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Financial Tutorial Financial Tutorial P&L, Balance Sheet, Cash Flow, and Dashboards Daniel Ilisevich and Peter DiGiammarino Three distinct but integrated financial statements tell how well an organization is performing from a financial perspective. – Income Statement – Balance Sheet – Cash Flow Statement 2 Income Statement • Also known as P/L or P&L Statement. • Can be for a project, program, group, division, company or conglomerate. • Shows performance over a period of time. • Can be on a Cash or an Accrual basis depending on whether the preference is to match expenses to – Revenue or – Time. • No help in determining cash position of an organization. 3 Income Statement • Revenue • Cost of Sales or Cost of Goods Sold • Gross Profit • Operating Expenses • Non-Cash Expenses • Net Income / Net Loss 4 Income Statement starts with Revenue (or Sales) which is money received for goods and services sold to customers Examples of goods and services provided in exchange for revenue: REVENUE • Consulting hours Money earned from operations • A report Not income from other activities • Working system Revenue must be earned • Facilitated session • A part • A product • Etc. 5 The direct cost of goods and services sold are subtracted from Revenue to get Gross Profit or Contribution to Profit COST OF GOODS SOLD aka: Cost of Sales (COS); costs directly Example direct costs associated with the activities required to earn the revenue of goods & services: • Personnel REVENUE • Supplies GROSS PROFIT • Travel • Shipping • Etc. • Gross Profit = Revenue – COGS • Gross Profit is the money left to run the business and earn a net • Gross Profit Margin or profit after meeting revenue obligations Gross Margin = Gross Profit / Revenue • Negative Gross Profit means costs to earn (deliver) the revenue exceed the (market) price of the good or service 6 Example Project Plan Contract Value: 562,252 Hourly Actual Actual Actual Actual Cost August September October November December January February Total Revenue 29,068 80,094 163,088 139,020 30,347 70,090 50,545 562,252 Cost of Revenue - Direct Labor 8,300 21,672 35,640 35,746 22,157 19,644 14,166 157,326 Fringe 0.34 2,822 7,369 12,118 12,154 7,534 6,679 4,816 53,491 Subs/Contractors 188 188 ODCs 53 100 153 Subtotal 11,122 29,041 47,999 47,900 29,791 26,323 18,982 211,158 ITD Costs 11,122 40,162 88,161 136,062 165,852 192,175 211,158 211,158 Gross Profit 17,946 51,053 115,089 91,120 556 43,767 31,562 351,094 % Revenue 62% 64% 71% 66% 2% 62% 62% 62% Direct Labor Documentation 35 248 248 Front End CSS-008: SISE 60 - - 171 189 157 48 40 605 Back End CSS-009: Sr Dev 45 - - 432 205 194 208 180 1,218 QA CSS-012: QA 40 - - 60 182 6 48 40 336 DBA 50 - - - 1 - 1 1 3 CM 42 - 2 3 5 PM CSS-006: PM 72 - 18 12 17 8 12 8 74 Technical Manager Support CSS-005: ARM 50 - 197 - - 5 202 Technical Manager CSS-005: ARM 72 133 - - 54 60 20 266 2,956 Subs/Contractors Subcontractor #1 51 Subcontractor #2 50 2 Person 3 50 Person 4 50 7 Expenditures from normal business operations not tied directly to generating revenue are subtracted to compute Operating Profit. COST OF GOODS COST OF GOODS SOLD SOLD INDIRECT COSTS REVENUE (or Operating Expenses) GROSS PROFIT OPERATING PROFIT Profit Margin = Examples of indirect costs: Profit or • General management Operating Profit or Earnings Before Interest, Taxes, • Rent, IT, Infrastructure Depreciation, and Amortization • Sales & Marketing (EBITDA) / Revenue • Administrative (e.g., Governance, Human Resources, Finance) • Bonuses and Commissions 8 Operating Costs • Indirect Costs, or Operating Expenses, tend to be organized by business function; e.g.: – Sales and marketing – Research and development (R&D) – General and Administrative (G&A) to facilitate accountability and external performance benchmarking Track labor and non-labor operating costs separately Non-cash expenses can be classified as either COGS or operating expenses, depending on use of the asset: – Depreciation and Amortization of long-lived assets such as: • Equipment (computers, cars, etc.) • Software (bought or developed) • Facilities – Stock based compensation 9 Non-operating Costs are subtracted to get Net Income or, in a non-profit: Contribution to Unrestricted Net Assets. COST OF GOODS COST OF GOODS SOLD SOLD INDIRECT COSTS REVENUE GROSS PROFIT OPERATING PROFIT COST OF GOODS Examples of non SOLD operating costs: • Interest INDIRECT