Profit Optimization and Value Enhancement
Download
Report
Transcript Profit Optimization and Value Enhancement
Profit Optimization
and
Value Enhancement
For the Small to Medium-Size
Enterprise (“SME”)
Financial Management
Manage
Margins
Cash Flow
Communication & Coordination
Accountants are from Mars
Entrepreneurs are from Venus
Are backward looking
Are recording, organizing &
reporting what happened in the
past
Have knowledge of what has
happened
Can produce tremendous
amounts of data
Can produce any type of report
you want, but do not know
what you need
Are forward looking
Envisioning, planning & creating
Have knowledge of what is
planned.
Needs information for decision
making, not data
Does not know what is available
therefore does not know what to
request
Business Templates & Tools for SMEs
Data
SME Business Owners and Officers need to analyze their
businesses regularly using financial analysis tools that can
give them insight into their firms just like Major Corporations.
Such as:
Trends in Key Financial Measures
Optimal Profit Available to the Firm
Asset Financing
“Z” Score Underwriting Risk Assessment
Ratio Analysis Introduction
Breakeven Concepts
Trade-off of Cutting Costs vs.. Increasing Sales
Information
Good Decision Making
Success
CLIENT: CAPITALIST VENTURE, INC.
PERIOD
Balance Sheet
2002
2001
2000
Cash
Receivables - Trade
Receivables - Other
Prepaid Insurance
Inventories
Other Current Assets
63,967
89,665
70,399
47,513
91,722
-
31,000
108,095
31,000
30,072
28,208
TOTAL CURRENT ASSETS
292,727
178,984
119,930
Net Fixed Assets
Deposits
Deferred Charges
Other Assets
TOTAL ASSETS
326,244
-
285,802
210,798
8,966
627,937
8,966
473,752
8,966
339,694
PERIOD
2002
Payables - Trade
Other Current Liabilities
Loans from Shareholders
TOTAL CURRENT LIABILITIES
15,486
216,112
231,598
Long Term Debt
TOTAL LIABILITIES
Common Stock
Retained Earnings
TOTAL LIABILITIES & EQUITY
2001
2000
19,264
161,266
180,530
66,301
10,333
76,634
231,598
180,530
22,972
99,606
1,000
395,339
627,937
1,000
292,222
473,752
1,000
239,088
339,694
Income Statement - Detail
CLIENT: CAPITALIST VENTURE, INC.
SALES
2002
4,625,661
4,625,661
2001
4,219,672
4,219,672
2000
3,881,531
3,881,531
Material
Direct Labor
Other Costs
COST OF GOODS
1,923,230
676,021
764,964
3,364,215
1,804,609
823,509
506,851
3,134,969
1,567,859
722,994
641,500
2,932,353
GROSS PROFIT
1,261,446
1,084,703
949,178
104,000
326,344
98,424
8,194
58,900
24,251
469,250
560,595
102,500
292,645
69,385
5,402
86,117
19,474
395,802
506,795
78,000
242,404
39,474
9,856
98,547
14,998
294,144
417,545
1,089,363
971,325
777,423
1,089,363
971,325
777,423
172,083
113,378
171,755
Sales #1
TOTAL SALES
DIRECT COSTS
GENERAL & ADMINISTRATIVE EXPENSE
Officers' Compensation
Salaries & Wages
Depreciation
Interest Expense
Rent
Taxes (Excluding Federal Income Tax)
Other Operating Expenses
Other General & Administrative Expenses
TOTAL GENERAL & ADMIN. EXPENSES
SUMMARY
TOTAL OPERATING EXPENSES
OPERATING INCOME
Sales
Sales vs Gross Profit
$5,000,000
Gross Profit
$4,625,661
$4,500,000
$4,219,672
$3,881,531
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,261,446
