owner withdrew less cash than he could have in order to build his working capital 42 21

23 Cash flow and profit are NOT the same thing and you need to know the difference A successful business MUST maintain good accounting records and financial controls. Have someone who knows what they are doing keep your books As the owner you must understand the financial statements to manage effectively 43 Sources and Uses of Cash The first Source and Uses statement simply reflects what the Cash Flow Projection and the Balance Sheet show. Total cash in the business increased by $4,

24 Sources and Uses of Cash #1 (simple) Sources of Cash Cash on hand beginning of year: $ 4, Net cash generated during year: $ 64, Uses of Cash Owner withdrawal from business: $ -60, NET CASH REMAINING: $ 4, Sources and Uses of Cash (continued) The second projects what might be required if the owner wants to purchase a new(er) boat It assumes he can get approximately the depreciated value of his existing boat ($29,000) from a sale, and can borrow $30,000 from a bank at 7% payable over 10 years 46 23

25 Sources and Uses of Cash #2 Boat Purchase Sources of Cash Cash on hand beginning of year: $ 4, Net cash generated during year: $ 4, Proceeds from sale of boat: $ 29, Bank Loan: $ 30, TOTAL AVAILABLE CASH: $ 68, Uses of Cash Purchase of new boat: $ -55, NET CASH REMAINING: $ 13, Debt Service for 10 year loan at 7% interest: Monthly payment would be: $ Annual cash need would be: $ 4, Can he handle the debt service? Out of nearly $65,000 cash generated each year, he will use more than $4, for debt service He could reduce his Owner Withdrawal, or he could plan to increase revenues to cover the loan So, if he is going to buy a new boat using a loan he s going to need a plan that shows how he will be able to make the loan payments 48 24

26 As an added check on projections, you can do a breakeven analysis The formula for calculating the break-even point is: Break-Even (Revenue dollars needed) = (equals) Fixed Costs 1-Variable Cost (as a % of sales) How much additional revenue will he need to be able to make the loan payments? This is keeping all of his other expenses (including owner s draw) the same 49 Using the numbers from the cash flow projection, let s see what the break-even analysis tells us: Total Annual Fixed Cost of loan: $4, Divided by Variable Costs as % of revenues $108, ,500 equals = minus (-) equals = Total Annual Fixed Cost divided by = $10, To pay for the loan, revenues will have to increase by that amount, or approximately 6%. That translates to an additional 2,856 pounds landed annually, or increasing the average price received by 22.5 cents to an average of approximately $3.98 per pound. Are either possible? 50 25

27 Financial ratios are a valuable and easy way to interpret the numbers found in statements They can help to answer critical questions such as whether the business is carrying excess debt or inventory, whether customers are paying according to terms, whether the operating expenses are too high and whether the company assets are being used properly to generate income Most importantly, it s what the banks use to measure how you re doing! 51 The current ratio gauges how capable a business is in paying current liabilities by using current assets only. Current ratio is also called the working capital ratio. The formula is: Total Current Assets Total Current Liabilities (that means Total Current Assets divided by Total Current Liabilities) A good value for this ratio is 2 to 1 (or 2:1 or 2/1). In our example the ratio is 9, , = 4.2. Very healthy! 52 26

28 Debt to equity is also called debt to net worth. It quantifies the relationship between the capital invested by owners and investors and the funds provided by creditors The formula is: Total Liabilities (or debt) Net Worth (or Total Equity) The higher the ratio, the greater the risk to a current or future creditor. A lower ratio means the company is more financially stable and is probably in a better position to borrow money. However, an extremely low ratio may indicate that the owner is too conservative and is not letting the business realize its full potential. In our example, the Debt to Equity Ratio is.061, which may be considered too low a ratio. 53 Net profit margin shows how much net profit is derived from every dollar of total sales. It indicates how well the business has managed its operating expenses. It also can indicate whether the business is generating enough sales volume to cover minimum fixed costs and still leave an acceptable profit. The formula is: Net Profit Total Sales The higher the value for this ratio the better, but it must be over 0.0 to indicate a profitable company. In our example, the fisherman enjoys a Net Profit Margin of 34% or 34 for every dollar of revenue brought in

29 This evaluates how effectively the company employs its assets to generate a return. It measures efficiency. The formula is: Net Profit Before Taxes Total Assets For our fisherman, his Net Profit Before Taxes is $60, and his Assets are $38,262.50, for a return of 59%. However, if the draw of $60,000 is considered, the return falls to 2.3% 55 To wrap it up: Use the Cash Flow Forecast to develop the Profit & Loss Statement. The P & L will tell you whether the business is profitable on an on-going basis. If cash is generally positive it should be profitable. Use the Cash Flow Forecast and P & L to prepare the Balance Sheet and Sources and Uses of Cash. You now have the financial statements your business plan requires. Check your numbers using accepted financial ratios. This is the information a lender will rely upon to decide whether to lend you money! Be sure your numbers are consistent! 56 28

30 Something very important to remember: There is help out there! Your local Maine Small Business Development Center (Maine SBDC) is there to help. Your local SCORE chapter may be of assistance. Your local banker is a good source of information and advice. They also know others who can help

31 For confidential, individualized, no cost to client business counseling and assistance contact: Maine Small Business Development Center Location: Coastal Enterprises, Inc. Contact: David Hill Phone: x Thank you! A Financial Planning Workshop for Fishing Families Trade Adjustment Assistance Program Dedicated to helping Maine small business succeed