Chaim Yudkowsky, CPA, CITP, CGMA - Byte of Success Part 1 of a three part series focused on helping small and midsized business become more profitable.

1. How to MakeHow to Make
More MoneyMore Money
Part 1Part 1
presented bypresented by
Chaim Yudkowsky, CPAChaim Yudkowsky, CPA
Grabush, Newman & Co., P.A.Grabush, Newman & Co., P.A.
410-296-6300 www.gnco.com www.byteofadvice.com

3. Six qualities of successfulSix qualities of successful
businessesbusinesses
What are they?

4. 1997 Resolutions?1997 Resolutions?
Cash Flow Plan

5. CASH FLOWCASH FLOW
What is it?

6. ““Business can survive withoutBusiness can survive without
profit, but cannot remainprofit, but cannot remain
viable without cash flow.”viable without cash flow.”
-Chaim Yudkowsky, October 1993

7. What is Cash Flow?What is Cash Flow?
The cash coming into the business
vs.
The cash going out of the business

8. What is Adequate Cash Flow?What is Adequate Cash Flow?
Adequate cash flow means there is
sufficient funds available from the
operations of the business or from
loans to meet the current
obligations of the business

9. Consequences of InadequateConsequences of Inadequate
Cash FlowCash Flow
Loss of trade discounts
Dissatisfied suppliers
Inadequate inventory levels
Lost sales opportunities
Poor banking relations
Lost expansion opportunities
Loss of operating control
Bankruptcy

10. Types of businesses that haveTypes of businesses that have
the greatest challengethe greatest challenge
planningplanning
cash flow...cash flow...

11. Businesses that sell on creditBusinesses that sell on credit
Must incur costs while serving or selling to
the customer and wait until a later date to
collect.

12. Businesses that sell a productBusinesses that sell a product
Must buy the product in advance of selling
it to the customer.
May have to carry a sizable inventory,
purchased in advance of the sale.

13. Businesses that sell a productBusinesses that sell a product
on crediton credit
Have to purchase the product in advance of
selling it to the customer.
May have to carry a sizable inventory
purchased in advance of the sale.
Have to wait after the sale to collect from
the customer.

14. Businesses that manufactureBusinesses that manufacture
a producta product
Have to make the product prior to making it
available for sale.
Must finance the manufacturing cycle.
Must purchase and finance raw material and
WIP
Must pay labor immediately
Must pay manufacturing overhead
Must carry finished goods inventory.

15. Businesses that manufactureBusinesses that manufacture
a product and sell on credita product and sell on credit
Have to make a product prior to making it
available for sale.
Must usually carry a finished goods
inventory.
Have to wait to collect from the customer.

16. Seasonal and cyclicalSeasonal and cyclical
businessesbusinesses
Increasing sales require build in inventory
prior to the sale (which must be financed).
Increasing sales cause growth in receivables
after the sale (which must be financed).
Positive cash flow when sales decline.
Must be careful with positive cash flow as a
result of a decline in business.

17. Growing businessesGrowing businesses
Same as seasonal or cyclical business
except no positive cash flow when sales
decline.
Sales growth and the demands on cash flow
can easily exceed the ability of profits to
finance it.
Much of cash flow is usually committed to
term loan payments to finance equipment
needed to support the growth.

18. New businessesNew businesses
Since all sales represent growth, new
businesses have the same problems as
growing businesses.
The company’s plan must provide for
adequate capital and working capital
financing from the beginning.
New businesses usually get one shot at
structuring their financial needs.

19. Importance of ProfitImportance of Profit
Small businesses must be profitable.
Most small and medium size
businesses are undercapitalized.
Little room for error.
Profit is usually the only source for
new equity capital.
Must have adequate capital to be able
to borrow.

20. ...Sun Tsu, about 600 B.C.

21. TranslationTranslation

22. Foretelling TriumphForetelling Triumph
Those who triumph, compute at
their headquarters a great
number of factors prior to a
challenge.
Those who are defeated compute
at their headquarters a small
number of factors prior to a
challenge.

23. Much computation brings
triumph.
Little computation brings defeat.
How much more so with no
computation at all!
By observing only this, I can see
triumph or defeat.

24. Developing YourDeveloping Your
Cash Management PlanCash Management Plan

25. What Is a Cash ManagementWhat Is a Cash Management
Plan?Plan?
How much cash will I need?
When will I need it?
Where will I get it?
Typically, to the business owner,Typically, to the business owner,
cash management means knowingcash management means knowing
in advance:in advance:

26. How many of you have your next 12
months’ cash plan in operation?
How many of you know when you are
going to run out of cash, or when your cash
balances will drop to their lowest levels?
How many of you know how long your
present cash resources will last?
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

27. Managing YourManaging Your
Operating ExpensesOperating Expenses
(To budget or not . . .(To budget or not . . .
That is the question!)That is the question!)