$1,500,000
$949,178
$1,084,703
2000
2001
$1,000,000
$500,000
$2002
Net Sales vs Total Operating Expense
$5,000,000
Total Operating Ex
$4,625,661
$4,219,672
$4,500,000
$4,000,000
Net Sales
$3,881,531
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$1,089,363
$777,423
$971,325
$500,000
$0
2000
2001
2002
Sales
Sales vs Net Profit (NOI)
Net Profit
$5,000,000
$4,625,661
$4,219,672
$4,500,000
$4,000,000
$3,881,531
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$171,755
$113,378
$172,083
2001
2002
$-
2000
Net Worth
Net Worth
$450,000
$396,339
$400,000
$350,000
$293,222
$300,000
$240,088
$250,000
$200,000
$150,000
$100,000
$50,000
$0
2000
2001
2002
Working Capital
Working Capital
$70,000
$61,129
$60,000
$50,000
$43,296
$40,000
$30,000
$20,000
$10,000
$(1,546)
$2000
$(10,000)
2001
2002
Optimal Profitability
Using Historical Income Statement Data for the Most
Recent 3 or 4 Years You Can Create an Optimal
Income Statement Utilizing the Minimum Cost Line
Item Expense-to-Sales Percentage Experienced by
Your Company
The End Result is a Dramatic Difference in Current
Year Profits vs. Optimal Profit Potential
As can be seen in the following real world example,
the Company was recording a Pretax Profit of
$172,083 when they could have been earning a
Pretax of over $493,986 if they had achieved their
“Optimal Performance”.
This equates to Profit Improvement of almost
$322,000!
Income Statement - Summary
PERIOD
SALES
Total Sales
DIRECT COSTS
Material
Direct Labor
Other Direct & Subcontractor
COST OF GOODS
GROSS MARGIN
GENERAL & ADMIN EXP
Officer's Compensation
Depreciation
Interest Expense
Rent
Taxes (Exclude Federal Income)
Salaries & Wages
Other General & Admin Expense
TOTAL GEN'L & ADMIN EXP
OPERATING INCOME
CLIENT: CAPITALIST VENTURE, INC.
2002
DOLLAR
2001
%
DOLLAR
2000
%
DOLLAR
%
OPTIMAL
DOLLAR
%
4,625,661
100.0% 4,219,672
100.0% 3,881,531
100.0%
4,625,661
100.0%
1,923,230
676,021
764,964
3,364,215
1,261,446
41.6% 1,804,609
14.6%
823,509
16.5%
506,851
72.7% 3,134,969
27.3% 1,084,703
42.8% 1,567,859
19.5%
722,994
12.0%
641,500
74.3% 2,932,353
25.7%
949,178
40.4%
18.6%
16.5%
75.5%
24.5%
1,868,434
676,021
555,617
3,100,072
1,525,589
40.4%
14.6%
12.0%
67.0%
33.0%
104,000
98,424
8,194
58,900
24,251
326,344
469,250
1,089,363
2.2%
2.1%
0.2%
1.3%
0.5%
7.1%
10.1%
23.6%
102,500
69,385
5,402
86,117
19,474
292,645
395,802
971,325
2.4%
1.5%
0.1%
1.9%
0.4%
6.9%
9.4%
23.0%
78,000
39,474
9,856
98,547
14,998
242,404
294,144
777,423
2.0%
1.0%
0.3%
2.5%
0.4%
6.2%
7.6%
20.0%
104,000
98,424
8,194
58,900
24,251
288,875
350,534
1,031,603
2.2%
2.1%
0.2%
1.3%
0.5%
6.2%
7.6%
22.3%
172,083
3.7%
113,378
2.7%
171,755
4.4%
493,986
10.7%
Optimal Profit Improvement
Current Profit
Optimal Profit
Optimal Improve.
50% Optimal Improve.
800,000
700,000
600,000
Dollars ($)
500,000
400,000
300,000
200,000
263,299
292,601
321,903
131,649
146,301
160,952
80%
90%
100%
351,206
380,508
175,603
190,254
110%
120%
100,000
0
-100,000
Percent of Normal
Asset Misfinancing
Many Firms erroneously use Short-Term
Capital to finance Long-Term Assets. This
is a big mistake.
The Results can be felt throughout the
Firm.
