PROFIT MASTERY
Knowledge Driven
Financial Performance
Profit Mastery Basics
WHAT GETS MEASURED, GETS
MANAGED
and
What Gets Managed
Gets Done!
Profit Mastery Content
Seven Steps to Building Value
1.
2.
3.
4.
5.
6.
7.
Plan Properly
Monitor Financial position
Understand Price, Volume, Cost
Manage Cash Flow
Manage Growth
Finance Properly
Plan for Transition
Financial Operating Cycle
Profit
Income Statement
Cash
Balance Sheet
Sales
Assets = Liabilities + Net Worth
Net Profit
Efficiency
Uses of Profits:
1. To pay for new assets
2. To pay off debt
3. To pay out to the owners
Ratio Analysis Spreadsheet
Year 1
Year 2
Industry Calculations,
Year 3 Composite Trends, or
Observations
BALANCE SHEET RATIOS: Stability (or “Staying Power”)
1.
2.
3.
Current
Current Assets
Current Liabilities
1.7
1.1
0.99
1.8
Quick
Cash + Accts. Rec.
Current Liabilities
0.8
0.5
0.38
0.8
Debt-to-Worth
Total Liabilities
Net Worth
1.5
1.4
2.68
1.2
726,100
734,400
282,300
734,400
823,700
307,300
INCOME STATEMENT RATIOS: Profitability (or “Earning Power”)
4.
5.
Gross Margin
Gross Profit
Sales
21%
20%
18.5% 22.2%
Net Margin
Net Profit Before Tax
Sales
3.5%
3.0%
0.29%
3.2%
400,000
2,160,000
6,300
2,160,000
ASSET MANAGEMENT RATIOS: Overall Efficiency Ratios
6.
7.
8.
Sales-to-Assets
Sales
Total Assets
2.3
2.3
1.9
2.4
Return on Assets
Net Profit Before Tax
Total Assets
8.2%
6.9%
0.56%
6.9%
Return on
Investment
Net Profit Before Tax
Net Worth
20.9% 16.5%
2.0%
15.8%
2,160,000
1,131,000
6,300
1,131,000
6,300
307,300
ASSET MANAGEMENT RATIOS: Working Capital Cycle Ratios
9.
Inventory
Turnover
Cost of Goods Sold
Inventory
5.6
8.1
4.2
4.9
10.
Inventory
Turn-Days
360
Inventory Turnover
64
44
86
74
11.
Accounts Receivable
Turnover
Sales
Accounts Receivable
8.9
10
8
8.5
12.
Accounts Receivable
Turn-Days
360
Accts. Rec. Turnover
40
36
45
43
13.
Accounts Payable
Turnover
Cost of Goods Sold
Accounts Payable
12
10.4
5.7
9.8
14.
Average Payment
Period
360
Accts. Pay. Turnover
30
34
63
37
1,760,000
419,000
360
4.2
2,160,000
270,000
360
8
1,760,000
310,100
360
5.7
Scorecard
Profit Mastery Scorecard
INCOME STATEMENT RATIOS: Profitability (or “Earning Power”)
Y1
4. Gross Margin
5. Net Margin
Gross Profit
Sales
Y2
Y3
Industry
21% 20% 18.5% 22.2% 400,000
2,160,000
Net Profit Before Tax 3.5% 3.0% .29% 3.82% 6,300
Sales
2,160,000
For every $1 of (bottom #), there is $X of (top #)
Low Gross Margin
What’s their Low Gross Margin costing?
Their Peers’ Margin:
22.2%
Their Margin in Year 3:
18.5%
Difference
+/- 4%
Sales in Year 3:
X margin difference:
$2,000,000
X .04
Margin $ Left on the Table: $80,000
Primary Impact: Profit
Profit Mastery Scorecard
ASSET MANAGEMENT RATIOS: Working Capital Cycle Ratios
Y1
Y2
Y3
Industry
9.
Inventory
Turnover
Cost of Goods Sold
Inventory
5.6
8.1
4.2
4.9
1,760,000
419,000
10.
Inventory
Turn-Days
360
Inventory Turnover
64
44
86
74
360
4.2
11.
Accounts Receivable
Sales
8.9
Accounts Receivable
10
8
8.5
2,160,000
270,000
40
36
45
43
Turn-Days
360
Accts. Rec. Turnover
360
8
13.
Accounts Payable
Turnover
Cost of Goods Sold
Accounts Payable
12
10.4 5.7
9.8
1,760,000
310,100
14.
Average Payment
Period
360
Accts. Pay. Turnover
30
37
360
5.7
Turnover
12. Accounts Receivable
34
63
$126,000 (C)
$16,000(C)
$60,000(C)
$10,000(P)
$38,000(P)
$10,000 (P)
$7,000(P)
$80,000(P)
$15,000 (P) / $4,000 (P)
$22,000(P)
Financial Forecasting
• Pro forma Financial Statements
– Reports that provide projections of a firm’s financial
position
– Purposes of pro forma statements
• How profitable can the firm be expected to be, given the
projected sales levels and the expected sales expense
relationships?
• What will determine the amount and type of financing (debt
or equity) to be used?
• Will the firm have adequate cash flows? If so, how will they
be used; if not, where will the additional cash come from?
Forecasting Profitability
• Net Income Depends On:
– Amount of sales
– Cost of goods sold and operating expenses
– Interest expense
– Taxes
“If we’re doing so well, then why
am I always so broke?”
Financial Statements
• Balance Sheet
• Income Statement
– Profit & Loss
– (Break-Even Analysis)
• Cash Flow Statement
Goals
• Operational Expenses
– Reduce Operating (overhead)costs by 3%
• Sales Increase
– Increase annual sales by 2%.
• Gross Margin
– Increase margin from 40% to 42%
• Reduce Long term Debt
– Pay down Debt - to become leaner
Tools in forecasting - Breakeven Analysis, WCC
• Determine fixed & variable costs
• Calculate margin
• Breakeven (BE) level of Sales
= Fixed Costs/Contribution Margin
• Compare to Market size