Performance-Management

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FINANCIAL COMMUNICATION

CAPITAL CONSIDERATIONS

FINANCIAL STATEMENTS

FINANCIAL SCORING

FINANCIAL INTELLIGENCE

PERFORMANCE MANAGEMENT

DECISION MAKING

3 INDISPENSABLE BUSINESS TOOLS

I.THE BREAK EVEN POINT

The Break Even Point is that moment in time when all of the company’s costs are covered and the next dollar that comes in is profit. The Break Even Point ties directly into the INCOME STATEMENT. (THE TIE—Both differentiate between Cost of Goods Sold and Overhead.) Combined, The Break Even Point and the INCOME STATEMENT tell you if you are making a profit from the products you sell or the hours you bill.

There are three (3) formulas that determine the Break Even Point:

•

BREAK EVEN UNITS = OVERHEAD / PROFIT MARGIN PER UNIT

•

BREAK EVEN TOTAL MONEY SALES = BREAK EVEN UNITS X SALES PRICE PER UNIT

•

BREAK EVEN PRICE = (OVERHEAD / UNITS) + VARIABLE COST PER UNIT

The Break Even Point can be illustrated as follows:

II.FINANCIAL RATIOS

Financial Statements fit together like a jigsaw puzzle. Analyzing their interaction can be referred to as Fundamental, or Basic, Analysis. Financial Ratios help you to learn what the Numbers are really saying. They provide an insight into a business’s Financial Statements and paint a picture of its financial performance. Ratios depict relationships between numbers. To calculate a ratio you simply divide one number by another number. The result is usually express as a percentage. Ratios help you read between the lines of the Financial Statements. By comparing numbers you can learn more about them than by examining the stand alone number. Because of this, ratios let you know if your performance is favorable or unfavorable. (Are you winning or losing?)

Ratios work together, in much the same way as Financial Statements do. They fit together like the pieces of a puzzle. And once you have all the pieces in place, the picture becomes apparent. The interaction of ratios is called Power Analysis. By examining their connections and relevance you can evaluate your business performance in greater detail.

The following ratios are critical to business survival. They are grouped according to common usage in Finance and Accounting.

III.THE VARIANCE REPORT

The Variance Report is a comparison of specific numbers; those of your actual performance against budgeted figures. Once the comparison is made, the difference, or variation, is calculated and expressed as both a dollar figure and a percentage variation.

Typically, the Variance Report will show the Current Month as well as a Year to Date calculation.

A sample Variance Report columnar breakdown would look like this:

CURRENT MONTH

YEAR TO DATE

Budget

Actual

Variance

Budget Actual

Variance

Variance Reports serve as our compass in business. They let us know when we are off course and help point us in the right direction to reach our targeted goals.

PLEASE NOTE! One of the great benefits of the Variance Report is that it can be invaluable to the budget planning process. Ask yourself this question: “If you are consistently over, or under, the budgeted line item on the Variance Report, month after month, what should that tell you?” You have done one of two things in your budget planning process.

1) You have included something in that budget category that is not coming into play, or

2) Something has been omitted from that budget category.

Either way the Variance Report provides insight into your next Budget, helping you better understand what should be included and what should be omitted. The result—A better target to shoot at…

The correct answer is both the company, as an entity, and each person associated with the company individually. The Common Denominator in both assessments is "The Numbers" .

The Numbers provide the basis for Navigating, Guiding and Controlling the business.

The Numbers also provide each individual a way of measuring and gauging their performance and level of contribution.

THE COMPANY

There are three (3) major perspectives from which to assess and evaluate a Company’s Performance:

Horizontal Analysis (Trend Analysis) & Vertical Analysis (Common Size Ratio Analysis)

3 Indispensable Business Tools;

1) The Break Even Point

2) Financial Ratios, and

3) The Variance Report

The Budget Process

THE INDIVIDUAL

There are also three (3) major considerations to address when assessing and evaluating Individual Performance:

A Tangible Means of Ascertaining Success or Failure (Patrick Lencioni in his acclaimed book, THE THREE SIGNS OF A MISERABLE JOB, described it best perhaps when he said, “Employees need to be able to gauge their progress and level of contribution for themselves. They cannot be fulfilled in their work if their success depends on the opinions or whims of another person, no matter how benevolent that person may be. Without tangible means of assessing success or failure, motivation eventually deteriorates as people see themselves as unable to control their own fate.”

An Understanding of the Financial Side of the Business (Increases an individual’s effectiveness on the job, and enhances their career opportunities.) Individuals benefit in 3 ways:

1. They make better decisions, because they better understand the overall picture.

2. They have more fun, and hence better attitudes, because they can better appreciate

progress made and ‘the thrill of victory’ in competing, with others and themselves.

3. They participate more willingly, because they are constantly gaining self confidence

and greater skill sets.

