Author Archives: dougc

Cash On Hand, How Much Is Too Much?

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Many executives and analysts will argue that there is no perfect balance or ratio for cash on hand in your business. In our opinion, every industry differs and the reasons for having cash on hand could vary greatly depending on those industries.

I've recently been asked to give monthly cash on hand estimates to executives which seemed like an odd question since it can vary greatly. Then it prompted me to look into the models and how we are deriving cash on hand for the businesses we consult.

This led me to question how much cash on hand I advise businesses to keep in the business.

One important aspect I began to look more closely at was how fast the company collects its receivables, seasonal inventory requirements and available credit lines. If no line of credit was available to the business the cash on hand increased significantly. If you collect on your receivables quickly, say within 30 days; then you need less reserve cash than if you collect your receivables within 120 days. In addition, for companies that had more than 3 year's worth of data, I studied a frequency pattern of the cash coming in. This determined slow months when more cash on hand was needed to cover expenses for raw materials, salaries and benefits, etc... The month's with more robust sales could generally reduce cash on hand. A variable percentage was calculated based on expense to projected sales ratio.

(Please note, rational sales forecasts are needed for this, and over-inflated projections can ruin the cash on hand needs)

In addition to what the business is currently doing I look at the current forecast and next fiscal year budgets to get an idea of where the expenses are heading. For industries that are capital intensive or companies that have large projects scheduled for future months, we would need to reevaluate their cash on hand projections in accordance to their spending. Many companies have the same recurring expenses month-in and month-out. However, one large project can offset this amount and require additional cash on hand each month until the project is complete.

Nonetheless, your business needs to keep cash on hand, whether it be as little as thirty days or as great as twelve months to stay afloat. The last crisis you want to worry about as an executive is not being able to keep the lights on while sales are robust.

If you have any questions feel free to write me directly at doug@yipfolio.com.

Doug C. is a Financial Analyst for a top 20 Fortune 500 Financial Services company and owner of YIPFolio Financial & Management Consulting Services. He specializes in Financial & Accounting services including balance sheet, P&L, fixed assets, and capital funding. He has spent several years in the Hosting and Technology industry while consulting management and senior management on all aspects from raising capital to managing daily cash flow. Doug received his BS in Finance from Fairfield University and resides in the Greater New York City area.

The Blue Print: Laying out a business plan

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I’ve recently read a business plan that has prompted me to write another piece on the topic.  The first thing that should be done when starting a new business is creating the plan, or the blueprint for the organization.  For many reasons the business plan is a critical component to the businesses successes and failures and helps reiterate and reinforce the focal points of the company when times are hard.  Studies show the first twelve months can make or break a business and can be stressful times.  Your business plan can be your backbone and rock during these hard times.  Therefore, you need to put the effort into creating the business plan, sticking to it, or adjusting accordingly as you develop, grow, and continue forging ahead.  In addition to being your own support your business plan can help secure financial help with start-up costs, short-term loans, and tracking your goals.

There are nine key sections to the business plan: Executive Summary, Market Analysis, Company Description, Organization & Management, Marketing & Sales Management, Service or Product Lines, Funding Requests, Financials, and an Appendix.

The Executive Summary is the most important section and should provide a short synopsis of the entire plan as well as some history of your company.  I recommend completing the entire plan before writing this section.  This section should answer questions such as:

  • ·         What kind of company do you have?
  • ·         Who are your primary customers?
  • ·         What are your short and long-term goals?
  • ·         How many employees do you anticipate having? What key metric will drive this anticipatory rate?
  • ·         Who are the leaders of the organization? What experience do they have and how will that experience be leveraged in this enterprise?
  • ·         If you are seeking funding, how much are you looking for?

Following the Executive Summary should be a Market Analysis.  It is imperative you understand who your competition is and know everything there is to know about the market you are entering.  If you are creating a new market or are in a new market, relate the similarities to another industry’s beginnings.  Remember to be realistic as the only person you will be fooling is yourself.  Knowing who your customers are and how your competition acts will be a key component in advertising and marketing your product.

The Company Description & Organization & Management sections should speak for themselves.  Discuss what type of company you are, LLC, S-Corp, C-Corp, LTD, LLP, etc… What is the company about, the mission statement, goals, and the purpose the company ultimately serves.  Then discuss the Organization & Management, how these individuals were selected for the position they are in, and the experience they have to excel in this position.  The Organization & Management section can be a critical section for investors because well respected leaders and managers can make all the difference during key growth stages.

The Marketing strategy should elaborate on four key points: market penetration, growth, channels of distribution, and communications.  There is no right or wrong answer to your strategy in this section.  Marketing is always evolving and changing and so are your customer’s demands.  This makes marketing an extremely challenging fixture for any business.  However, this section will help you and the investors understand your outlook on marketing and make your strategy relevant to your business.  In addition to the four key points mentioned above this section should discuss sales force and sales activities.

