Decision-Making

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FINANCIAL COMMUNICATION

CAPITAL CONSIDERATIONS

FINANCIAL STATEMENTS

FINANCIAL SCORING

FINANCIAL INTELLIGENCE

PERFORMANCE MANAGEMENT

DECISION MAKING

PROBLEM SOLVING

GATHERING INFORMATION

The First Step in Problem Solving

“Six Honest Serving-Men”

I keep six honest serving-men

(They taught me all I knew)

Their names are What and Why and When

And How and Where and Who…

-Rudyard Kipling

When gathering information always remember that:

WHO:

WHAT:

WHERE:

WHEN:

HOW:

WHY:

KEEP THESE THOUGHTS IN MIND

When You Gather Information—Communication is Vital

WHO:

With whom do you want to communicate better?

Prioritize them in order of importance.

WHAT:

What message do you want to communicate in a professional or tactful manner?

What obstacles are keeping you from communicating the way you would like?

WHERE:

Where do you want to communicate better? (Describe the environment.)

Describe the setting where you want better communication in detail.

WHEN:

What is the time venue surrounding where you would like better communication?

Put in order or importance the times and places you would like to communicate with better tact and professionalism.

HOW:

Describe how you are communicating now—good or bad.

Describe how you are feeling before, during and after your communicating sessions right now.

WHY:

Describe the benefits you would get from being able to communicate with more tact and professionalism. Can you express the benefits in terms of dollars or personal happiness?

Describe what will happen if you don’t improve your communication skills. Be as specific and detailed as you possibly can be. Can you express the loss in terms of dollars or personal sadness?

GATHERING INFORMATION

A Good Place to Begin…A Company Questionnaire

COMPANY QUESTIONNAIRE

When was your company founded?

Is the business a corporation, partnership or sole proprietorship? Who are the officers?

Are any officers on a full time basis? Do they have other business interests?

Who are the stockholders and interest of each?

Who serves as General Manager?

Who is involved in determining company policy?

How often do your directors meet?

Are there any affiliated or subsidiary companies?

What is the current annual volume?

What should the annual sales volume be?

What sales volume is required to break even?

What is your current working capital?

What is the current profit before taxes?

What should the annual profit before taxes be?

Do you have a policy and procedures manual? What is your trade area? What products do you handle? Which product lines are most profitable?

Are you computerized

What reports do you get? Which reports do you use the most often?

What information do you want that you don’t get now?

How many employees do you employ? How many salespeople? How are they compensated?

How many sales orders do you process each month?

How many active accounts do you have on your books?

What is the current amount of accounts receivable?

What are your terms?

What is the average age of your accounts receivable?

From how many vendors do you presently buy?

Are you satisfied with their performance?

Do you issue purchase orders on all purchases?

How do you measure vendor performance?

What is the current amount of accounts payable?

Do you take advantage of all purchase discounts?

What are your plans for the future? Are they in writing?

Have you ever experienced any law suits?

Have you ever had financial difficulties?

Do you have established bank credit? Established credit lines? Available limits?

How much do you owe currently?

How do you project the cash requirements of the company?

Have you ever or do you now factor receivables? Have you pledged inventory?

Do you have a feel for the trends in your industry?

How do you measure the productivity of your employees?

Do you have an incentive program?

What is your current employee turn over rate?

Do you have an inventory control policy?

What is your current amount of inventory?

Do you understand the ‘lean process’?

How often do you take a physical inventory?

How long does it take?

How many items do you have in inventory?

How much of your inventory is obsolete?

Do you have a cost control process?

Who are your key people? What are their duties and income/compensation?

Are you satisfied with your key people?

Would you rehire them today?

Do you train your key people?

How often do you hold meetings with your key people?

What do you consider to be your most URGENT problem?

What is your most important problem?

How often do you receive operating statements?

What is the first thing you look at when you get your statements?

How do you control operating expenses?

Are you departmentalized?

Do you now or have you ever had a union?

Do you keep detailed company records? Are they accessible?

What do you consider to be your most URGENT problem?

What is your most important problem?

How often do you receive operating statements?

What is the first thing you look at when you get your statements?

How do you control operating expenses?

Are you departmentalized?

Do you now or have you ever had a union?

Do you keep detailed company records? Are they accessible?

PROBLEM SOLVING

Step by Step

Perhaps one reason we are not better problem solvers is that we have not been taught how to solve problems. We are then left to our own accord of trial and error. Experience can be a wonderful teacher if we learn from the experience. All too often when we solve problems successfully we don’t take the time to record our success for future reference. The next time we face the same or similar problem we are left to repeat trial and error all over again. The cycle becomes vicious and frustrating. The dilemma’s answer lies hidden in the structured approach to problem solving. Simply put, a step by step outline strategy in problem solving will break the trial and error cycle. The process can then be taught to others who can in turn pass it along. The strategy’s benefit is greater productivity and better utilization of the one asset we have a critical shortage of—time.

The following 10 Steps depict the step by step strategy to effective problem solving:

Investigate & gather information

Define the problem—on paper!

Brainstorm possible solutions—key word is quantity (as many as possible)

Prioritize the possible solution list and apply the Pareto Principle (the 80/20 rule)—key word is quality

From the 20% top possible solutions choose the one deemed most appropriate right now

ACT—whatever the choice take immediate action

Follow up and inspect activity

Evaluate results to date

Repeat all the above steps if any part of the problem is yet unresolved—continue repeating until all facets of the problem are solved

Record your results for later reference—on paper!

WHAT IF, you didn’t know where you were, didn’t know where you wanted to go, and had no control over where you went?