An Appreciation of their Contribution to the Company, and How their Performance can move the Numbers (An added benefit to the company is improved Teamwork.) As Karen Berman & Joe Knight point out in their book, FINANCIAL INTELLIGENCE, “When people understand a company’s objectives and work to attain them, it’s easier to create an organization built on a sense of trust and a feeling of community. In the long run, that kind of organization will always be more successful than its less open counterparts.”

PERFORMANCE

MANAGEMENT

Whose Performance needs managing?

A QUESTION TO CONSIDER...

The Numbers in Performance Management

THE NUMBERS IN PERFORMANCE MANAGEMENT

The Bridge from Awareness to Action

HORIZONTAL ANALYSIS (TREND ANALYSIS)

Horizontal Analysis, or Trend Analysis as many Financial and Accounting people refer to it, is simply comparing the Numbers over an extended period of time. It takes into consideration a number of accounting periods, not just the current one. The value of Trend Analysis is that it will produce a ‘Range’ of activity for a given line item in the Financial Statements over the surveyed period of time. In essence, it provides a history that can be used in comparisons. Those comparisons can be with the company ‘s performance itself, that of competitors, or within the industry as a whole.

VERTICAL ANALYSIS (COMMON SIZE RATIO ANALYSIS)

Vertical Analysis, or Common Size Ratio Analysis, converts the Numbers, contained in the Financial Statements, into percentages. Converting the Numbers into percentages is vital for comparison purposes. It allows for easier, and more accurate, comparison with a company’s own operating history, that of its competitors and industry averages as well. (Industry averages are often referred to as Benchmarks.) To convert the Numbers into percentages is a simple process:

The first step is to choose a ‘Common Number’ which will serve as the anchor for comparison with all the other numbers contained in that particular Financial Statement. The ‘Common Number’ for each of the Financial Statements is as follows:

THE BALANCE SHEET—TOTAL ASSETS

THE INCOME STATEMENT—TOTAL SALES

THE CASH FLOW STATEMENT—OPERATING CASH FLOW

The second step is to divide each and every line item number, on each Financial Statement, by its respective Common Number. This translates the Numbers on each Financial Statement into percentages that can be used for comparisons.

PLEASE NOTE! Remember that Horizontal Analysis (Trend Analysis) provides for comparison, analysis and evaluation of percentages over time (across accounting periods), while Vertical Analysis (Common Size Ratio Analysis) allows for comparison of Numbers on each Financial Statement, within the given accounting period. Horizontal and Vertical Analysis go hand in hand to reveal Company Performance.

3 Indispensable Business Tools

The Budget Process

THE BUDGET PROCESS

INTRODUCTION/WHAT IS BUDGETING?

How The Mind Thinks…Going on a trip…

Fill your bags with clothes

Pack food

Be sure you have enough money

Make sure you have directions

Take your phone, iPod, etc.

Budgeting is conceptually similar—Planning your trip and ensuring that you will have sufficient resources to make it to your destination.

An organization plans its journey toward its strategic objectives in a similar fashion, and it prepares for the journey with an action plan called a BUDGET.

A budget can accomplish various tasks…

Cover a short time span…Make sure you have enough cash for the next month or two

Take a long term perspective…You may want to develop a new product which may take years

Focus on required resources for a specific project…If you take on a new project then the budget will plot the costs for the time, money and people involved

Account for income as well as expenditures…It allows you to create a profit plan based on an expected increase in funds or revenue

DEFINITION: So what is a budget? It is the translation of strategic plans into measurable quantities, that express the expected resources required and anticipated returns over a certain period.

A budget functions as an action plan.

It may also represent the future financial statements of the organization.

Finally, a budget is an adaptable tool for management to use to achieve its strategic goals.

WHAT YOU DON’T KNOW IS COSTING YOU…

Understanding the Budgeting Process

Overview

I.Introduction

II.What is Budgeting?

III.Budget Functions

IV.Types of Budgets

V.The Master Budget

VI.The Human Side of Budgeting

VII.Summing Up

Introduction…A Closer Look

“Good Grief, it’s budgeting time again!”

Can cause stress, conflict and eat up lots of hours

Good budgets are worth the time and trouble

A good budget can be the difference between financial success and insolvency

A good budget can help the business expand to its full potential

Good budgets force you to plan strategically

The difference between ‘incremental thinking’ and ‘strategic thinking’

Provide powerful control mechanisms

Used correctly good budgets foster improved communication

What is Budgeting?...A Closer Look

Planning a trip

The importance of strategic objectives—The Mission/Vision Statement

Your Action Plan=Your Budget

The accomplishment of various tasks

Budget defined

Future Financial Statements

Adaptable tool to achieve targeted goals

How A Budget Functions…A Closer Look

Four Basic Functions—Each critical to the success of the organization’s strategic goals.

