Foundation for success using financial management- Chase Morrison

How to Build a Foundation for Success
Using Financial Management
Valley Economic Development Center &
Resource Planning Solutions

http://www.chasemorrisoncfo.com | 2012 Chase Morrison, Inc | ChaseMorrison@b2bcfo.com

What should you expect to learn?

• How to establish processes that will provide you with a
foundation for business growth
• Methods for better understanding the factors that impact
your business performance
• Ways to improve your ability to foresee opportunities and
issues as well as react to them sooner
• Gain an understanding of benchmarks and how they can
help your business
• How you can acquire business intelligence from your
accounting data


Agenda
• Use Excel to create a P&L, Balance Sheet and Cash Flow plan
based on QuickBooks data
• Review some important performance metrics
• Review the performance management cycle
• Define critical success factors (CSF) explore how to create
them
• Look at how Key Performance Indicators support CSFs
• Review a sample set of KPIs
• Define dashboards and describe the relationship between
KPIs and dashboards
• Learn how to create dashboard
• Define benchmarks and why are they important
• Summarize keys to foundation for success


Reasons why is planning important
• Need a yardstick to measure progress
• Need feedback to either validate or refute critical
assumptions
• Helps to identify deviations that should be
addressed
• Provides intelligence on future opportunities
and threats
• Sets long-term strategic priorities
• Provides basis to communicate and align
objectives across the business

Step #1 – Build a Profit & Loss (P&L) Plan
• Start with prior year
actual results
• Revenue planning is
most critical
• Detail level is
discretionary
• Example at right is
pulled from Quickbooks
• Used escalation factors
to produce monthly
budget

Profit & Loss Plan (Excel Workbook)
Key objective is validation of your business model, as in “Income is > Expense”

Net Sales

Cost of Goods
●●●

●●● Variable
Expense

●●●

Fixed
Expenses
●●●
Net Income

Prior-Year Results 2012 Budget By Escalation
from QB Month Factors

Step #2 – Build a Balance Sheet Plan
• Start with prior year actual
• Cash basis vs. accrual
accounting
• Balance sheet plan is a bit
more complex
• Significant items are A/R,
inventory, fixed assets.
• Use efficiency factors to
forecast A/R, inventory
and Accts Payable.
• Fixed assets require
analysis of new purchases
& depreciation

Balance Sheet Plan
Summary of what a company owns and what it owes

●●●

Assets (This is what the
company owns)

●●●

Liabilities (This is what the
company owes to vendors,
creditor & employees)
Equity (This is what is
owned by stakeholders,
●●●
investors and owners.)

Prior-Year Results 2012 Budget By
from QB Month


Step #3 – Statement of Cash Flow

• Calculated using both the
P&L and balance sheet.
• There is no budget vs.
actual CF report in QB.
• Cash Flow is:
+ AssetsPriorPeriod – AssetsCurrentPeriod
+ LiabilitiesCurrentPeriod – LiabilitiesPriorPeriod
+ EquityCurrentPeriod – EquityPriorPeriod
+ Net Income or (Loss)
- Depreciation
= Cash Flow


Cash Flow Plan

●●●

Operating CF

●●● Investing CF

Financing CF

Change in CF
position for year
●●●

Metrics used to generate balance sheet
• Days Sales Receivables – Measure of days of AR outstanding (70 days as of YE)
• Days Inventory On Hand (OH) – Days of inventory outstanding (196 days as of YE)
• Days Payable Outstanding – Days of Accounts Payable outstanding (99 days as of YE)
• Note improvement as year progresses (DSR 70 to 66, DIOH 196 to 180)


Helpful Ratios & Tests For Maintaining
Optimum Performance
P&L Return on Sales % Net Profit / Sales
Gross Margin % Gross Profit / Sales
Balance Sheet Days Sales Outstanding AR / Avg Daily Sales
Days Inventory Outstanding Inventory / Average CO
Cash Cycle DIOH + DSO
Return on Assets % Net Profit / Total Assets
Return on Equity % Net Profit / Equity
Debt To Equity Debt /Equity
Operating CF OCF is positive If not, need to understand why
OCF > Net Profit If not, need to understand why
unable to convert NP to cash
OCF > Fixed Asset Investment Shows ability to fund fixed assets
internally


