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Building Business Acumen

Building Business Acumen. Building Business Acumen. What is Business Acumen?. …the ability to make good business decisions in a timely manner with an understanding of how the decision should impact the business. 3. Business is Tough!. Only 5-10% of business start-ups survive past 5 years.

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Building Business Acumen

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  1. Building Business Acumen Building Business Acumen

  2. What is Business Acumen? …the ability to make good business decisions in a timely manner with an understanding of how the decision should impact the business. 3

  3. Business is Tough! • Only 5-10% of business start-ups survive past 5 years. • 14% of CEOs lose their job every year. • Booz & Co. • 70% of merger and acquisition activity do not live • up to expectation. Wall Street Journal 2007 5

  4. Business Acumen Every business must focus on fivebusinessdrivers. • If they do, they will be successful. • If they don’t, they’ll fail. 4

  5. Defining Cash Definition What is required to grow and maintain the business. Measures Cash – the bills and coins in the register, petty cash, and cash in the bank. Also includes cash equivalents, like CD’s and other highly liquid investments, that easily convert into cash within 90 days. Cash Flow – The cash generation from core business activities calculated from the difference between the cash that flows into and out of the business in a given period of time (month, quarter, annual) 8

  6. Cash & Cash Flow Pay off debt Invest it Spend it Save it 9

  7. How to Obtain Cash ProCon • Earn it • Cash from Operations • Sell Assets • Cash from Investing • Borrow it • Cash from Financing No Cost Immediate Immediate Time Reduce Assets Cost (Interest) Can a company have too much Cash? How much is too much/little? 9

  8. How Much Cash? • A company should have sufficient cash to cover… • their interest • expenses • capital expenditures • take advantage of opportunities • plus a little for emergencies Top Uses of Cash for Corporations • Dividend Pay-outs • Stock Buy-backs • Mergers & Acquisitions (M&A) • Research & Development (R&D) • Capital Expenditures (CAPEX) • Cash Balance Increase 9

  9. Benchmark Cash S&P 500 Average 6% 24% 9% 5% 18% 33%

  10. Cash Review Define Cash Driver What is required to grow and maintain the business. 2. Measures of Cash 1. Cash – easily converted in 90 days or less to cash. 2. Cash Flow – Difference of cash in and cash out over a given period of time. 3. Importance of Cash Driver - Sufficient to run business - Enhance shareholder value - Improve attractiveness to suppliers and customers. Benchmark the numbers 200820092010 Revenue $762 M $565 M $584 M Cash $34 M $49 M $140 M 9

  11. Defining Profit Definition What is left over after you have subtracted expenses. Can be expressed in dollars ($) or percent (%). Measures Gross Profit / Gross Profit Margin – Profit after Cost of Goods Sold (COGS) have been subtracted from sales. Earnings Before Interest Tax Depreciation & Amortization (EBITDA) – Reflects controllable earnings. Net Profit / Net Profit Margin – Profit after all expenses have been subtracted from sales. 10

  12. Sale Price: $1.00 Water - $ .04 Label - $ .10COGS Bottle & cap - $ .11 Packaging (Direct Labor) - $ .15 Total: ($ .40) $1.00 - $.40 = $.60 = 60% Gross Profit Rent - $ .03 Salaries, Gen, Admin. - $ .10 Marketing - $ .07 Shipping - $ .15 Total: ($.35) $1.00 - $.40 - $.35 = $.25 = 25% EBITDA Depreciation / Amorit. - $.02 Interest & Tax - $.12 Total: ($.14) $1.00- $.40 - $.35 - $.14 = $ .11 = 11% Net Profit Life Spring Artesian Water

  13. High Profit Companies 24% 33% 32.7%

  14. Low Profit Companies 7.9% 3.9% 1.4%

  15. Benchmark Profit S&P 500 Average Net Margin 11% 11

  16. Profit Review Define Profit Driver What is left over after you have subtracted expenses. Can be expressed in dollars ($) or percent (%). 2. Measures of Profit 1. EBITDA (Margin) – subtract COGS & SG&A 2. Net Profit (Margin) – subtract all expenses 3. Importance of Profit Driver - Net Profit is one of the most important #’s for the business. - Indicates price strength - Identifies ability to manage costs Benchmark the numbers 200820092010 EBITDA $39 M $70 M $80 M Net Profit 1.5% 9.0% 11.4% 11

  17. Defining Assets Definition What we have and how well we use what we have. Asset Strength – the ability to remain viable during ups and downs in the marketplace. Asset Utilization – the ability to efficiently and effectively use assets to generate profits. Measures Return on Assets (ROA) – Percent value of Net Profit to Total Assets. Revenue per Employee - Company efficiency measure that reflects employee count and revenues. 12

  18. Benchmark Assets S&P 500 Average ROA 6% 13

  19. Assets Review Define Asset Driver What we have and how well we use what we have. 2. Measures of Asset 1. ROA – Percent value of Net Profit to Total Assets. 2. Revenue per Employee – Company efficiency measure that reflects employee count and revenues. 3. Importance of Asset Driver - Demonstrates ability to work smarter rather than harder. - Indicates company invests in “right” assets - Indication of execution & efficiency Benchmark the numbers 200820092010 Rev./Employee $378k $354k $352k 13