Planning

Coordinating and Communicating

Monitoring Progress

Evaluating Performance

Types of Budgets…A Closer Look

Short term vs. Long Term Budgets

Fixed vs. Rolling Budgets

Incremental vs. Zero-Based Budgeting

Kaizen Budgeting

Remember—“Planning needs to precede, but never overwhelm, action.”

The Master Budget…A Closer Look

Master Budget Defined

3 Important Questions

Setting Assumptions-The first step in developing a budget.

Tips for setting assumptions

Preparing the Operating Budget—5 Step to Success

Creating Financial Budgets—Supporting the Operating Budget

Financial Budget Composition—3 Developmental Budgets

The Human Side of Budgeting…A Closer Look

Top-Down vs. Participatory Budgeting

Tips for ‘Negotiating’ your team’s budget

Slack, Padding & Sandbagging

What-If Scenarios and Sensitivity Analysis

Tips for Effective Budgeting

Summing Up…A Closer Look

Move forward and keep on track

Making it all worthwhile

BUDGET FUNCTIONS

Budgets perform 4 basic functions, each of which is critical to the success of an organization achieving its strategic objectives. These four functions are:

Planning

Coordinating & communicating

Monitoring progress

Evaluating performance

PLANNING…A 3 Step Process

Choosing goals (On Paper!) How the Wealthy Think

Reviewing options and predicting results Quantity—Quality—80/20 Rule (Pareto Principle)

Deciding on options Problem Solving—Action

COORDINATING & COMMUNICATING

Coordination Gathering the pieces together—Individual unit budgets or division budgets

Balancing and combining them to achieve the MASTER BUDGET (This can be quite a feat!)

Communication Upper level management needs to communicate the company’s strategic objectives to all levels of the organization, and the individual planners need to communicate their particular needs, assumptions, expectations and goals to those evaluating the departmental and functional budget pieces

Everyone involved must listen to one another

MONITORING PROGRESS

Once the plan has been set in motion, the budget becomes a tool that managers can use to periodically monitor progress They do it by comparing actual results with the budgeted numbers

It allows for timely corrective action Take a longer rather than shorter perspective

The difference between the actual and the budgeted numbers is called the variance

It targets action

EVALUATING PERFORMANCE

Effective performance—evaluation systems contribute to the achievement of strategic goals, and budgets provide essential tools for measuring management performance

Managers are held responsible for results

Performance evaluations serve a number of purposes:

They motivate employees through reward systems based on performance (7 motivators and

achievement)

They provide the basis for compensation decisions, future assignments and career advancement

They create a basis for future resource allocations

TYPES OF BUDGETS

Short term versus Long term Budgets

Fixed versus Rolling Budgets

Incremental versus Zero-Based Budgets

Kaizen Budgeting

List all the different types of budgets you use:

10)

THE MASTER BUDGET

THE MASTER BUDGET IS THE HEART AND SOUL OF THE BUDGET!

IT BRINGS ALL THE PIECES TOGETHER, INCORPORATING THE OPERATING BUDGET AND THE FINANCIAL BUDGET OF AN ORGANIZATION INTO ONE COMPREHENSIVE PICTURE…

Master budgeting goes hand in hand with strategic planning at the highest level.

Using the organization’s strategic goals as its foundation, the budget-building process is both chronological and iterative, moving back and forth, testing assumptions and options

Before preparing a Master Budget, senior managers must ask these three important questions:

Do the tactical plans being considered support the larger and longer-term strategic goals of the organization?

Does the organization have, or have access to, the required resources—that is, the cash it needs to fund the activities throughout the immediate budget period?

Will the organization create enough value to attract adequate future resources—profit, loans, investors, etc.—to achieve its longer-term goals?

SETTING ASSUMPTIONS…The first step in developing a budget is establishing a set of assumptions about the future. The assumptions the managers make will directly affect the preparation of the budget.

Assumptions should be sought from sources that have the best information

Developing assumptions is a companywide endeavor in which coordination and communication play a key role

PREPARING THE OPERATING BUDGET

Calculate the expected revenues

Calculate the expected cost of goods sold

Calculate the other expected costs

Calculate the expected operating income

Develop alternative scenarios

CREATING THE FINANCIAL BUDGETS

A cash budget that predicts and plans for the level and timing of cash inflow and outflow

An operating asset investment plan that ensures that adequate capital will be available for operating assets such as inventory and accounts receivable

A capital investment plan that budgets for proposed investments in long-term productive assets such as property, plant, and equipment expenditures and extended research-and-development programs

STEPS TO FOLLOW IN BUILDING YOUR OWN CASH BUDGET

Add receipts

Deduct disbursements

Calculate the cash surplus or deficiency

Add the beginning cash balance

Determine financing needed

THE HUMAN SIDE OF BUDGETING

BEHIND THE NUMBERS ARE REAL PEOPLE…

The budget is a series of negotiations between disparate interests…

The human element is what can make the budget process so engaging and, at times, so frustrating…