Many businesses don’t know how they are really doing, are aiming at the wrong target, and don’t know when they are off course, much less how to get back on it. So they find themselves in the above scenario.

The outcome of their decisions, consequently, is at best, a shot in the dark.

GOOD DECISIONS in business require a GUIDANCE SYSTEM.

There are three (3) Essential Elements of a Guidance System:

Navigation—which tracks location

Guidance—which compares Navigation information to Target information in order to determine direction, and

Control—which accepts Guidance information and affects the necessary changes in course

Three questions must be answered for a business to have a firm foundation for establishing a sound Guidance System and making Good Decisions:

How is Your Business Really Doing?

What is the Ultimate Goal of Your Business?

How Are You Controlling Your Business?

To help answer those questions, three (3) areas of concentration need to be addressed:

Examining the CRITICAL FACTORS that Decision Makers Use to Make Good Decisions

Gathering Information and PROBLEM SOLVING

Understanding THE CASH CONVERSION CYCLE

The following information will provide the basis for creating a reliable Guidance System for your business.

DECISION

MAKING

What If?

A QUESTION TO CONSIDER...

CRITICAL FACTORS DECISION

MAKERS CONSIDER

There are 18 Factors Listed that provide Awareness in the Decision Making Process & prompt Action that helps avert the loss of Time, Effort and Capital…How is Your Business making decisions?

1. 3 Bottom Lines

Net Profit

Return on Assets (ROA)

Operating Cash Flow (OCF)

2. 3 Indispensable Business Tools

Break-Even Point (Direct & Indirect Expenses)

Financial Ratios

Variance Reports

3. Risk vs. Reward (Profitability & Liquidity)

4. Return on Investment (ROI) Calculations

5 Variables—Time, Rate, Present Value, Payments & Future Value

Payback Method

Net Present Value (NPV)

Internal Rate of Return (IRR)

5. Working Capital

6. Liquidity Ratios

Current Ratio

Quick Ratio (Acid Ratio)

7. Vertical Analysis (Common Size Ratios)

8. Horizontal Analysis (Trend Analysis)

9. Operating Cash Flow (OCF)

OCF should be positive

OCF should be greater than Net Profit

OCF should be greater than ICF (Absolute Value)

OCF should be trending upward

10. Return on Assets (ROA) & Return on Equity (ROE) Graphs

11. Free Cash Flow (Free Cash Flow comes from the Cash Flow Statement. Operating Cash Flow (OCF)

minus the amount invested in capital equipment. That is all there is to it. Free Cash Flow is simply the cash

generated by operating the business minus the money invested to keep it running.)

12. The Simple Du Pont Formula=Return on Sales (ROS—Also called Profit Margin) X Asset Turnover

(Also called Marketing Leverage) = Return on Assets (ROA)

13. Extended Du Pont Equation=Return on Assets (ROA) X Financial Leverage (Total Assets divided by

Total Equity) = Return on Equity (ROE)

14. Key Performance Indicators (kpi’s)—by industry

15. Key Financial Indicators (kfi’s) & Financial Drivers

16. Key Turnover Ratios

Receivable Turnover

Inventory Turnover

Payable Turnover

17. Key Turnover Days Calculations

Receivable Days

Inventory Days

Payable Days

18. Aging of Receivables

Critical Factors Decision Makers Consider

Problem Solving

Cash Conversion Cycle

CASH CONVERSION CYCLE

How much Cash Does Your Business Need?

INVENTORY PERIOD RATIOS

INVENTORY TURNOVER RATIO = COSTS OF GOODS SOLD / INVENTORY

INVENTORY DAYS = 365 (or 360) / INVENTORY TURNOVER RATIO

ACCOUNTS RECEIVABLE PERIOD RATIOS

RECEIVABLE TURNOVER RATIO = SALES / ACCOUNTS RECEIVABLE

RECEIVABLE DAYS = 365 (or 360) / RECEIVABLE TURNOVER RATIO

ACCOUNTS PAYABLE PERIOD RATIOS

PAYABLES TURNOVER RATIO = COSTS OF GOODS SOLD / ACCOUNTS PAYABLE

PAYABLE DAYS = 365 (or 360) = PAYABLES TURNOVER RATIO

CASH CONVERSION CYCLE (CCC)

TERMINOLOGY USED

RECEIVABLE DAYS = DAYS SALES OUTSTANDING (DSO)

INVENTORY DAYS = DAYS IN INVENTORY (DII)

PAYABLE DAYS = DAYS PAYABLE OUTSTANDING (DPO)

CASH CONVERSION CYCLE FORMULA

RECEIVABLE DAYS plus INVENTORY DAYS minus PAYABLE DAYS = CCC DAYS

DSO plus DII minus DPO = CASH CONVERSION CYCLE

DAYS DAYS SALES OUTSTANDING plus DAYS IN INVENTORY minus DAYS PAYABLE OUTSTANDING = CASH CONVERSION CYCLE DAYS

The above illustration will help you determine how much Cash your business needs access to, for operations.

It takes into consideration the concepts of Turnover Ratios as well as Days Receivable, in order to calculate how long your cash is tied up. (Therefore, telling you how much Cash you need access to, for day to day operations.)

To calculate the amount of Cash availability needed, you begin with Days Sales Outstanding. You add Days In Inventory and then subtract Days Payable Outstanding. This will give you the CASH CONVERSION CYCLE DAYS.

Once you know how many days your Cash is tied up, all you need to do to calculate how much Cash you need access to, for your business, is to multiply the number of Cash Conversion Cycle Days by your average Sales per Day.

Knowing how much Cash you need access to, and how many days your Cash is tied up, will help you establish the Liquidity needed for your business to remain solvent and survive.