The Performance Management Cycle

Establish
Establish Plan
Critical Success
& Assumptions
Factors

Gain New Identify Key
Insight & React Performance
To Changes Indicators

Measure Create
Performance Dashboards


Critical Success Factors
• CSF = What things absolutely need to be
accomplished for a business to succeed
• Questions that you can use to get at your CSFs:
– My business is better than my competitors because…
– My customers always say that they like it when…
– If I stopped ______________ my customers would start
to go elsewhere
– Our products are highly sought after because…
– Because of our __________ customers perceive us to
be ______________.
– We need to achieve _____________ to establish the
necessary __________ resources from ___________.


CSFs for Example Company

• Service levels need to improve 25% over prior year
– Maintain order responsiveness
• Customer Service response lead times need to
decrease 10%
– Be attentive to customer complaints and order issues
• Internally fund all cash requirements for 2012,
including those relating to new product launch
– Do not incur additional debt in 2012
• Managing CSFs requires measuring and managing
their associated key performance indicators.


Key Performance Indicators (KPI)

• KPIs are used measure CSF performance and
ensure we are on target
• KPIs should tell you what corrective action is
required, if any.
• KPIs are typically not financial
• Tie performance responsibility to a specific group
or person
• Measured regularly
• Are typically the source for dashboard measures.

KPIs for Example Company
• Service levels need to improve 25% over prior year
– KPI #1: Backorders cannot exceed $7.5K (‘11 Avg=$10K)
• Customer Service response times need to decrease 10%
– KPI #2: Average call waiting time reduced from 180 seconds
to 160 seconds
• Internally fund cash flow requirements relating to new
product:
– KPI #3: Accounts Receivable needs to go from 70 days to 66
by year end 2012
– KPI #4: Inventory days on hand have to drop from 196 days
to 180 days
– Gross Margin needs to increase 1% over prior year (from 41%
to 42%)
KPI #5: Reduce scrap cost 25%
KPI #6: Reduce direct labor hours 5%


Creating Dashboards
• Use Excel charting capability to create dashboards
• This example leverages a six panel layout
• Display includes prior year as column and current
year trend as line.
• Each graph uses two Y axes because of the
column-line combination
• Plan and actual data are input in space to left of
graphs
• Month cell at A2 for month number


Feb, Mar, Apr trend
Using A KPI Graph (Backorders) calls out for
attention.

Legend
helps
Target set a
identify
75% of PY
Favorable vs
($7.5K)
Unfavorable
trends

Looks as though Feb,
Note prior-year
Mar, Apr issue was
average for
resolved in May
perspective


Six-Panel Dashboard
• Summarizes KPIs
primary KPIs that drive
CSFs
• Updating is function of
business importance
• Significantly more
impactful when linked
to compensation
• Provides insight on
current as well as future
performance


Benchmarking
• Is a process of comparing one's business processes and
performance metrics to industry bests and/or best practices
from other industries.
• Differences between one’s own processes and the target’s,
highlights areas for improvement
• Relevant performance metrics include balance sheet metrics
(e.g. DSO, DIOH, etc.), profitability metrics (GM %, ROA,
etc.).
• Can also compare resources used to perform a function,
such as Finance (as in % revenue dedicated function).
• Benchmarking against targets in other industries can also
provide valuable insight.
• Objective is to identify weaknesses and then adapt best
practices to one’s own business.


Benchmarking Example


Keys to foundation for success

1. Establish plans for your P&L, balance sheet and cash flow
2. Regularly generate and review plan vs. actual results
3. Identify performance deviations and determine root cause
of variance
4. Keep an eye on important ratios (ROA, GM %, etc.)
5. Utilize CSFs and KPIs to identify root causes of variances to
plan and ensure business is “on track”
6. Take action to correct unfavorable trends
7. Implement simple dashboards to help identify trends and
stimulate review of threats and opportunities
8. Find and utilize relevant benchmarks and adapt best
practices
9. Create close linkages between financial reporting and
financial planning


Foundation for success using financial management- Chase Morrison

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