The bread and butter of your business plan is the Service or Product Line(s) section.  This tells the investors the benefit of what you are selling.  Be sure to focus on the benefit of your product to consumers and not necessarily all of your actual products.  If you are a hosting company, or aspiring company, and offer Shared, Reseller, VPS, Dedicated, and Co-location, you do not need to break down each specific product and what they are.  You should talk about the added benefit and services each of these products will feature.  The market summary should help the readers understand more about the actual products you’re offering and the basics behind your products and/or services.  In addition to touching on the added features or services describe the products or services from a consumer point of view, what stage of development that product or service is in, and the benefits of your product or service and the ability to meet consumer needs.  It is also beneficial to list what separates you from the competition in this section.

The Financials & Funding Request section should be relevant, within scope, and not be an extreme.  The previous sections laid out who your company is and where you want it to be.  This section should discuss the financial implications of getting there.  It is important to discuss what your current funding requirements are, future requirements over the next five years, how these funds will be used, and any long-term strategies you plan to implement that would have a significant impact on funding or cash flow.  Always discuss time frames and what the funds will be used for.  Once you have listed your requirements and requests be sure to include the justification for it.

The second portion to the Financials & Funding Request section should include prior Financial statements such as three to five years’ worth if you have them.  It is imperative that your Financials match your funding request or else you will immediately project inconsistencies in your plan.  Remember investors are used to looking at charts, graphs, and pivot tables, don’t forget to be creative and capture the attention of the reader.

Lastly, finish up the business plan with your Appendix.  This section is not included with the submission of your business plan and usually is requested by investors.  This section shares credit history of your business, resume of key executives and employees, pictures of your products or recommendations of your services, letters of reference, details of your market studies and their sources, relevant articles or references to your business plan, software or any other license, permits, or patents, copies of leases, building permits, contracts, list of business consultants, including attorney and accountants.

Be sure to remember who and where you sent your business plan and appendix.  This is the key to your successes and failures.

For further analysis of the Business Plan please see my September 2011 blog entries on YIPFolio.com.  For any questions or inquiries please send an email to Doug.

Doug C. is a Financial Analyst for a top 20 Fortune 500 Financial Services company and owner of YIPFolio Financial & Management Consulting Services. He specializes in Financial & Accounting services including balance sheet, P&L, fixed assets, and capital funding. He has spent several years in the Hosting and Technology industry while consulting management and senior management on all aspects from raising capital to managing daily cash flow. Doug received his BS in Finance from Fairfield University and resides in the Greater New York City area.

 

Starting & Sustaining Your Business, Financially

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To further touch upon last week’s article written about GPM (gross profit margins) and the two fundamental statements: balance sheet & profit (loss) statement, I wanted to further discuss the preparation of a businesses finances. There are two things to consider when starting a business or even managing a new business for that matter. Understanding how you are going to fund your business and when you can expect profits.

In order to understand how you are going to fund your business you better understand what your financing needs are in addition to the types of options that will be available to you. Money, or capital, not only helps your business get off the ground but keeps the business sustainable. Some options that exist for your business entail borrowing money, using business versus personal finances, and other eligible business assistance.

In my experience most young companies entertain the idea of either equity financing or debt financing. Equity financing is money that is raised by a company in exchange for a share of ownership. This is not limited to publically traded corporations but is a viable option for all facets of business. Obtaining equity allows a business to obtain funds without incurring debt, or simply put, without having to repay a specific amount of money at a particular time. Equity financing can come from a plethora of sources including friends, relatives, employees, customers, industry colleagues, or non-professional investors. The most common equity finance contributors are venture capitalists.

In contrast to equity financing, debt financing is borrowing money that must be repaid over a period of time, usually with interest. This debt can be short-term, which is fully repaid in under one year, or long-term, repayment is due in excess of one year. The difference between equity and debt is ownership. With debt financing the lender does not gain ownership interest in the business, and the return on investment is tied to interest payments. In general debt financing requires some collateral to guarantee the repayment of the loan and interest. If you are an LLC or private corporation the lender can ask for a personal guarantee in case of default in addition to the collateral placed against the loan. This tactic is used to mitigate lending risks as well as ensure the borrower has sufficient personal interest at stake towards making the business succeed.

After funding and sustaining your business operations the next question is always tied to making money. One key question I am often asked by startups is, “When will I start seeing profits?” The answer to this question lies in the breakeven analysis. This tool is used to determine when a business’s revenue will outpace its expenses, which is also known as, making a profit. In order to determine this extensive research should have been conducted on start up costs. Generally speaking this can be obtained from the business plan (if you do not have a business plan it would be beneficial to begin there). Knowing what your expenses are going to be will inform you of the sales revenue you need to cover those expenses. In addition to market demand this should help set a guideline for pricing of your products as well. For established businesses or business units, to calculate the breakeven point, identify all of your fixed and variable costs.

Fixed costs are typically referred to as overhead because they are needed to run the business but not attributed to sales volume. For example, rent, administrative salaries, telephone lines, and other non-sales volume related expenses are considered fixed costs. Variable costs are just the opposite and are tied directly with sales volume such as additional servers, increased bandwidth, and disk drives. Knowing your fixed and variable costs will help determine how many unit sales are needed and how much to sell them for to breakeven.

