Understanding Your Financial Performance

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Understanding Your Financial Performance

• By Mike Mallaro
• CFO, The VGM Group

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Steps To Understanding Financial Performance

• Benchmark Past Results
• Plan Your Future Success
• Manage Your Liquidity
• Understand Your Profitability

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Steps To Understanding Financial Performance

• Benchmark Past Results
• Plan Your Future Success
• Manage Your Liquidity
• Understand Your Profitability

4
Benchmark Past Results

• Identify Key Performance Indicators
• Up to 10 key drivers
• Measure in Comparable Units
• Compute Your Historical Results
• Compare to Peer Data
• Make Decision on Action Plan

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Key Performance Indicators

• Profitability
• Sales
• Asset Management
• Cash Flow Liquidity

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Key Performance Indicators

• Profitability
• Revenue per Employee
• Gross Margin Percentage
• Net Profit Percentage
• Operating Expenses as a percentage of revenues
• Operating Income
• Net Income

• Sales
• Percentage increase in sales
• Comparable unit sales increase

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Key Performance Indicators

• Asset Management
• Days Sales Outstanding (DSO)
• Billed
• Unbilled
• Inventory Turnover

• Cash Flow Liquidity
• Availability of Cash
• Cash Flow from Operations
• Working Capital
• Cash Balance

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Measure in Comparable Units

• Use These . . .
• DSO
• Revenue per employee
• Expenses as a of sales
• Days Sales held in Inventory

• Instead of These . . .
• Ageing Percentages
• FTEs
• Percentage change in expenses
• Inventory balance

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Computing Historical Results

• DSO
• Gross Margin Percentage
• Net Profit (Margin) Percentage
• Revenue per Employee
• Availability of Cash

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DSO

• Accounts Receivable
• Divided by
• Ave Sales per Day
• Equals
• Days Sales Outstanding
• --------------
• Sales for a period
• Divided by
• Number of days in the Period
• Equals
• Ave Sales per Day

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DSO - continued
Example Ave Sales per Day
Revenues Days Ave Sales/Day
Annual 2,000,000 360 5,555
Quarterly 575,000 90 6,388
Example DSO calculation
Receivables Ave Sales/day DSO
Annual 470,000 5,555 85 days
Quarterly 470,000 6,388 74 days
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Gross Margin Percentage

• Revenues
• Minus
• Cost of Goods Sold
• Equals
• Gross Margin Dollars
• --------------
• Gross Margin Dollars
• Divided by
• Revenues
• Equals
• Gross Margin Percentage

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Gross margin Percentage cont
Example
Revenues 2,000,000
Cost of Goods Sold 850,000
Gross margin dollars 1,150,000
Gross Margin Percentage 57.5
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Net Profit (Margin) Percentage

• Revenues
• Minus
• Cost of Goods Sold Expenses
• Equals
• Income Before Taxes
• --------------
• Income Before Taxes
• Divided by
• Revenues
• Equals
• Net Profit (Margin) Percentage

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Net Profit (Margin) Percentage
Example
Revenues 2,000,000
Cost of Goods Sold 850,000
Gross margin dollars 1,150,000
Operating Expenses 1,000,000
Pre-Tax Profit 150,000
Net Profit (Margin) 7.5
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Revenue per Employee

• Revenue
• Divided by
• Ave Number of Full-Time Employees
• Equals
• Revenue per Employee
• --------------
• For Full-Time Employees
• Consider
• Full-Time Fractional for Part-Time

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Revenue per Employee
Beginning Ending Average
Full-time 8 10 9
¾ time 2 2 2
½ time 6 8 7
Total 17 20 18.5
FTEs
9
1.5
3.5
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Revenues Ave FTEs Revenue/Employee
2,000,000 14 142,857
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Available Cash

• Cash and Deposits
• Plus
• Existing Lines of Credit
• Less
• Existing Borrowings on Lines of Credit
• Equals
• Available Cash

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Benchmarking Example - DSO

• You vs. AA Homecare Survey

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Benchmarking Example - DSO

• Results in a different light?
• You over time vs. AA Homecare Survey

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Benchmarking Example - DSO

• Full Picture
• You over time vs. AA Homecare Survey and Industry
  Leaders

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Determine Plan of Action

• Use Benchmarking to shine the light on areas of
  the business
• Where the results show signs of possible trouble,
  dig deeper and devote attention

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Steps To Understanding Financial Performance

• Benchmark Past Results
• Plan Your Future Success
• Manage Your Liquidity
• Understand Your Profitability

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Plan for Success

• Those who fail to plan are planning to fail

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Plan for Success

• Establish Goals
• Develop Action Steps Needed to Reach Goals
• Build Financial Plans (Pro-forma statements)

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Establish Goals

• Be specific and measurable
• Exercise your right to dream The goal should be
  substantial enough that, if achieved, it really
  matters

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Identify Action Steps Necessary to Achieve Goal

