CFOWise

Get Online and Measure your ROI

Over $200 billion dollars will be spent purchasing goods and services online in 2008, according to the brief above from the April 8th, 2008 USA TODAY. The Internet is becoming the major medium for marketing, advertising, and purchasing. This is a powerful revelation for emerging and medium-sized business owners – it levels the playing field with the big guys and allows for tremendous niche and overall market segmentation strategies. Some feel money spent on their website and e-commerce functionalities are costly and even cumbersome. For those that feel this way, I have some news – the numbers don’t lie.

This is great financial help for small business owners. Not only do you need to get online, but, with the overwhelming amount of available content, you need a strategy to make your web presence stand-out. So, how do we calculate ROI on web strategies? It is important to note that you cannot trade sales dollars for costs. In other words, you cannot say that you spent $10,000 on your web presence and that if it generates over $10,000 in revenue, then you have made money on the dollars spent.

You must consider your gross margin, because you will have certain costs that will vary with an increase in sales, or, in other words, you will incur costs to provide your products or services. If your gross margin, or the percentage of sales remaining after you subtract your variable costs from your revenue, averages about 30%, then your break-even on $10,000 of investment into the web would be $33,333 ($10,000 divided by .30).

Part-Time CFO’s Agree on Need for KPI’s

The following results of a survey conducted by Grant Thornton validate what every business needs – a weekly report that highlights the most important ratios and metrics in the company. GRANT THORNTON SURVEY RESULTS

Part-time CFO‘s Agree on Need for KPI‘s

Why the Bank Account Fools Most Entrepreneurs

INTRODUCTION
Business is about cash flow. Whoever coined the phrase “Cash is King,” must have been in business. But an entrepreneur’s bank account can sometimes be the most misleading source of information about how the business is really doing.

THE CASH VS.PROFIT DILEMMA
Your profit and your cash will almost never equal each other in the same period. This is one of the most difficult concepts for small business owners and entrepreneurs to understand. Here are two examples to help you understand the difference between the two.

EXAMPLE 1 – POSITIVE PROFIT, NEGATIVE CASH FLOW
Let’s imagine you start your business and in the first month your sales explode. You generate $100,000 of sales and you are amazed. Your gross margin on your sales is 50%, meaning your gross profit is $50,000. Since you are a new business with very little overhead expenses, you only spend $10,000 in this category. Your profit for the month is $40,000. But does that mean you have $40,000 of profit in the bank? Most likely not.

While you were having this great month, you spent $60,000 on overhead and your costs of goods sold. Assuming you paid for all of these during the month, your cash outflow was $60,000. But what about your cash inflow? Assuming you extend net 30 terms to your customers, you didn’t collect any of your sales for the month during the month. So your inflow is ZERO. The bottom-line of this example is this: $40,000 of profit, but a negative $60,000 in cash flow. Profit does not equal cash!

Perhaps the biggest challenge that this situation presents is that while you celebrate your fantastic first month in business, you can’t figure out why all of your checks are bouncing. An additional challenge is that the you may actually think something is wrong with the business and make a bad decision as a result.

EXAMPLE 2 – NEGATIVE PROFIT, POSITIVE CASH FLOW
For the second example, let’s assume month 2 of your business has sales of only $10,000. Assuming a 50% gross margin and $10,000 in overhead expenses like last month, this business will post a net loss of $5,000 for the month. But what about cash?

Well, assuming all the customers pay on time, you collect the $100,000 of sales from last month, and you pay your cost of goods sold and overhead expenses of $15,000. Your net cash flow for the period is a positive $85,000. So, the company recognizes a loss but nets $85,000 in cash flow. Again, profit does not equal cash and the bank account balance is at $25,000 at the end of month two.

The biggest challenge with this scenario is you look at the bank account balance and feel great. If you fail to realize you need to improve next month’s performance you will quickly erode all of your profit from the first month.

THE COMMON ENTREPRENEUR QUESTION
Most entrepreneurs will, at some point, ask a version of the following question when they are looking at their financial statements: “How can this report say I lost $20,000 last month when I know I have $50,000 in the bank today?” This question is usually followed with: “This report must be wrong.”

Knowing that cash and profit almost never equal each other in the same period, the fact that the two are different potentially validates the accuracy of the financial statements. Understanding the dynamic difference between profit and cash will empower entrepreneurs to improve both their profit and cash. And it can also be the catalyst to correctly forecast their company’s cash flow.