For example, if it costs $25 to create one virtual private server, and there are fixed costs of $1,000, the break-even point for selling the Virtual Private Servers would be 40.

(If the price of each server sold was $50), 1,000 (fixed cost) / (50 – 25) = 40 Virtual Private Servers.

Revenue = $50 x 40 units sold = $2,000 | Fixed Cost = $1,000 | Variable Cost = $25 per unit sold = 25 x 40 = $1,000 | Net Income = Revenue – Expenses or $2,000 - $1,000 - $1,000 = 0 [Break-even].

In the same analysis, selling 41 virtual private servers would be the point of profitability. 41 VPS x $50 = $2,050 - $1,000 – (25*41) = $2,050 - $2,025 = $25. Undercutting or underestimating your variable and fixed costs is only going to undermine the integrity of your analysis. Be sure to include realistic figures and be able to support how you derived these numbers. Many investors will pick this analysis and ask you how you plan to get to the number of units needed to break-even. If you have any questions please feel free to contact Doug@YIPFolio.com.

Doug C. is a Financial Analyst for a top 20 Fortune 500 Financial Services company and owner of YIPFolio Financial & Management Consulting Services. He specializes in Financial & Accounting services including balance sheet, P&L, fixed assets, and capital funding. He has spent several years in the Hosting and Technology industry while consulting management and senior management on all aspects from raising capital to managing daily cash flow. Doug received his BS in Finance from Fairfield University and resides in the Greater New York City area.

Accounting for Technology: Gross Margins and Financial Statements.

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Many of my most recent young and highly talented software and service clients have unbelievable knowledge and depth into their technological field.  However, I find like many other young companies, these professionals lack the Finance & Accounting knowledge in order to best represent their company financials and financial stability to creditors, banks, venture capitalists, or other key stakeholders.  It has led me to rethink how I consult companies and how I train their management teams to look at their own performance.  Three key metrics or financial terms I would like to talk about today include gross margins, Profit & Loss (P&L) Statements, and the Balance Sheet.

Gross margins, which can also be referred to as gross profit margins, by definition is a company’s total sales revenue minus its cost of goods sold (COGS), divided by the total sales revenue, expressed as a percentage.  The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company.  Obviously, the higher gross margin percentage the more a company retains on each dollar of sales.

For example, if Company XYZ were said to have a Gross Profit Margin of 25%, it would retain $0.25 from each dollar of revenue generated. Strong gross margins vary between companies and industries depending on the service or product being provided.  However, keep in mind gross profit margins do not translate directly into net profit.  The gross margins are generally put towards capital expenditures and operating expenditures, including general and administrative expenses.

One of the first analyzes I put forth with my clients always relates to profit margins and knowing what your COGS are in comparison to your net sales (or earnings capacity for new company’s).  In close to ten years of industry experience around the Hosting Industry I find many new companies and founders tend to overlook Accounting and Finance principles.  Two very important concepts assets and liabilities and net profit can be found on two separate financial statements that should always be viewed by senior management.  They are the P&L, or statement of net income, and the balance sheet.

The balance sheet is a financial statement that summarizes a company’s assets, liabilities and shareholder’s equity at a specific point in time.  It is the best depiction of what a company owns versus what it owes.  In translation to the hosting industry this can be viewed as leasing a server from a reseller versus leasing space in a data center and purchasing servers.  In most US GAAP scenarios the expense of purchasing new server and co-locating it would be pushed to the balance sheet and depreciated over the useful life, typically three to five years.  On a month-to-month operating lease, that same server [as an example] costs $500 at your local reseller is shown on the Statement of Net Income or P&L (profit & loss statement).  If the cost of that server to purchase is $5,000 and the useful life three years, the P&L would receive approximately $140 a month in depreciation expense versus $500/mo for data processing and data center expenses.  Granted additional upfront costs and other fees apply; further analysis is required to understand which model, operating leases or ownership, works best for you.  Keep in mind separate business models and key management philosophies can determine whether purchasing assets or leasing them is best, not just in terms of upfront capital costs, but also from a maintenance and support perspective.

The P&L statement  summarizes the revenues, costs and expenses incurred by your company during a specified period of time. Generally speaking profit centers and corporations report quarterly whereas cost centers look at monthly P&L’s.  This statement shows the ability of a company to generate profit by increasing revenues and reducing costs.  A good measure of company growth is not always looking at the bottom line and seeing the fluctuation of profits but rather the increase in sales.

Doug C. is a Financial Analyst for a top 20 Fortune 500 Financial Services company and owner of YIPFolio Financial & Management Consulting Services. He specializes in Financial & Accounting services including balance sheet, P&L, fixed assets, and capital funding. He has spent several years in the Hosting and Technology industry while consulting management and senior management on all aspects from raising capital to managing daily cash flow. Doug received his BS in Finance from Fairfield University and resides in the Greater New York City area.