• Build a catalog of actions needed to achieve
  larger goal.
• Action steps are interdependent
• Assign individual responsibility
• Hold individuals accountable

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Build a Pro-Forma Financial Statement

• Start with 2 years of historical results
• Lay out columns for each of next 3 years
• Draft amounts for years 1-2-3 using history and
  general assumptions
• Fill in goals for year 3, which is presumably
  better than initial draft
• Work backwards to determine what is necessary on
  individual line items to achieve goal
• Work multiple iterations until you get to the
  optimal path to achievement of goal

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Financial Pro-Forma Goals View
2001 2002 2003 2004 2005
Oxygen 280 335
Rehab 310 315
Total Revenue 590 650
Equipment 180 195
Payroll 280 310
Occupancy 65 70
Marketing 25 40
Net Income 40 35 100
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Financial Pro-Forma Next Round
2001 2002 2003 2004 2005
Oxygen 280 335 600
Rehab 310 315 400
Total Revenue 590 650 1,000
Equipment 180 195 290
Payroll 280 310 425
Occupancy 65 70 100
Marketing 25 40 95
Net Income 40 35 100
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Financial Pro-Forma Final Round
2001 2002 2003 2004 2005
Oxygen 280 335 400 500 600
Rehab 310 315 340 375 400
Total Revenue 590 650 740 875 1,000
Equipment 180 195 225 260 290
Payroll 280 310 320 360 425
Occupancy 65 70 80 90 100
Marketing 25 40 60 120 95
Net Income 40 35 55 45 100
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Business Planning

• Match operational objectives to numbers
• Be aggressive, but reasonable
• Use it as a roadmap
• The process is as important as the end product
• Always keep plan out three years

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Steps To Understanding Financial Performance

• Benchmark Past Results
• Plan Your Future Success
• Manage Your Liquidity
• Understand Your Profitability

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Liquidity

• Available cash is the most important KPI for
  liquidity
• Liquidity Financial Flexibility

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Liquidity Choices

• CPA View Make lowest cost choices (i.e. do not
  borrow if you have the money!)
• Experienced View Trade away current income for
  the financial flexibility of better liquidity.

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When Would Extra Liquidity Help?

• Loss of major referral source
• Health problem removes owner from the business
• Ugly divorce
• Medicare messes up
• Medicare changes the rules
• Medicare conducts an unfair audit
• Flood, fire, tornado, hurricane, earthquake, etc
• Severe bad publicity
• Competitor price war

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Paths to Optimal Liquidity

• Decrease receivable DSO
• Finance equipment purchases so that payments are
  matched to receipt of revenues
• Lease rather than own
• Increase the size of credit lines
• Seek dating from suppliers
• Increase inventory turns

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Steps To Understanding Financial Performance

• Benchmark Past Results
• Plan Your Future Success
• Manage Your Liquidity
• Understand Your Profitability

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Understand Your Profitability

• The Power of The Incremental Dollar
• Expense Management
• Segment Performance

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The Power of the Incremental Sales Dollar

• The most profitable sales in your business are
  incremental sales

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The Power of Incremental Sales

• Existing PL
• Sales 600
• Cost of sales 300
• Personnel 160
• Occupancy 50
• Marketing 30
• Pre-tax income 60
• of sales 10

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Impact of Additional Referral Source

• Existing Incremental
• Sales 600 30
• Cost of sales 300 15
• Personnel 160
• Occupancy 50
• Marketing 30 ___
• Pre-tax income 60 15
• of sales 10 50

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Additional Referral Source at a Discount

• Existing Incremental _at_ 20 discount
• Sales 600 24
• Cost of sales 300 15
• Personnel 160
• Occupancy 50
• Marketing 30 ___
• Pre-tax income 60 9
• of sales 10 37.5

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Before After

• Existing Incremental After
• Sales 600 24 624 4
• Cost of sales 300 15 315
• Personnel 160 160
• Occupancy 50 50
• Marketing 30 ___ 30
• Pre-tax income 60 9
  69 15
• of sales 10 11

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What this means to you . . .

• Look at net profit margin, not just gross profit
  margin
• Consider the lifetime value of the customer
• The incremental sales dollar is virtually always
  your most profitable sales dollar.

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Expense Management

• People are your most important asset.
• People-related costs are by far the largest
  controllable expense in an HME business

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Expense Management

• Having the appropriate headcount is the single
  most important thing you can do to responsibly
  manage your expenses.
• Revenue per FTE is the key performance indicator
  to utilize.
• Drive to the targeted revenue per employee.

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Segment performance

• Drill down to profitability by segment.

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Segment Analysis

• Consider some of these segmentations
• Respiratory vs. HME vs. Rehab
• Medicare vs. Medicaid vs. Private Insurance
• Referral Source A vs. Referral Source B
• Branch A vs. Branch B

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Conclusion

• Analyze Existing Performance
• Plan Your Future Success
• Leverage Your Assets
• Understand Your Profitability

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Understanding Your Financial Performance

• By Mike Mallaro
• CFO, The VGM Group