CONCLUSION
How can entrepreneurs best understand the difference between their profit and cash? The best way to accomplish this is a thorough review and analysis of the company’s monthly financial statements (which should include, at a minimum, a balance sheet, income statement, and statement of cash flow) by a CFO Partner. In addition, the exercise of forecasting these statements will help validate and invalidate your assumptions on a monthly basis until you have a firm grasp on all of the moving parts in the company’s cash flow.

Should entrepreneurs look at their bank account balance regularly? Sure, so long as they agree to not be fooled by the balance.

Use Financials to Improve Profit and Maximize Cash

Here are the details and schedule:

Entrepreneur’s Financial Statement and Analysis Course – Parts 1 through 3

Geneva Building (1410 West 1200 South, Orem, UT 84058) Room GB 203

Part 1 – Thursday, April 23, 2009- 5:00-7:00 pm- Improving Profit through the Income Statement (Profit and Loss Statement)

Part 2 – Thursday, April 30, 2009- 5:00-7:00 pm – Strengthening Financial Health through the Balance Sheet

Part 3 – Thursday, May 7, 2009- 5:00-7:00 pm- Maximizing Cash Flow through the Statement of Cash Flows and Obtaining Clarity through Financial Modeling

These are the classes you have been asking for – what the numbers mean on the three financial statements and how to interpret those numbers to make sound financial decisions every Small Business Owner and entrepreneur needs to know how to read financial statements.  And the classes are FREE.  If you are in business bring your company’s yearly financial statements (profit and loss, balance sheet, and statement of cash flows) for 2007 and 2008 to each class.  Between the first and second class, our CFO Partners will use a software program to calculate each company’s key financial ratios and measurements as well as compare these numbers to the benchmarks in their respective industry.  As always our Part-Time CFO‘s will keep everything completely confidential.  The following is a brief description of each class:

• Part 1- Income Statement- April 23- Drive Your Company’s Profitability
  1. Revenue Recognition and Modeling
  2. Cost of Goods Sold
  3. Manufacturing and Selling, General & Administrative Overhead
  4. Gross Margin and Net Margin
  5. Break-Out Variable and Fixed Costs
  6. Calculate Break-Even
  7. How to use this information to Improve Profits

• Part 2- Balance Sheets- April 30- Improve Your Company’s Financial Health
  1. Assets = Liabilities + Equity
  2. Current Assets
  3. Fixed Assets and Depreciation
  4. Other Assets
  5. Current Liabilities
  6. Long-Term Liabilities
  7. Equity/Net Worth
  8. Need to Reconcile Each Account Each Month for Accuracy
  9. Financial Ratios to Assess Business Health and Why Business Health is Important
  10. How to Use the Numbers to Improve Financial Health

• Part 3- Statement of Cash Flows- May 7- Improve Your Company’s Cash Flow
  1. Cash from Operations
  2. Cash from Investing
  3. Discuss Cash from Financing
  4. Common Cash Traps
  5. 3-month Cash Flow Projections
  6. How to Use This Information to Improve Cash Flow
  7. Sources and Types of Financing
  8. Basic Principles and Formulas of Firm Valuation

You can attend one, two, or all three of these sessions.  Even though the classes are FREE, we ask that you register so we will have enough handouts.  Registration is required for this class- contact our office at 801-863-8230 or sbdcinfo@uvu.edu.

This class will be taught by Ken Kaufman, founder and CEO of CFOwise.  For more than a decade Ken has built a reputation as a leader who is respected for his integrity, work ethic, and commitment to lifting people and companies to new levels of achievement. Ken has served in several leadership roles, including CFO Partner, COO, VP of Administration, and VP of Sales, in start-ups, mid-stage companies, and large multi-national corporations. His experiences cover a variety of industries, including construction, real estate, financial services, business services, medical/dental, distribution, and outsourcing.  In two of his executive roles, Ken helped a start-up grow to over $100 million in annual sales in just four years and he helped a medium-sized company almost triple its operations in just three years. Ken has served as a court-appointed receiver and has negotiated “workout” proceedings for several insolvent entities. He was recognized as the top producing manager in a Fortune 500 firm. He has developed and presented numerous business plans and financial forecasts that have successfully obtained the debt and/or equity financing required for growth.