Understanding the Finances of Your Business

September 13, 2012

Agenda

• Income Statement• Cash Flow• Managing for Profit• Managing Retainers• Client Interaction

Income Statement

• Revenue Recognition• Fixed and Variable Expenses• Critical Ratios• Expense Reduction• Profitability

Revenue

• Time– Billable Hours– Retainers– Project Fees

• Mark-up– 17.65%

Mark-up

Media

• Billing to client100

• Paid to Media 85

• Commission 15

• Comm % - 15/100 – 15%

Production

• Paid to Vendor 85

• Mark-up 15

• Billing to client100

• Mark-up % - 15/85 – 17.65%

Billing Revenue

Time

20,000.00

20,000.00

Out-of Pocket

5,882.50

882.50

Total

25,882.50

20,882.50

Cost of Goods Sold

Compensation

• Account Handlers Salaries• Administrative Salaries• Bonuses• Benefits• Freelance Labor

Facilities

• Rent• Telephone• Computer Services

• Computer Equipment?• Furniture?

Marketing

• Website• New Business• Networking• Speaking Engagements• Conferences

Other Expenses

• Databases• Insurance• Supplies• Travel

Expense Reduction

• Rebillable Expenses• Admin Surcharge• Volume Discounts• Rebates

Critical Ratios

Critical Ratios

Revenue 100% 100%

Compensation 57% 52%Facilities 8% 7%Marketing 3% 3%Other 18% 16%

Profit 14% 22%

Critical Ratios

Revenue 100 100

Compensation 57 52Facilities 8 7Marketing 3 3Other 18 16

Profit 14 22

Critical Ratios

Revenue 100

Compensation 57Facilities 8Marketing 3Other 18

Profit 14

Critical Ratios

Revenue 100 110

Compensation 57 57Facilities 8 8Marketing 3 3Other 18 18

Profit 14 24

Critical Ratios

Revenue 100 110 100%

Compensation 57 57 52%Facilities 8 8 7%Marketing 3 3 3%Other 18 18 16%

Profit 14 24 22%

Cash Flow

Cash Flow

• Billing & Collections• Profit• Growth• Capital Expenditures

Cash Flow Reporting

• Beginning Balance

– Less Cash Out

– Plus Cash In

• Closing Balance

Revenue: $110KProfit: 22%Billing: Retainer

Month 1 2 3 4 5 6 7 8 9

Balance (116,000) (122,000) (98,000) (74,000) (50,000) (26,000) (2,000) 22,000

Cash Out

- Compensation

57,000

57,000 57,000 57,000 57,000 57,000 57,000 57,000 57,000

- All Other Expenses

29,000

29,000 29,000 29,000 29,000 29,000 29,000 29,000 29,000

- Client Expenses

30,000

30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000

Cash In

- 110,000 140,000 140,000 140,000 140,000 140,000 140,000 140,000

Balance

(116,000)

(122,000) (98,000) (74,000) (50,000) (26,000) (2,000) 22,000 46,000

Revenue: $110KProfit: 22%Billing: Time

Month 1 2 3 4 5 6 7 8 9

Balance (116,000) (232,000) (208,000) (184,000) (160,000) (136,000) (112,000) (88,000)

Cash Out

- Compensation

57,000

57,000 57,000 57,000 57,000 57,000 57,000 57,000 57,000

- All Other Expenses

29,000

29,000 29,000 29,000 29,000 29,000 29,000 29,000 29,000

- Client Expenses

30,000

30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000

Cash In -

-

- 140,000 140,000 140,000 140,000 140,000 140,000 140,000

Balance

(116,000)

(232,000) (208,000) (184,000) (160,000) (136,000) (112,000) (88,000) (64,000)

Revenue: $100KProfit: 14%Billing: Time

Month 1 2 3 4 5 6 7 8 9

Balance (116,000) (232,000) (218,000) (204,000) (190,000) (176,000) (162,000) (148,000)

Cash Out

- Compensation

57,000

57,000 57,000 57,000 57,000 57,000 57,000 57,000 57,000

- All Other Expenses

29,000

29,000 29,000 29,000 29,000 29,000 29,000 29,000 29,000

- Client Expenses

30,000

30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000

Cash In -

-

- 130,000 130,000 130,000 130,000 130,000 130,000 130,000

Balance

(116,000)

(232,000) (218,000) (204,000) (190,000) (176,000) (162,000) (148,000) (134,000)

Cash Flow

• What’s the Effect of…– Rapid Growth?– Capital Expenditures?– Loans?– More Rapid Billing and Collection?