COSTS • Taxes • Depreciation NON-OPERATING COSTS • Amortization • Transaction fees NET INCOME 10 Example Income Statement Jan Feb Mar Q1 Revenue 2,873 2,889 3,274 9,037 Cost of Revenue Direct Labor 682 776 816 2,275 Fringe on DL 290 318 219 828 ODCs 51 75 86 211 1,023 1,169 1,121 3,314 Gross Profit 1,850 1,720 2,153 5,723 % Rev 64% 60% 66% 63% Operating Expenses 1,074 1,058 1,261 3,393 (Cap Software) (241) (216) (220) (677) (M&A) - (15) (74) (89) EBITDA (adj) 1,017 892 1,187 3,095 % Revenue 35% 31% 36% 34% Amort. & Depreciation 174 167 164 505 Interest, net 160 145 159 465 Income Taxes - - 698 698 Net Income 683 565 91 1,339 11 Summary: Revenue less Costs equals Profit COST OF GOODS SOLD COST OF GOODS SOLD COST OF GOODS SOLD INDIRECT COSTS INDIRECT COSTS REVENUE GROSS PROFIT NON-OPERATING COSTS OPERATING PROFIT NET INCOME • Revenue less Cost of Good Sold (aka Direct Costs) = Gross Profit • Gross Profit divided by Revenue = Gross Margin • Gross Profit less Indirect Costs = Operating Profit (aka EBITDA) • Operating Profit divided by Revenue = Operating Profit Margin • Operating Profit less Non-Operating Costs = Net Income • Net Income divided by Revenue = Net Income Profit Margin 12 Example P&L Summary Company Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 2008 2008 Income Statement Plan Actual Plan Actual Plan WV Plan WV Plan WV Revenue License 200 307 500 396 1,650 1,050 4,614 1,606 6,964 3,359 (License to Subscrip) - - - - (1,100) (800) (3,664) (756) (4,764) (1,556) Subscription 628 629 629 640 637 676 1,035 806 2,930 2,751 Maintenance 2,213 2,180 2,225 2,082 2,257 1,974 2,287 2,318 8,982 8,554 Customization 700 1,052 775 1,294 950 1,500 1,025 1,500 3,450 5,346 Services 3,500 3,640 4,100 3,551 4,325 3,750 4,550 3,700 16,475 14,641 7,242 7,808 8,229 7,963 8,719 8,150 9,847 9,174 34,037 33,095 Direct Contribution 4,411 4,857 5,097 4,964 5,410 4,999 6,319 5,976 21,237 20,796 % Rev 61% 62% 62% 62% 62% 61% 66% 65% 62% 63% Net of License 4,211 4,550 4,597 4,568 4,860 4,749 5,369 5,126 19,037 18,993 % Rev 60% 61% 59% 60% 59% 60% 60% 62% 60% 61% Total Labor 3,130 3,071 3,479 3,288 3,711 3,404 3,866 3,372 14,186 13,135 % Direct 64% 66% 66% 69% 67% 69% 68% 67% 66% 68% Total Indirect Costs 2,861 2,478 3,154 2,749 3,518 3,506 4,006 4,009 13,539 12,742 (Cap Software) (160) (75) (307) (83) (590) (700) (624) (620) (1,680) (1,477) EBITDA 1,709 2,454 2,250 2,298 2,482 2,193 2,936 2,587 9,378 9,531 % Revenue 24% 31% 27% 29% 28% 27% 30% 28% 28% 29% EBITDA, net of Cap SW/PRISM X 1,603 2,410 2,192 2,339 2,403 2,113 2,870 2,589 9,067 9,451 Total Debt 26,016 25,472 25,534 24,990 25,053 24,509 22,841 22,297 22,841 22,297 Net Debt 22,215 22,317 21,698 19,065 21,239 18,746 19,854 17,767 19,854 17,767 13 To be in control of operations requires a systematic and programmatic approach to always knowing where things sit. TERM DEFINITION KEY COMPARISON Target How things would ideally be in the long term; i.e., what Similar organizations in we ultimately seek to accomplish, the same industry or Goal Plan How things are supposed to be over a planning Target; prior period horizon (e.g., a year); i.e., what we are supposed to actual results; other or make happen next, players Budget Projection How things are expected to be in a near-term Plan; prior period performance period; e.g., over the next 1 to 3 months; actual results; or i.e., what we now realistically believe is going to Forecast happen next. Actual Actual results from a past period; i.e., what has Past projections; other actually already happened. players; past results; forward projections Working Sum of Actual and Projected results for a planning Plan; other players horizon; i.e., where we now think things will end up for View this performance period. 14 Balance Sheet balances assets with liabilities and owner equity. http://www.bookkeeping-financial-accounting-resources.com/accounting-balance-sheet.html 15 Balance Sheet Assets are usually at the top – Current Assets • Cash • Liquid investments such as money market and mutual funds – Tangible Fixed Assets • Inventory • Property, Plant, and Equipment • [Accumulated Depreciation] – Intangible Assets • Goodwill • [Accumulated Amortization] 16 Example Assets Balance Sheet Jan Feb Mar Cash 7,785 6,686 7,638 Accounts Receivable 12,621 11,428 10,828 Other 193 118 138 Total Current Assets 20,598 18,232 18,604 Fixed Assets @ Cost 3,551 3,551 3,559 Accum.
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