Working Capital and Profitability are
adversely affected when this is allowed to
happen.
Net Fixed Assets
Asset Financing
Current Liabilities
Long TermLiabilities
$350,000
$326,244
$285,802
$300,000
$250,000
$231,598
$210,798
$180,530
$200,000
$150,000
$100,000
$50,000
$76,634
$22,972
$2000
2001
2002
Key Financial Ratios
Few Companies regularly pay attention to their
financial ratios other than current ratio and net
profit ratio.
A historical look at 14 Solvency, Safety,
Profitability, Asset Management and Turnover
Ratios can give you insight if you graph their
trends.
Are these ratios moving in the right directions?...
CLIENT: CAPITALIST VENTURE, INC.
Ratios - Analysis of Change
2002
SOLVENCY RATIOS
QUICK RATIO - Cash+AR+Mrkt Sec / Current Liabilities
2001
2000
1.1
0.8
1.6
1.3
1.0
1.6
58%
62%
41%
27%
26%
24%
4%
3%
4%
43%
39%
72%
737%
891%
1143%
27.4%
23.9%
50.6%
62.0
58.2
Should be minimum 1:1
CURRENT RATIO - Current Assets / Current Liabilities
Should be minimum 2:1
SAFETY RATIO
DEBT TO EQUITY - Total Liabilities / Net Worth
80% is high.. Should not be more than 100%
PROFIT RATIOS
GROSS PROFIT MARGIN RATIO- Gross Profit / Sales
Can fluctuations be explained?
PRETAX PROFIT MARGIN RATIO - Profit before tax/Sales
Measures ability to withstand adverse conditions
RETURN ON EQUITY - Operating Income / Net Worth
At least 10% is regarded desireable
KEY ASSET MANAGEMENT RATIOS
SALES TO ASSETS - Sales / Total Assets
Compare to industry norms. Reflects over or under trading
RETURN ON ASSETS - Net Operating Income / Total Assets
Efficient companies have high returns
TURNOVER MANAGEMENT RATIOS
INVENTORY TURNOVER - Cost of Goods Sold / Inventory
NA
Can significant variances be explained?
INVENTORY TURNOVER DAYS - 365 / Inventory Turnover
5.9
6.3
NA
Measures how quickly a company can change to market or product changes. Also risk during a downturn.
ACCOUNTS RECEIVABLE TURNOVER - Sales / Accounts Receivable
51.6
88.8
NA
7.1
4.1
NA
217.2
162.7
NA
1.7
2.2
NA
Quality of receivables assessment. Do you have a lot of 90+ day receivables?
AVERAGE COLLECTION PERIOD - 365 / Accounts Receivable Turnover
Time between credit sales and payment reciepts. Quality of receivables is critical to maintaining liquidity.
ACCOUNTS PAYABLE TURNOVER - Cost of Goods Sold / Accounts Payable
How well is accounts payable is being managed?
ACCOUNTS PAYABLE PAYMENT PERIOD - 365 / Accounts Payable Turnover
Is payment period consistent with taking cash discounts?
Solvency Ratios
Current Ratio
Quick Ratio
Current Ratio Recommended
Quick Ratio Recommended
2.5
Current Ratio
Recommended
2.0
1.6
1.5
1.0
1.3
1.6
Quick Ratio
Recommended
1.0
1.1
0.8
0.5
2002
2003
2004
Z Score Financial Risk Assessment
Z Score Ratings are frequently used in the
Banking Community to Assess Risks of
Underwriting Loans or other financial
instruments.
The 5 Ratios used in this analysis have been
shown to be successful bankruptcy predictors.
Edward I. Altman, Professor at New York
University.
Business Failure Potential Analysis - "Z" Score Rating
PERIOD
CLIENT: CAPITALIST VENTURE, INC.
