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Uncovering Your Client s Financial Blindspots

Alan Miltz
Director Pearl Financial Services
Email: alan.miltz@pearlfinance.com.au Website: www.pearlfinance.com.au PH +61 412 300 401

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22 Countries +1500 Accountants

000s of Companies

+200 Banks
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Equity is the most expensive source of funding

Have you ever tried to get equity funding? Approx 2 to 5% of companies are successful in attaining equity finance What does an investor look for?

Obtaining Equity Finance

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A Prospective Investor will look at: Management Opportunities Valuation Exit Strategy ROI Is your client a MOVER?

Smorgon Way

Two heads are better than one Everyone has the right to be heard in a non-threatening way The truth will be told Our word is our bond The needs of the customer come first There will be no surprises - put the uncomfortable issues on the table Promote teamwork and leadership Be proactive corporate citizens

Smorgon Factors for Success

1. 2. 3.

If you aim for the moon you might make the sky, keep trying. Write things down in Black and White (The Dream) Business Plan Get the right people into the Organisation, the backbone people not the high flyers. Hard work - No substitute for hard work and persistence, never give up. Always back your own judgement

4. 5.

Gary s Furniture

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We are going to use a case study based on a company Gary s Furniture. Gary s Furniture was founded in 2001 Gary is a furniture importer and manufacturer and distributes to 500 stores including majors and independents Gary believes he is doing fantastically

B-91
.

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Gary s Furniture

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Gary s net cash flow

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Gary s Furniture

On a scale of 1 to 10 how would you rate Gary's Furniture s financial performance? On a Scale of 1 to 10 how do you think the Bank rates Gary's Furniture s financial performance? What is Gary's cash flow for 2009?

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Net cash flow

On the 1st of January 2010 I have $10,000 in the bank. On the 31st of December 2010 I have $1,000 in the bank. What is my net cash flow? $9,000 outflow

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Net cash flow

Why can t we apply this logic to the company?

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The funnel analogy

Plotting your Critical Success Factors

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How does finance measure SCA?

Profit? Revenue Growth? Cash Flow? Market Share? Return? Dividends?

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How does finance measure your SCA?

Profit Revenue Growth Cash Flow Market Share Return Dividends

The balance sheet

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Funding (E +ND) 9.5 +17.3

Operations NOA 26.8

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The management accounting equation the balance sheet

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Why go into business?

Return On Capital Employed OR Return On Net Assets

(ROCE)

(RONA)

ROCE = RONA
(The Dupont Theory of Financial Analysis)

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Financial analysis the theory

ROCE = EBIT/Net Operating Assets

OR

EBIT

$4.6M
X

Revenue $42M NOA $26M

Revenue $42M

The ROCE equation

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As management it is mission critical that over time we ensure that our EBIT is growing at a faster rate than our investment in our Net Operating Assets.

EBIT

NOA
.

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Optimizing Growth
KEY POINTS
8m
Optimising growth?

B C
Fast growth?

7m 6m 5m

Clear understanding of what the business is doing Which quadrant is the business in now, where is it heading and why? What are the opportunities for the business? What will the outcomes be for the business There are options and the answer is it depends This provides a powerful partnership tool
.

A
Declining Growth?

EBIT

4m 3m 2m 1m 24m 25m 26m 27m 28m 29m

E Corporate stress?
Re-engineering Working Investment?

NET ASSETS

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Marketing understanding your customers

Most companies operate under the 80/20 rule 80% of their customers account for 20% of the revenue.

What do we want to work with?

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They want a relationship We want a relationship

They don t want a relationship

We don t want a relationship

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What do we do with the 3 and 4s?

They want a relationship We want a relationship

They don t want a relationship

We don t want a relationship

Increase price Enforce strict terms

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What do we do with the 1 and 2s?

The goal is to identify blind spots with 1 and 2 clients and lock them into the business. Ask these key clients for a wish list (i.e. what do we need to do to at least be equal with your best supplier?) Provide these clients with your wish list (i.e. what we want from them) Document a supply chain agreement.

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The role of Finance

Finance s role is to measure the company from a business and banking perspective.