28. BUDGET DEFINITION:BUDGET DEFINITION:
An orderly system of living beyond your means
A schedule of systematically going into debt
An attempt to live below your earnings
A method of worrying about what you spend before as
well as afterwards
A method of saying no to somebody’s request to spend
money before they’ve even asked for it
A quantitative expression of a plan of action and an aid
to the authorization and control of transactions

29. If you have an advertising budget ofIf you have an advertising budget of
$25,000 for the year and suddenly, in the$25,000 for the year and suddenly, in the
10th month of your year, you’ve spent10th month of your year, you’ve spent
your budget allowance, will you stopyour budget allowance, will you stop
advertising?advertising?
Answer: “NO”

30. So what good are budgets?So what good are budgets?
Does a budget provide information about what
will happen to your business?
Does a budget help you make decisions...or
just feel guilty about them?
Does a budget help you make more money
and ease your stress?

31. Don’t budgetDon’t budget
anymore!anymore!
Plan!

32. The “Know-Where-Your-GoingThe “Know-Where-Your-Going
Financial Plan”Financial Plan”
How much cash you will need
When you will need it
Where you will get it
Remember, effective cash managementRemember, effective cash management
means knowing in advancemeans knowing in advance

33. We must always knowWe must always know
the answer to thethe answer to the
question:question:
““Where am I going and whenWhere am I going and when
will I get there?”will I get there?”

34. Benefits of PlanningBenefits of Planning
Planning letsPlanning lets
you knowyou know
where youwhere you
are goingare going
and whatand what
obstaclesobstacles
you mayyou may
encounter onencounter on
your way.your way.

35. Planning Forces a Pro-Active,Planning Forces a Pro-Active,
Not Reactive, Mind-SetNot Reactive, Mind-Set
The plan will make your actual financial
information significantly more meaningful
“The numbers” can be compared to what you
have actually set out to achieve . . .
The best way to know how you are doing is to
know how you want to do

36. When you take a trip,When you take a trip,
you plan an itinerary.you plan an itinerary.
When you take a financial trip,When you take a financial trip,
how about the financialhow about the financial
itinerary?itinerary?

37. The Primary Elements of YourThe Primary Elements of Your
PlanPlan
The Profit and Loss Plan
– Shows anticipated operations (income and expenses) over
the next 12 months or longer
The Cash Flow Plan
– Takes information from P&L plan, converts it into cash
flow, answers basic questions of “Where will my cash
go?” “How much will go there?” and “How long will my
cash last?”
Forecasted Balance Sheets
– The forecasted balance sheet is the only way to
determine if the projected P&L and Cash Flow plans are
reasonable.

38. Getting StartedGetting Started
Keep it SIMPLE!
Don’t get too ambitious
Just GET GOING!

39. Two Basic Ways ofTwo Basic Ways of
Developing YourDeveloping Your
Cash Management PlanCash Management Plan
Using historical data
Developing the numbers one
at a time (getting behind the
numbers)

40. Historical DataHistorical Data
Easiest to develop
History is a good predictor of the future
Expenses remain relatively constant
Management not fully aware what makes a business
expense
History is not a good predictor of the future
Outside economic forces make past obsolete
Lacks accountability
STRENGTHSSTRENGTHS
WEAKNESSESWEAKNESSES

41. Getting Behind the NumbersGetting Behind the Numbers
More accurate
Pinpoints accountability
More time consuming to
develop
STRENGTHSSTRENGTHS
WEAKNESSESWEAKNESSES

42. Using History to Develop YourUsing History to Develop Your
PlanPlan
Use historical percentages in the current plan
If an item has been running at 5%, use 5%
Sales = $100,000; Auto runs at 5% therefore
use $5,000 in the plan
Simple
Easy to use
A great way to get started

43. Getting Behind the NumbersGetting Behind the Numbers
Auto expense @ 5% = $5,000
What’s the magic of 5%?
We need to shift thinking
Why not 3%, 4.5% or 6%?
Is there a better way to MANAGE this
expense?

44. Example: Auto at 5% isExample: Auto at 5% is
$5,000$5,000
How many autos do we support? Who’s?
How are they paid for? Credit cards,
submit mileage, pay gasoline bills direct,
etc. etc.
Do we have a consistent policy for all?
What about an allowance?
Is there any way to reduce this expense?

45. Example: Auto at 5% isExample: Auto at 5% is
$5,000 cont.$5,000 cont.
3 autos supported
Average cost = $125 per month
Bill, Sally and Ellen use them
3 x’s 125 = 375 x 12 = $4,500
Possible reduction $500 or 10%

46. How to Get StartedHow to Get Started
Use history to develop your first plan
After several months of comparing plan vs.
actual decide on a single expense item to
begin with
Begin the process reviewing one expense per
month
Estimated time each month ..... about 1 hour
Remember: 1:1, Reduce expense by $1 = 1
$ of additional profit and cash flow

47. Be able to locate differences between what you
thought would happen and what actually did
happen
Avoid being a crisis manager
Confine your management activities to the
exceptions—items significantly different from
the plan
On a monthly basis, compare theOn a monthly basis, compare the
operations of your company withoperations of your company with
the financial plan. You will:the financial plan. You will:

48. What If the Financial Plan IsWhat If the Financial Plan Is
Wrong?Wrong?
CHANGE IT

49. A financial plan is a livingA financial plan is a living
document that changes asdocument that changes as
conditions change.conditions change.
Change the plan...Change the plan...
After you have reviewed particular items for a
number of months and taken corrective
action but are still consistently over or under
plan
Only after you have exhausted all other
remedies to bring your actual expenses or
income in line with original estimates