KPI’s Levers for Your

Business

Karen ChinB2B CFO®

January 27, 2009

My Background

30+ years in finance and accounting

• 20+ with KPMG• 15+ as Controller and/or CFO

Core competencies

• Accounting management• Financial analysis• Forecasting• Cash flow management• Budgeting• Advanced technology applications and data mining

Topics

Evolution of a business

Evaluating the financial performance• Key Performance

Indicators

Next steps

Evolution

Why start a business?

• Freedom to “run the show”• Innovative product• Provide superior service• More income

Entrepreneurs are “Finders”

• Live in the future; pull others into the future

• High ethical and moral business core values

• Creative, visionary, innovator, dreamer

• Relationship builder

How Does It Start?

Building an Infrastructure

EmployeesVendorsOutside contractors

Computer hardware and softwareMachinery and equipment

BankersAccountantsAttorneys

Operating procedures and processes

Lenders or leasing companiesOffice space or buildings

Infrastructure Creation

Owner’s Activities

• Building relationships with customers

• Creating relationships with vendors

• Delegating tasks to employees or associates

• Causing sales and cash to come into the company

Business Grows

High level of customer service

Short cash collection cycles

Few customer complaints

Low overhead

Personal sacrifice by the Finder

As a result of Infrastructure Creation is Infrastructure Peak

Company runs “lean and mean”

Infrastructure Peak

A Shift in Perspective

“I should have a raise”

“We need more people so

we can take time off”

“We need a better

building”

“I need a new

car/house/vacation…”

“We should buy more

equipment or inventory

A result of running lean is burn-out of owner and employees

Result of Shift

During infrastructure peak less thought is given to the need of the customer and “lean and mean” is no longer the mantra of the company.

Outgrowth of Infrastructure

Symptoms of Infrastructure Outgrowth

• Employees – higher turnover, increased theft of time, money and inventory, increased cost of benefits and training

• Cash – receivables increases, cash shortages, increased dead inventory, owner lends money to cover overhead

• Vendors – delay deliveries, relationships decline, time is spent finding new vendors

• Customers – complaints increase, orders decrease, problems increase

• Productivity – quality decreases, inaccurate information, more meetings, equipment downtime

The Result?The Danger Zone

The Danger Zone is created when the cash needs of your company far

exceed the cash available to meet those needs

Owner’s New Activities

• Analyzing cash flow• Meeting with bankers and

lenders, attorneys and accountants

• Deciding which bills can be paid

• Hiring or firing staff• Writing checks

“Unofficial Organization Chart”

• Finders – future thinkers

• Minders – historical view

• Grinders – live for today

The Danger Zone

• During this time, the Finder’s time shifts toward being a Minder

Potential Outcome• Loss of current and future customers• Damaged business relationships• Lost enthusiasm or

energy of the Finder• Damaged

relationships with family members

• Death of the dream of the founder

• Death of the company

Escaping The Danger Zone

• Find sales with good margins• Leave Minding activities to others• Sales or cash? – let others find the

cash, finders need to generate sales

Owner Must Returnto Finding• Stop trying to solve all

the problems• Rely on others for

Minding– Find someone who is

good at it– Bring in someone Finder

can trust• Return the focus to

finding new customers• Refocus on product and

market factors

Let the Minder Find Cash

• Cash might be tied up in A/R, Inventory, fixed assets

• Re-negotiate credit facilities based on:– Clean and timely financial statements– Acceptable key ratios– Evidence of improving cash flow

Understanding the Minder’s World

Key Performance Indicators

It’s All RelativeWhere are you now?

Where do you want to be?

Where are others?

Where were you?

Current Ratio

01234567 6.7

1.75 2.39 3.041.74 2.37 2.04 2.52

3366 52421 53131 541211541511 541513 54187 56131

Total Current Assets ÷ Total Current Liabilities

Generally, this metric measures the overall liquidity position of a company. Watch for big decreases in this number over time.

Quick Ratio

00.5

11.5

22.5

3 2.79

1.5 1.44

2.87

1.692.27

1.561.16

3366 52421 53131 541211541511 541513 54187 56131

(Cash + Accounts Receivable) ÷ Total Current Liabilities

Another good indicator of liquidity. Use only collectible Accounts Receivable. Companies with significant Inventory and/or Prepaid Expenses will see a bigger swing in this number compared to the Current Ratio

Debt to Equity

01234567

0.341.62

1.13

6.45

1.25 1.64 1.282.83

3366 52421 53131 541211541511 541513 54187 56131

Total Liabilities÷ Total Equity (or Net Worth)

Leverage ratio that indicates the composition of a company’s total capitalization. Generally, creditors perfer a lower ration to decrease financial risk while investors prefer a higher ratio to realize the return benefits of financial leverage.

Return on Sales

-30.00%-20.00%-10.00%

0.00%10.00%20.00%30.00% 23.49%

4.01%6.27%6.04%12.36%

-30.00%

7.04%2.54%

3366 52421 53131 541211 541511 54151354187 56131

Net Profit before taxes ÷ Sales

How much profit is the company generating for every dollar it sells? Track it carefully over time and against industry competitors.

Return on Assets

-20.0%0.0%

20.0%40.0%60.0%

33.6%

3.8% 1.3%

50.0%

-3.4%-15.6%

10.6%1.3%

3366 52421 53131 541211541511 541513 54187 56131

Net Income ÷ Total Assets

How many cents of profit each dollar of asset is producing. Businesses with high capital equipment will generally produce less.

A/R Turnover and A/R Days

Accounts Receivable Days0

20406080

79.2

17.9128.7

44.97

25.98

49.9240.49

31.98

3366 52421 53131 541211 541511 541513 5418756131

A/R Turnover = Net Credit Sales ÷ Average Accounts Receivable

Both ratios compare sales and accounts receivable. Higher turnover is better; lower A/R Days is better

A/R Days = (Accounts Receivable ÷ Sales) * 365

Inventory Turnover and Inventory Days

Inventory Days05

10152025

1.48

21.03

2.75 2.79

10.82

3366 52421 53131 541211 541511 541513 5418756131

Inventory Turnover = Net Sales ÷ Inventory

Both ratios compare sales and inventory . Higher turnover is better; lower A/R Days is better

Inventory Days = (Inventory ÷ Sales) * 365

Accounts Payable Days

Accounts Payable Days0

1020304050

26.934.54

17.11

4.99

22.05

46.4

32.09

4.72

3366 52421 53131 541211541511 541513 54187 56131

How timely does the company meet is payment obligations? Lower is normally better

A/P Days = (Accounts Payable ÷ Cost of Goods Sold) * 365

Profit MarginGross Profit Margin

0.00%20.00%40.00%60.00%80.00%

100.00%

3366 52421 53131 541211 541511 541513 54187

Net Profit Margin

-30.00%-20.00%-10.00%

0.00%10.00%20.00%30.00%

-30.00%

Are You a Finder?

Do You Spend Too Much Time “Minding”?

Minder’s ActivitiesEvaluate

ratios over time

Compare ratios to industry

Forecast Cash Flow

Prepare budget and tie incentives

to meeting or exceeding budget

Develop dashboard to enable quick

response to changes in market

condition

Escape The Danger Zone

Someone is spending time with your current and future customer. If not you, it will be your competition.

Go find new customers, open new markets, dream and have some fun!

Karen Chin

B2B CFO®

281-693-3872kchin@b2bcfo.com