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Financial Metrics for Non-Financial Executives
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Teaching Elephants to Dance:
Financial Metrics for Non-Financial Executives
Dan RuchmanMay 18, 2009
What is Business?
• Organized• Delivery of products or services• Agreed upon price• Value for value• Profit
What makes for Success?
• Mission• Vision and Values• Goals• Plans• People• Is that all?
Success – the Intangibles
• Desire… • Communication… • Analysis…• Focus…• Wisdom
What We’ll Talk About
• Accountants - Who you are• Non-accountants – what they do,
and why don’t they care?• Metrics & Management• The opportunity• When the band plays together…
the company being all it can be.
Accounting -- & Balance
• Does this give you comfort?
The accountant,
The friend, and . . .
The dinosaur
Who are You?
• Accountants• Why you do what you do• Measuring • Communicating• Impacting the bottom line
Who are THEY?
• Non-accountants• R&D• Marketing• Manufacturing• Sales• General Management
Non-accountants
BABEL?
• Do we all speak different languages, like the Tower of Babel, destined for confusion, miscommunication, miscues, missteps and costly errors?
Language of the Universe
La matematica è l'alfabeto nel quale Dio ha scritto l'universo.
– Galileo Galilei
Language of Business
La finanza è la lingua nel quale Dio discute degli affari.
Finance is the language of business.
Language of Finance
• P&L• Balance Sheet• Cash Flow• Financial Ratios• Footnotes• Investor info, trends, other
numeric but non-financial things
P&L – or Income Statement, or Stmt of Operations, or Statement of Earnings
• How much did we sell – goods & services
• What did it cost us?• Did we make money?
• Is our business growing?• Is our profitability good, bad,
improving?
Basic P&L
($ in 000s)2008
Revenue (Sales) $25,000
Cost of Goods Sold (COGS) 10,000
Gross Profit 15,000
Operating Expenses 10,000
Profit Before Tax (PBT) 5,000
Taxes 1,000
Profit After Tax $4,000
P&L: A lot of terms in a short amount of time
• P&L – the income side• P• L• Income• Sales – gross, net, etc.
More P&L - Costs
• Product costs – Fixed, VariableStandard, process, totalSemi-FixedFOHVOHInternal costs vs vendor costsOutsource vs buying from sister coDistribution, warehousing
More P&L – Expenses
• Marketing• Selling• R&D• G&A
The Power of DefinitionsAdding value with metrics
P&L – Terms & Ratios
• “Profit Margin”…? Gross Margin Operating Margin Contribution Margin Pre-tax vs Post-tax EBITDA
A word on EBIT…
. . .Earnings Before Irregularities
and Tampering?
Another Word on EBITDA
Earnings Before I Tricked the Damn Auditor
A Final Word on EBITDA
• Earnings Before: Interest Taxes Depreciation Amortization
. . . and it MEANS?
EBITDA
A popular metric designed to focus on the core operations of the company, excluding non-cash and other items beyond the control of the operating side of the business.
… and some CAVEATS
Key P&L Metrics
• Sales growth year-over-year• Earnings growth year-over-year• Gross profit margin percentage• Operating expense % of sales• Profit Margin: Operating, and Net
Risk versus Reward
The basic concept : If you take on more risk, you should only be doing it if you stand a chance of getting a higher reward.
More on Risk & Reward
• The grocery business
• The restaurant business
• The mob
Return: A Holy Grail
Balance Sheet
• What do we own?• What do we owe?
• Are we financially strong?• How does our financial position
compare with last year?
Basic Balance Sheet
2008
($ in 000s)
Assets
Current Assets 10,000
Fixed Assets, less Depreciation 12,000
Total Assets 22,000
Liabilities
Current Liabilities 5,000
Long-term Debt 12,000
Total Liabilities 17,000
Equity 5,000
Total Liabilities and Equity 22,000
Balance Sheet - Terms
ASSETS• Current Assets• Accounts Receivable• Inventory• Intangible Assets• Fixed Assets• Depreciation
Balance Sheet – The Other Side
LIABILITIES• Current Liabilities• Accounts Payable• Long Term Debt• Convertible Debt• Off-Balance Sheet Debt
Balance Sheet: Equity
EQUITY• Stock – Common vs Preferred• Retained Earnings• Diluted stock ownership: options
Balance Sheet:Key Metrics
• Liquidity measures• Current Ratio• Quick Ratio
• Debt-to-Equity (D/E)• Negative Equity
Cash Flow
• How much $ did we start the year with?
• How much $ did we end the year with?
• Where is cash being used, and from where is cash coming in?
Cash Flow – Key Terms
• Free Cash Flow• EBITDA• Cash Positive• Cash Negative• Capital Intensive• Cash Burn Rate
Cash Flow – Key Issues
• Burn rate vs Cash Balance vs Earnings
• Future capital spending needs• Cash from sale of stock – When?
Why?• Paydown of debt – When? Why?
Other Key Metrics
• Return on Assets (ROA, RONA, RNOA)
• Return on Equity (ROE)• Earnings per share (EPS)• Price/Earnings Ratio (P/E)• Free Cash Flow – Be careful!• Inventory turnover
Concepts
• Accuracy versus Precision• Information is Power: Share it• Know Your Audience• Thinking: The Box• The Price of Miscommunication• The Opportunity
Thinking – Inside, Outside, Through the Box
A Story
19th Century Shoe Salesmen
Questions to be Answered
• Is the company financially sound?• Has the right degree of financial
savvy?• Right balance of bottom line focus vs
market share vs growth vs customers, vs…?
• Would I invest in this company?
• The Price
•The Challenge
•The Opportunity
Galileo… Updated for Business• Mathematics is the language by which
God has written the universe.−Galileo
• Today’s reality: Finance and accounting are the language by which business writes and measures its successes and it failures.
Why You’re Here
"You are not here merely to make a living. You are here in order to enable the world to live more amply, with greater vision, with a finer spirit of hope and achievement. You are here to enrich the world, and you impoverish yourself if you forget the errand."
-- President Woodrow Wilson
Teaching Elephants to Dance
Financial Metrics for Non-Financial Executives
Dan RuchmanRuchman & Associates Creative and Intelligent Solutions for Finance, Operations & Strategy. Lighting the Path to Profitability Office: 858.784.0104 Dan.Ruchman@RuchmanAndAssociates.com
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