Interactive Cash Flow

Managing for Profit

Profit Influencers

1. Raise Prices - Higher Value2. Lower Variable Costs - Efficiency3. Fix Underperformers4. Increase Volume - Utilization5. Lower Overhead Costs

Raise Prices

• Earn higher fees – Specialization– Innovation– Add more value

• Get “better” work• Train/develop staff• Invest in new (higher-value) services

Lower Variable Costs

• Develop methods/systems to avoid duplication of efforts

• Improve performance/efficiency for each assignment

• Increase leverage in the delivery of services – use appropriate level for each activity

Fix Underperformers

• Deal with underperformers

• Drop unprofitable services

• Drop unfavorable clients

Increase Volume

• Increase utilization (billable hours per person)

Lower Overhead Costs

• Reduce space and equipment costs• Reduce support staff costs • Improve speed of billing• Improve speed of collections

Profitability Levers

• Salaries• Billing Rates• Hours Worked• Billable Percent• Overservicing

Billing Power AnalysisNumber of employees at each level

XBilling rate for the level

XTotal Hours (1,750)

XBillable Target

=Potential Income

SAS – Billing Power

Salary Rate Target Revenue Ratio

Level 1

110,000 220 80% 308,000 2.80

Level 2

85,000 180 85% 267,750 3.15

Level 3

65,000 160 90% 252,000 3.88

Level 4

40,000 120 95% 199,500 4.99

Total

300,000 1,027,250 3.53

Average

75,000 170

Financials Interactive

Causes of Overservicing

• Poor budgeting/over promising

• Mis-used time

• Improper Staff Allocation

• Staffing to monthly retainers

Budgeting

• Define Scope of Work

• Budget by activity

• Include details

Mis-Used Time

• Work done at wrong level

• Perfectionism

• Low-value activities

Staffing to Retainers

Staff Allocation

• Anticipate staff levels on each account for the upcoming month

• Balance with individual employee billable targets

• Be realistic – tie to actual activities• Compare actuals to anticipated

Staff Allocation Interactive

SASSOW/Over-servicing Report

Staffing to Retainers

• View budget as annual– Monthly billing is a convenience

• Anticipate high activity months• Account for number of billable days/month• Inform client of monthly staffing levels• Do work at appropriate levels

      Billable Staffing

Month Billing Spikes Days Levels

Jan 20,000 14,000 21 14,067

Feb 20,000 14,000 19 12,727

Mar 20,000 14,000 22 14,737

Apr 20,000 14,000 21 14,067

May 20,000 40,000 22 40,000

Jun 20,000 14,000 21 14,067

Jul 20,000 14,000 20 13,397

Aug 20,000 14,000 23 15,407

Sep 20,000 60,000 19 60,000

Oct 20,000 14,000 23 15,407

Nov 20,000 14,000 20 13,397

Dec 20,000 14,000 19 12,727

         

Total 240,000 240,000 250 240,000

Retainer Interactive

SAS – Budgets/Client Forecast

Client Interaction

Client Interaction

• Contract Considerations

• Managing the SOW

• Organic Growth

Contract Considerations

• Compensation Terms– Mark-up– Payment Speed– Cost Adjustment Capability

• Termination Terms– No End Date– Automatic Renewals– Protection on Front-Loaded Programs

• Other Issues?

Managing the SOW

• Budget with Details• Build in a Contingency Budget• Review Month’s Budget Mid-Month• Review Annual Spending Monthly• Communicate Overages to the Client• Manage Staffing Changes• Keep Staff Fully Engaged – Internal, if

Necessary

Growth

• New Business– 30-35% Loss Each Year– $4 Billion Total– $1.2-$1.4 Billion

• Organic Growth– Much Less Expensive– Excellent Investment

• Client Satisfaction/Retention– 6 Month Extension – Double Growth Rate

Other Issues?

Understanding the Finances of Your Business

September 13, 2012