Financial Concepts for Successful HR Professionals

Transcription

1 Financial Concepts for Successful HR Professionals Patty Lawrence, CMA Partner & Consulting CFO 1

2 Outline The Business Life Cycle Accounting Basics Understanding Financial Statements Assessing Financial Health HR + Accounting = Success! 2

3 Life Cycle of a Business 3

4 Life Cycle of a Business CHALLENGES obtaining initial funding managing cash reserves managing sales expectations accounting management establishing customer base establishing market presence you ve decided to pursue a business idea product and/or services are determined need to learn & adjust business model to ensure profitability 4

5 Life Cycle of a Business CHALLENGES dealing with increasing sales dealing with increasing customers increasing market competition (pricing, etc) moving into new markets effective management adding new products/services expanding existing business accounting management 5 business consistently generating revenue cash flow opens new opportunities fine-tune business model expand to new markets/channels

6 Life Cycle of a Business CHALLENGES increasing market competition moving into new markets adding new products/services expanding existing business exit strategy accounting management dominating market presence still growing, but not at an explosive rate step back and re-assess growth options 6

7 Life Cycle of a Business CHALLENGES avert stage by innovating rejuvenate product line re-evaluate customer needs & value provided protect cash flow exit strategy accounting management 7 business fail here decreasing sales, plunging profits survival mode, cut losses, exit business search for new opportunities & business ventures

8 Life Cycle of a Business CHALLENGES repositioning/rethinking markets, customer needs & product offerings starting over YIKES! insolvency bankruptcy business has no value 8

9 Life Cycle of a Business CHALLENGES re-gaining traction in market re-building sales re-invigorating employees rebuild financial strength & equity value re-formulate exit strategy 9 successful turnaround effort financial restructuring new leadership strategic focus process improvements

10 Accounting Fundamentals Who Cares? Need an understanding of the basics You communicate better with your co workers & candidates Know which gauges are important to watch More likely to be in control of your business & career You Care! 10

11 Accounting Fundamentals Bookkeeping: Recording, classifying and summarizing financial transactions in terms of dollars and their interpretation Debits & Credits: Entries made into the account ledgers to record changes in value resulting from business transactions Transactions: Any business event or activity that involves monetary value Accounts: Used to record and summarize business transactions 11

12 Assets: Accounting Fundamentals An economic resource of the business used to produce future economic benefits Liabilities: An obligation or debt of an entity Owner s Equity: Equivalent to the book value of the company 12

13 Accounting Equation: Accounting Fundamentals Assets = Liabilities + Owner s Equity A = L + OE 13

14 Revenue: Accounting Fundamentals Money earned from selling goods or services Expenses: Cost of goods or services that a business buys and uses to earn revenue Costs of running the business Net Income or Loss: Difference between Revenue and Expenses 14

15 Accounting Equation: Accounting Fundamentals Assets = Liabilities + Owner s Equity + Revenue Expenses Balance Sheet Income Statement A = L + OE + R E 15

16 Accounting Fundamentals 16

17 Accounting Fundamentals Cash Basis: Revenues are reported on the income statement in the period in which the cash is received from customers Expenses are reported on the income statement when the cash is paid out Accrual Basis: Revenues are reported on the income statement when they are earned which often occurs before the cash is received from the customers Expenses are reported on the income statement in the period when they occur which is often in a different period from when the payment is made 17

18 Accounting Fundamentals 18

19 Financial Statements Income Statement (P&L) measures the profit and loss of a business over a period of time Revenue Cost of Sales Margin/Gross Profit Expenses (SG&A, R&D) Operating Income EBITDA Earnings before interest, taxes, depreciation, amortization EBIT Earnings before interest & taxes Net Income/Loss 19

20 Financial Statements Interest Depreciation Amortization 20 EBITDA EBIT

21 Financial Statements Balance Sheet book value of the company at a certain point in time Assets Liabilities Owner s Equity 21

22 Financial Statements 22

23 Financial Statements Cash Flow where the money comes from and goes to Operating Activities Investing Activities Financing Activities Cash is King! 23

24 Financial Statements 24

25 Financial Statements Cash Flow Concerns the movement of money into and out of the business Functions as the gas in your business engine Where is cash tied up in your business? vs Profit Looks only at income and expenses Important to ensure you make money on your sales Can be profitable, but cash poor 25

26 How long is your cash cycle? Financial Measures 26

27 Financial Measures Common Size Ratios Liquidity Ratios Operating Ratios Solvency Ratios 27

28 Common Size Ratios Financial Measures Calculate each line item as a percentage of the total, which makes comparisons more meaningful. Common Size Ratios from the Balance Sheet Common Size Ratios from the Income Statement Helpful in identifying trends 28