2002
2001
2000
1 Current Assets
$
292,727
$
178,984
$
119,930
2 Current Liabilities
$
231,598
$
180,530
$
76,634
3 Working Capital
$
61,129
$
$
43,296
4 Total Assets
$
627,937
$
473,752
$
339,694
5 Total Liabilities
$
231,598
$
180,530
$
99,606
6 Common Stock
$
1,000
$
1,000
$
1,000
7 Preferred Stock
$
-
$
-
$
-
8 Treasury Stock
$
-
$
-
$
-
9 Value of Stock
$
1,000
$
1,000
$
1,000
(1,546)
10 Retained Earnings
$
395,339
$
292,222
$
239,088
11 Sales (annual)
$
4,625,661
$
4,219,672
$
3,881,531
12 Operating Income
$
172,083
$
113,378
$
171,755
Business Failure Potential Analysis - "Z" Score Calculations Below
13 WC (3) / Assets (4)
14 Importance Factor
0.097
-0.003
1.2
1.2
15 Net (13x14)
0.12
16 RE (10) / Assets (4)
17 Importance Factor
0.704
1.4
1.4
1.4
0.274
0.86
0.239
3.3
21 Net (19x20)
23 Importance Factor
0.01
0.6
0.6
0.00
25 Sales (11) / Assets (4)
26 Importance Factor
27 Net (25x26)
Z" Score - Failure Potential
3.3
0.79
0.00
24 Net (22x23)
0.99
0.506
3.3
0.90
22 Stock (9) /Liabilities (5)
0.15
0.617
0.88
20 Importance Factor
1.2
0.00
0.630
18 Net (16x17)
19 Income (12) / Assets (4)
0.127
1.67
0.01
0.6
0.00
0.01
7.366
8.907
11.427
1.0
1.0
1.0
7.37
8.91
11.43
9.27
10.56
14.24
Most Recent 'Z' Score of: 9.27 Shows Business Failure Potential to be Low*
Legend: Failure Potential Ranges: 1.8 or Less - Extremely High; 1.81 to 2.8 - Very High; 2.81 to 2.99 Possible; 3.0 or More - Low
Bankruptcy Risk
16.0
Risk Factor, 14.2
14.0
12.0
Risk Factor, 10.6
Risk Factor, 9.3
10.0
8.0
6.0
4.0
Possible, 3
2.0 Extremely High Risk, 1.8
0.0
2002
2003
2004
Key: <1.8 Extremely High Risk; 1.8 to 2.8 Very High Risk; 2.81 to 2.99 Possible; >3.0 Low Risk
Break Even Point Analysis
Many SME Firms have a limited Customer Base
where a Single Client may account for 20% or
more of the entire revenues of the Firm.
If the SME Firm should lose this Critical
Customer, can the Firm still Break-Even, or does
it know what cuts must be made to reclaim
Breakeven?
Most Firms don’t know the answer to this
question.
CLIENT: CAPITALIST VENTURE, INC.
BREAKEVEN ANALYSIS
SALES
1. NET SALES
2. OPERATING PROFIT
3. TOTAL OPERATING EXPENSES
CURRENT
4,625,661
172,083
4,453,578
%
100.0%
3.7%
96.3%
OPTIMAL
4,625,661
493,986
4,131,675
%
100.0%
10.7%
89.3%
FIXED EXPENSES
4. DEPRECIATION
5. INTEREST
6. RENT
7. OFFICER'S COMPENSATION
8. TAXES (EXCLUDE FED INCOME)
9. ALL OTHER FIXED EXPENSES
10. TOTAL FIXED EXPENSES
CURRENT
98,424
8,194
58,900
104,000
24,251
293,769
%
2.1%
0.2%
1.3%
2.2%
0.5%
0.0%
6.4%
OPTIMAL
98,424
8,194
58,900
104,000
24,251
293,769
%
2.1%
0.2%
1.3%
2.2%
0.5%
0.0%
6.4%
VARIABLE EXPENSES