  20. Defining Growth Definition The ability to increase year over year, quarter over quarter, and/or month over month. “In today’s business world, no growth means lagging behind in a world that grows every day…” “Investors expect it, employees are energized by it, customers are generally attracted to it and executives are measured by it.” Measures Revenue Growth – Top-line Sales/Revenues increase. EBITDA Growth – ‘Controllable’ Profit increase. Net Profit Growth – Bottom-line / Profit increase. 14

  21. Facing Rapid Decline • Best & brightest leave first. • Productivity goes down. • Morale goes down. • Costs are cut, which limits ability to grow, • company becomes less profitable. Studies Show: It usually takes 4 or 5 years for the company to recover.

  22. Facing Rapid Growth • Attracts/Retains the best & brightest! • Productivity goes up = more profit = more • cash = more ability to grow! • Morale is high. • You have the ability to grow in your career! • Growth gets more time & attention than any of the 5 elements in a public company.

  23. Growth in Action “Our brilliance is not retail. It’s our IT!”

  24. Benchmark Growth 15

  25. Growth Review Define Growth Driver The ability to increase year over year, quarter over quarter, and/or month over month. 2. Measures of Growth 1. Revenue Growth – Top-line Sales/Revenues increase. 2. Net Income Growth – Bottom-line / Profit increase. 3. Cost of Capital – Opportunity cost of funds deployed in an investment. Define Growth Driver The ability to increase year over year, quarter over quarter, and/or month over month. 2. Measures of Growth 1. Revenue Growth – Top-line Sales/Revenues increase. 2. EBITDA – ‘Controllable’ Profits increase 3. Net Profit Growth – Bottom-line / Profit increase. Benchmark the numbers 20092010 Sales Growth -25.9% 3.4% EBITDA Growth 78.34% 14.24% Net Profit Growth 363.09% 30.05% 3. Importance of Growth Driver “Investors expect it, employees are energized by it, customers are generally attracted to it and executives are measured by it.” 15

  26. Defining People Definition The External Customer, Vendor/Re-seller, or Internal Customer that has the ability to impact the success of the business. Measures Expressions of Interest (EOI) – The number of times a visitor clicks on a listing. Net Promoter Score (NPS) – Customer Care Satisfaction score. 16

  27. Failing to Anticipate Customer What companies have failed to anticipate customer expectations? What were the results? What limits companies from anticipating their customers’ wants and needs?

  28. Benchmark People Our NPS – 2011 73%. 2010 Net Promoter Scores – USAA = 81%, Apple = 78%, Facebook = 65%, Google = 63% 17

  29. People Review Define People Driver The External Customer, Vendor/Re-seller, or Internal Customer that has the ability to impact the success of the business.. 2. Measures of People 1. Expressions of Interest (EOI) – The number of times a visitor clicks on a listing. 2. Net Promoter Score (NPS) – Customer Care Satisfaction score. Importance of People Driver - Without People, then what happens? - Anticipate and then exceed expectations. - Customer service is for everyone; Internal, External, Vendors. Benchmark the numbers 200820092010 EOI 236.3M 261.9M 285.5M NPS 62% 71% 77% 17

  30. 5 Business Drivers Can you ignore any of these over time and still be successful? Can our clients ignore any of these over time and still be successful? 18

  31. Demystifying the Annual Report The Annual Report & Financial Statements Letter to the Share Holders: Identify which drivers are being focused on. Understand the strategic goal(s) Financial Statements: Identify the equation. Recognize the purpose of the statement. Locate the key numbers/measures. How do I impact each statement? CAN YOU READ THIS? 21

  32. Letter to the Share Holders 22

  33. Equation: Revenue – Expenses = Profit Purpose: Identify Profitability Total Revenue Top-line Cost of Revenue - Cost of Goods Sold (COGS) Gross Margin $60,650 / $123,018 = 49.3% Operating Profit Operating Income EBIT Net Margin $12,535 / $123,018 = 10.2% Net Profit Net Income Bottom-line 24

  34. Equation: Assets = Liabilities + Equity Purpose: Financial Strength Most Liquid Least Liquid (1yr.) Current Ratio Current Assets / Current Liabilities 24,334 / 36,705 = .663 Equity Ratio Total Equity / Total Assets $101,900 / $268,752 = 38% 26

  35. Equation: Cash from Operations +/- Cash from Investing +/- Cash from Financing = Net Change in Cash Purpose: Cash Management Earn It (Core Business) Sell Assets Borrow It 28

  36. 140 584 66 66 584 11.38 584 503 80.37 584 1658 .352 565 584 3.4 66 51 30.0 80.37 70.35 14.2 285.5 77% 35

  37. Locating Financial Information • Web Sites: • www.nasdaq.com • www.reuters.com • www.yahoo.com • www.finance.google.com • www.hoovers.com • www.smartmoney.com 55

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