29 Liquidity Ratios Financial Measures Measure your company s ability to cover its expenses. Current Ratio Quick Ratio Indicators of financial strength 29

30 Operating Ratios Measure the efficiency of your company s operations. Inventory Turnover Ratio Inventory Days on Hand Accounts Receivable Turnover Ratio Accounts Receivable Days on Hand Accounts Payable Turnover Accounts Payable Days Cash Cycle Return on Assets Financial Measures Key indicators to management running the business 30

31 Solvency Ratios Financial Measures Measure the stability of your company and its ability to repay debt. Debt to Worth Ratio Working Capital Net Sales to Working Capital Z Score Indicators of the company s viability and financial health 31

32 Performance Measures Manufacturing Productivity (cost of production) Pieces per hour Yield & Waste Machine Throughput Sales per labor hour Sales Inquiries (customer service department) Calls per day Conversion rate Sales Productivity (sales force) Sales per employee Sales/wages paid Turns (days) Inventory Receivables 32

33 ACME PRODUCTS INC. BALANCE SHEET Fiscal Year Ending December 31, 2014 Balance Sheet Assets Cash 40,443 65,034 26,396 Accounts Receivable 84,686 46,840 30,231 Inventory 17,451 10,000 17,307 Furniture & Equipment 75,770 55,962 0 Vehicles 76,155 21,230 27,216 Accumulated Depreciation (53,795) (29,692) (750) Total Assets 240, , ,400 Liabilities & Shareholder's Equity Accounts Payable 10,000 19,352 13,897 Deferred Revenue 57,627 10,000 5,000 Payroll Liabilities 15,998 4,958 2,659 Sales Tax Payable Line of Credit 1,618 22,156 15,325 Long Term Debt 110, ,912 59,501 Total Liabilities 196, ,300 97,158 Shareholder's Equity 44,344 3,074 3,242 Total Liabilities & Shareholder's Equity 240, , ,400 33

34 ACME PRODUCTS INC. INCOME STATEMENT Fiscal Year Ending December 31, 2014 Income Statement Revenue 1,354, , ,054 Cost of Goods Sold 614, , ,825 Gross Profit 740, , ,229 General & Administrative 236,069 98,160 20,983 Selling/Advertising 124,938 84,359 57,661 Compensation/Benefits 195, , ,784 Travel 8,885 5,600 4,351 Rent 14,273 21,497 10,913 Insurance 65,849 41,915 28,321 Utilities 19,358 11,466 14,448 Depreciation & Amortization 24,103 28,942 0 Total Operating Expenses 689, , ,461 Other Income/(Expense): Interest Expense (80) (572) (30) Gain/(Loss) on Investments Income Before Taxes 51,084 3,567 7, Taxes 9,814 3,735 10,590 NET INCOME 41,270 (168) (2,792)

35 Basic Financial Intelligence Understanding Your Numbers You need to know what is a good number and what is a bad number 35

36 Basic Financial Intelligence Impacting Your Numbers Do you know what to do about a bad number? 36

37 Departmental Expense Reports Financial Reports Measure spending vs benchmarks, typically budget & prior year Accountability tool 37

38 Departmental Expense Reports Financial Reports 38

39 Roadblocks to Profitability Owners, managers & employees who don t know, see, hear, trust or care. Ensure you have the systems to know See where you want to go and have a plan to get there Hear what your customers, vendors, lenders & employees have to say Develop an atmosphere of mutual trust Determine if your employees care about your objectives 39

40 Add Value to the Company s Bottom Line HR s Impact Effective Talent Acquisition & Management Fostering Employee Engagement Aligning HR Efforts with Overall Strategy 40

41 Talent Acquisition & Management HR s Impact Focus on Attracting & Hiring the Right Talent Hiring Mistakes Are Costly Employee Turnover is Expensive Invest in Employee Development Happy Employees are Priceless! 41

42 HR s Impact Employee Engagement Create a Line of Sight (LOS) for Employees Incentive Programs to Motivate Behaviors that Positively Impact the Bottom Line High Engagement leads to Improved Financial Performance Communication is Key 42

43 HR s Impact 43

44 HR s Impact Align HR with Overall Strategy HR Strategy should be linked with company strategy Build HR Strategy around company strategy 44

45 HR s Impact Align HR with Overall Strategy Employee performance management goals/objectives should incorporate elements of company strategy Hiring & retention processes should incorporate elements of company strategy Development plans should reflect strategic initiatives 45

46 Thank You! For more information, contact Patty at: