Download to read offline
Uploaded byJeff Wilson II, CPA/PFS, CFE, CGMA
Interpreting Financial Statements and their KPIs
The document provides an overview of financial statements including balance sheets, income statements, and cash flow statements, emphasizing their role in financial management and growth. It outlines key performance indicators, financial ratios, and cost structures crucial for benchmarking and efficiency in businesses, particularly for small to mid-sized nonprofits and government contractors. Additionally, it discusses the importance of accounting systems and leveraging strategies for funding business growth.
More Related Content
Similar to Interpreting Financial Statements and their KPIs
Interpreting Financial Statements and their KPIs
- 1. UNDERSTANDING FINANCIAL STATEMENTS ANDTHEIR TOOLS FOR GROWTH
- 2. TABLE OF CONTENTS Introductionto Financial Statements o Balance Sheet o Income Statement o Statement of Cashflow What should you be looking for: o Benchmarking o Business 2 Business Comparisons o Industry Averages Key Performance Indicators o Utilization Rate o Realization Rates o Overhead Rates o G&A Rates
- 3. TABLE OF CONTENTS FinancialRatios o Gross Profit Margin o EBITDA/Net Profit After Tax Margin o A/R Turnover Rate (Activity) o A/P Turnover Rate (Activity) o Net Working Capital (Liquidity) Leverage & Economies of Scale o Debt Leverage o Income Statement/Retained Earnings Leverage Accounting System needs and limitations o QuickBooks Online w/ Fathom Reporting o BQE CORE o Unanet o Deltek o Data analytics
- 4. ABOUT TODAY’S SPEAKER JeffWilson II CPA/PFS, CGMA, CFE Principal Mr. Wilson is the Principal of The W2 Group, LLC a “Cloud Based” accounting firm, based in Clinton, MD. He is a Certified Public Accountant (CPA), Accredited Financial Counselor (AFC), and Chartered Global Management Accountant (CGMA), and Certified Fraud Examiner (CFE) in the State of Maryland. In addition, he is an Advanced QuickBooks ProAdivsor. He specializes in working with small to mid–size Not for Profits, Government Contractors, and Federal and State governmental entities. In addition to being a CPA, he spends his free time as an advocate for financial literacy and personal money management by teaching financial management for local non-profits and churches in Southern Maryland.
- 5. THE BALANCE SHEET Assets-Liabilities =Equity C ash on Hand A ctivity L iquidity E fficiency The purpose is to build Equity.
- 6. INCOME STATEMENT/PROFIT &LOSS Profitability: GrossProfit Growth: Revenue Growth, Gross Profit Growth, Earning Before Income Taxes, Depreciation, Amortization (EBITDA) **Knowing your “Gross Profit Margin and Target is Key**
- 7. STATEMENT OF CASH FLOWS Provides infoon how cash is being provided and used in the business. Tells you if cash is being provided by operations or debt financing or Owner Investment
- 8. STATEMENT OF CASHFLOWS OperatingActivities Investing Activities Financing Activities
- 9. FINANCIAL RATIOS Your financial statements tella few stories about your business
- 10. GROSS PROFIT MARGIN How much moneyis left after paying the employees who create the “revenue”
- 11. GROSS PROFIT TARGETS Targetsare meant to be met When they are not met understand “Why” and adjust accordingly
- 12. EBITDA EARNING BEFORE INTERESTDEPRECIATION AND AMORTIZATION Net Income Interest Taxes Depreciation Amor tizati on Ebitda
- 13. ACCOUNTS PAYABLE TURNOVERRATE (ACTIVITY) Days in a Month Accounts Payable Total Cost of Sales Accounts Payable Days
- 14. ACCOUNTS RECEIVABLE TURNOVER RATE(ACTIVITY) Days in a Month Accounts Receivable Gross Income Accounts Receivable Turnover Rate
- 15. A/R VS. A/PTURNOVER RATE
- 16. NET WORKING CAPITAL(LIQUIDITY) Current Assets Current Liabilities Working Capital
- 17.
- 18. UTILIZATION RATE Hours Worked Total Hours Available Utilization Rate The utilization rate is an important number for firms that charge their time to clients and for those that need to maximize the productive time of their employees. It can reflect the billing efficiency or the overall productive use of an individual or a firm.
- 19. REALIZATION RATE Total Billed Hours Total Billable Hours Realization Rate Realization rate is another important metric for evaluating performance. Realization rates measure the difference between what you record as time and what percentage of that time is paid by the client.
- 20. COST STRUCTURE G&A Costs: Labor for strategic planning, business development efforts and to manage or perform administrative functions Bonuses for people who primarily charge their time to G&A Professional fees, such as legal, accounting, payroll processing fees, IT services. Travel – perhaps in support of business development efforts Business insurance (general liability) State & local taxes (not federal taxes!) Conferences, business meetings Dues and subscriptions A proportionate share of total facilities costs Fringe benefits are costs related to employing your labor force. Examples include: Vacation Holiday labor cost Other paid leave labor costs (such as jury duty, family leave) Employer payroll taxes (FICA taxes, state unemployment taxes) 401(k) employer match or contribution Health insurance and similar benefits
- 21. COST STRUCTURE Overhead Costs:Overhead costs support the efforts of the direct labor workforce, not necessarily related to a specific contract. Common examples of Overhead Cost: Small business personnel commonly wear multiple hats and often need to divide their time between many categories. Indirect labor is categorized based on what you are doing at the time. Overhead labor might be, for example, a meeting with project managers and/or the direct labor force that does not fall under the statement of work. The travel costs incurred to get you to the aforementioned meeting. Fees and costs associated with hiring direct employees. This could include the labor time for your HR person to do interviews, the costs of obtaining security clearances, outside recruitment fees, and the cost of job advertising. A proportionate share of total facilities costs (e.g., rent, office supplies, IT services, telephone costs, etc.)