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The Financial Health Check

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The quality of your client s cash flow

Strengths

Weakness

Next Period

impact on cash flow

Profit Working Capital Fixed Assets Cash Flow Funding

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For each measure let s look at

Profitability Sales GM% OH% EBIT% Working Capital AR Days Inv/WIP Days AP Days Working Capital %

Ideal Profile 100 30 20 10

>30 < 20 >10

28 30 20 22 8 10

<28 <22 <8

60 90 60 22

<60 <90 45 60 <22

60 70 90 100 60 70 22 25

>70 >100 <45 >70 >25

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Gary s numbers

Profitability Sales GM% OH% EBIT% Working Capital AR Days Inv/WIP Days AP Days Working Capital%

Ideal Profile 100 30 20 10

31 20 11

60 90 60 22 (70)

75 180

41

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The Power of One

It is essential to know the cash flow sensitivities of a 1% or 1 day change in: Price % Volume % COGS % OH % AR INV/WIP AP

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The Power of One - sensitivity

Change COGS % Price % AR days OH % INV/WIP days AP days Volume % - 1% +1% -1 -1 -1 +1 +1%

Effect on Net Cash Flow 406,000 187,000 118,000 84,000 81,000 81,000 -123,000

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Marginal cash flow

The additional cash that will be generated or used up if we sell $1 more of our product or services.

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Marginal cash flow for the next $1 of sales

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Marginal cash flow for the next $1 of sales

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Marginal cash flow for the next $1 of sales

What does this tell us? For each additional $1 of sales the business will require 10.34c of funding If the existing relationships stay the same

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Your client s Credit Officer

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Your client s Credit Officer

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Your client s Credit Officer

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Your client s Credit Officer

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A big picture for credit management

Understanding the customer

Basic approach to assessing SME performance PARSERS

Person management Amount Financial Repayment- Financial Security security Expediency management Remuneration servicing Services

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Key Measures

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Profitability

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Assets

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Working Capital

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Cash Wastage

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Strategy

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RONA %

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Credit Submission

Credit Assessment looks at 3 things

1. 2. 3.

Management Capability and Integrity Serviceability the first way out Security the second way out

Bank Pricing is a combination of risk and volume

Banks price for risk. Risk analysis for pricing is standardised using risk grade model. Risk Grading allows the bank to predict
Probability of default Loss given default

Inputs are a mixture of Mgt info, Financial info, Industry and credit bureau Info and Security detail Bank profitability is enhanced by extending further services:
Transaction accounts Merchant Facilities Personal A/cs Superannuation General insurance

Risk grading

The key elements in a risk grade model are: New Customer vs Existing Customer Longevity of business (Mgt) Experience of Management (Mgt) * Industry (Servicing) Historical account performance (Servicing) Historical servicing ratios (Servicing) Future servicing ratios (Servicing) * Security Cover ratios (Security) * Equity vs Debt (Security) * * Management can influence the outcome

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Things we needed to fix for Gary.....

Cash Performance

Enhanced cash after operations Improved cash flow quality Debt purpose for growth, not wastage Interest Cover >1.5x (EBIT/Interest Expense) Debt Service Cover >1.25x (NCAO/(Interest + Principle) Business can meet all commitments incl. tax, CAPEX, drawings and bank

Debt Servicing

Exciting Financial Future Improving Debt to Equity

Strategy translated into financial performance Bank will get money back Opportunity to grow lending to invest

Bank is not the only investor in the business Business leadership will back the proposition financially

10 ideas to better manage your bank

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Explain your financials Share your exciting future using numbers Focus your team on cash Borrow for growth, not wastage Always give the bank an exit opportunity Be the best in your industry Provide updates on industry issues (+ & -) Present high level but know the detail Have a 2nd bank ready to steal you Be profitable for them they ll do more to keep you!

Next steps

If you would like help to uncover your client s financial blindspots then why not look us up? Pearl Financial Services Pty Ltd Website: www.pearlfinance.com.au Or contact Alan directly: Email: alan.miltz@pearlfinance.com.au Or click here and complete the enquiry form and we will contact you for an obligation free chat about your cash performance