11. DIRECT MATERIAL
12. DIRECT LABOR
13. SUBS & OTHER VARIABLE EXPENSES
14. TOTAL VARIABLE EXPENSES
CURRENT
1,923,230
676,021
764,964
3,364,215
%
41.6%
14.6%
16.5%
72.7%
OPTIMAL
1,868,434
676,021
555,617
3,100,072
%
40.4%
14.6%
12.0%
67.0%
SEMI-VARIABLE EXPENSES
15. SEMI-VARIABLE EXPENSES
SUMMARY
16. FIXED EXPENSES
17. 50% OF SEMI-VARIABLE EXPENSES
18. TOTAL FIXED EXPENSES
(16+17)
19. TOTAL FIXED EXPENSES+PROFIT (18+2)
20. BREAKEVEN %
(18 / 19)
21. BREAKEVEN VOLUME
(1 X 20)
22. MONTHLY BREAKEVEN VOLUME
CURRENT
795,594
CURRENT
293,769
397,797
691,566
863,649
80.1%
3,703,993
308,666
%
17.2%
%
6.4%
8.6%
15.0%
18.7%
OPTIMAL
737,834
OPTIMAL
293,769
368,917
662,686
1,156,672
57.3%
2,650,155
220,846
%
16.0%
%
6.4%
8.0%
14.3%
25.0%
80.1%
57.3%
Turnaround
Strategy and Plan
Optimal Income Statement Summary
CLIENT: Texas
The Medical
Gulf Coast
Center
Medical Group
PERIOD
SALES
TOTAL SALES
2003
DOLLAR
2002
%
DOLLAR
2001
%
DOLLAR
2000
%
17,337,529
100.0%
13,576,065
100.0%
9,583,238
Salaries & Wages Other Than Partners
7,669,594
44.2%
5,143,587
37.9%
3,581,070
37.4%
Guaranteed Payments to Partners
3,836,580
22.1%
3,550,887
26.2%
2,602,218
11,506,174
66.4%
8,694,474
64.0%
5,831,355
33.6%
4,881,591
181,560
1.0%
Rent
1,044,191
Other Operating Costs (2003 Dep Est @ $400k)
TOTAL S, G & A EXPENSES
DOLLAR
100.0% 11,071,120
OPTIMAL
%
DOLLAR
%
100.0%
17,337,529
100.0%
3,927,957
35.5%
6,151,236
35.5%
27.2%
2,247,154
20.3%
3,519,075
20.3%
6,183,288
64.5%
6,175,111
55.8%
9,670,310
55.8%
36.0%
3,399,950
35.5%
4,896,009
44.2%
7,667,219
44.2%
144,717
1.1%
43,029
0.3%
104,104
0.9%
181,560
1.0%
6.0%
756,340
5.6%
646,364
4.8%
1,338,914
12.1%
1,044,191
6.0%
5,258,858
30.3%
5,002,823
36.9%
2,882,944
30.1%
3,492,741
31.5%
5,215,682
30.1%
6,484,609
37.4%
5,903,880
43.5%
3,572,337
37.3%
4,935,759
44.6%
6,441,433
37.2%
6,441,433
37.2%
1,225,786
7.1%
DIRECT COSTS
COST OF SERVICES
GROSS MARGIN
SALES, GENERAL & ADMIN EXP
Interest Expense
SUMMARY
TOTAL OPERATING EXPENSES
EARNINGS BEFORE TAX
6,484,609
(653,254)
37.4%
-3.8%
5,903,880
(1,022,289)
43.5%
-7.5%
3,572,337
(172,387)
37.3%
-1.8%
4,935,759
(39,750)
44.6%
-0.4%
Sales vs Gross Profit
Sales
Gross Profit
$20,000,000
$17,337,529
$18,000,000
$16,000,000
$13,576,065
$14,000,000
$12,000,000
$11,071,120
$9,583,238
$10,000,000
$8,000,000
$6,000,000
$4,881,591
$4,896,009
5,831,355
$3,399,950
$4,000,000
$2,000,000
$2000
2001
2002
2003
GP%
Gross Profit vs Salaries & Wages
vs Guaranteed Payments to Partners as % of Sales
Salaries & Wages Other Than Partners
Guaranteed Payments to Partners
50%
% of Sales
40%
44.2%
35.5%
37.4%
37.9%
35.5%
36.0%
44.2%
33.6%
30%
27.2%
26.2%
20%
22.1%
20.3%
10%
0%
2000
2001
2002
Year
2003
Net Sales
Net Sales vs Total Operating Expense
Total Operating Ex
$20,000,000
$17,337,529
$18,000,000
$16,000,000
$13,576,065
$14,000,000
$12,000,000
$11,071,120
$9,583,238
$10,000,000
$8,000,000
$6,000,000
$5,903,880
$6,484,609
2002
2003
$4,935,759
$3,572,337
$4,000,000
$2,000,000
$0
2000
2001
Sales vs Earnings Before Tax ("EBT")
Sales
$20,000,000
$17,337,529
$15,000,000
$13,576,065
$11,071,120
$9,583,238
$10,000,000
$5,000,000
$(39,750)
$(172,387)
$(1,022,289)
$-
(653,254)
$(5,000,000)
2000
2001
2002
2003
EBT
Net Worth
Net Worth
$0
2000
2001
2002
2003
-$500,000
-$1,000,000
-$887,891
-$1,500,000
-$1,333,767
-$2,000,000
-$2,500,000
-$2,214,323
-$3,000,000
-$2,867,877
-$3,500,000
Weekly Cash Management
Beginning Cash
Collections
Loan Proceeds
Total Cash Inflow
Cash Available
7-May
Plan
Actual
(307,583)
(307,583)
300,000
295,032
0
0
300,000
295,032
(7,583)
Planned Current Expenditures
Salaries & Wages
0
Past Due Payables
45,240
Note Payments
193,995
Total Cash Outflow
239,235
Ending Cash
Details
(246,818)
14-May
Plan
Actual
(139,989)
(139,989)
300,000
0
100,000
400,000
0
(12,551)
260,011
2,500
26,249
98,689
127,438
213,000
2,000
58,176
273,176
(139,989)
(13,165)
(139,989)
0
0
0
0
(139,989)
2003 Seasonal Sales Chart for
The Medical Center
10.0%
9.5%
9.5%
9.0%
9.0%
9.0%
8.6%
Percent
8.4%
8.5%
8.0%
8.6%
8.0%
7.8%
7.9%
7.8%
7.9%
7.4%
7.5%
7.0%
6.5%
6.0%
JAN
FEB
MAR
APR
MAY
JUN
JUL
Months
AUG
SEP
OCT
NOV
DEC
The Medical Center
Budget by Line Item
Annualized
Results
Adjustments
2004
Budget
% of Total
Revenues
Revenue
Professional Revenue
Refunds
Ancillary Income
Other Income
Total Revenues
15,493,503
(66,297)
1,814,726
94,614
17,336,546
Cost of Labor
Non-Physicians
Mid-Level Providers
Salaried Physicians
Subtotal Cost of Labor
6,331,377
444,036
954,191
7,729,604
(1,623,834)
(444,036)
(88,971)
(2,156,841)
4,707,543
0
865,220
5,572,763
29.78%
0.00%
5.48%
0.00%
222,528
(22,081)
200,447
1.27%
Total Cost of Sales
7,952,132
(2,178,922)
5,773,210
36.52%
Gross Profit
9,384,415
651,424
10,035,839
63.48%
General & Administrative (In Total)
5,946,508
(919,275)
5,027,233
0.00%
EBITDA
3,437,907
1,570,699
5,008,606
0.00%
Interest
181,560
0
181,560
1.15%
3,200,002
20.24%
1,627,045
0.00%
Other Labor Burden Expenses
Guaranty Payments
Net Income
3,836,582
(580,234)
(1,365,204) 14,128,299
(66,297)
(154,252) 1,660,474
(8,042)
86,572
(1,527,498) 15,809,048
(636,580)
2,207,279
89.37%
-0.42%
10.50%
0.55%
100.00%
Profit Optimization
and
Value Enhancement
For the Small to Medium-Size
Enterprise (“SME”)