- 22. COST STRUCTURE RATES OverheadRate - A company with low indirect costs will have a lower overhead rate, which makes it more competitive with other firms that must apply a larger amount of overhead cost to their products and services. G&A Rates – A company with Low G&A rates reflect a company that does not do a lot of unnecessary spending and manages their non direct expenses tightly. Fringe Rates – Your fringe rate lets you know how much your Annual Leave, Medical, and Retirement, are apart of your cost structure.
- 23. WHAT'S THE SCORE LIKEYOUR FAVORITE SPORT, BUSINESS IS COMPETITIVE. UNLIKE SPORTS THERE IS NO FORMAL SCOREBOARD TO REVIEW Ratios tell your individual story but industry comparison can help you do much more.
- 24. WHAT'S THE SCOREOF THE GAME: I Benchmarking is a systematic process for identifying and implementing best practice and efficiencies. Being able to compare your “KPIs” against Industry Averages is key to pushing your business to the next level Getting such data is difficult to attain you should look at the following areas to get relevant data on your business • Local Association of your Industry • Dun and Bradstreet • Moody’s • Bureau of Economic Analysis • Other Department of Commerce Agencies • Chamber of Commerce
- 25. LEVERAGE AND ECONOMIES OF SCALE Traditionally,to grow your business you have 2 methods. Debt vs. Equity
- 26. BALANCE SHEET LEVERAGE Whendeciding to grow your business, you have to make a decision. Specifically how will that growth will be funded. To grow your business you will expend capital whether through Business Developments or additional marketing, non-fully utilized labor, or new building. To pay for these costs, some business use their “line of credit”, take a loan, or issue debt securities, to fund the future growth. By using debt to fuel growth or run operations, you are leveraging your balance sheet. Your balance sheet must be able to handle and manage such leverage. Specifically, how much debt can your balance sheet handle before it is overleveraged. A balance sheet that can handle leveraged is one with a good “Current or Quick” Ratio. i.e. a company with enough assets/capital to support short or long term debt.
- 27. EQUITY LEVERAGING When decidingto grow your business, you may decide that it’s cheaper to borrow from yourself. What that means is the cost of acquiring more debt and interest costs is greater than using the company's own cash balance or the issuance of new stock in exchange for cash. When using equity to fuel growth you must be sure of the company's ability to continually produce Free Cash flow. In addition, you must have adequate liquidity and
- 28. ACCOUNTING SYSTEMS Your Accounting System isCritical to your success
- 29. ACCOUNTING SYSTEMS Your accountingsystem is key to how you manage your business. Your system need to be able to do the following: Manage Cashflows Pay Vendors Electronically Identify and Monitor key KPIs Report on the businesses Cost Structure Be able to scales as the business grows Ease of Use
- 30. ACCOUNTING SYSTEMS Leverageable AccountingSystems QuickBooks Online w/ Fathom Reporting BQE CORE Unanet Deltek
Editor's Notes
- #6 The Balance sheet display the financial position of an organization as specific point of time. It shows what a organization owns (Assets) and what a company owes (liabilities) and what a company has what remains once assets and liabilities have been netted or liquidated to pay off all liabilities When reviewing your balance sheet you should know what attributes about a company it can provide you. Your balance sheet can inform you about your C A L E Cash on Hand Activity : Accounts Payable Turnover| Accounts Receivable Turnover Liquidity: Current Ratio | Quick Ratio Efficiency: Return on Equity | Return on Capital Employed
- #7 The Income Statement measures the operating performance for any given period of time. Revenue is the result of monies earned for services provided and Expenses are a result of monies spent that are necessary to generate revenue. When reviewing the Income Statement/Profit & Loss, you should be looking to understand your organizations “Profitability”
- #8 The Statement of Cash Flows is usually the most under used financial statement used by Small Business Owners. However, its one of the most used financial statements of their bankers and financiers. Cash is still King. As Warren Buffett noted in the Berkshire Hathaway’s 2018 report: Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.
- #9 The Statement of Cashflows is Set up in 3 Sections: Operating Activities: This sections shows how your “core operations” provided or subtracted cash from your business Investing Activities: This section shows how “cash” was provided via equity sales or debt | or the use of cash for the purchase of fixed assets **(Remember Fixed Assets don’t show up as expenses on the income statement)** Financing Activities:
- #10 Your financial statements tell a few stories about your business. When reviewing your financial statements you need to understand and monitor the key performance indicators of the business: Key things to know about your business are: Gross Profit Target & Percentage Cost Structure Rates Utilization Rates Realization Rates
- #12 Targets are meant to be met. When they are not met understand “Why” and adjust accordingly. Targets should be based on a mix of Management Expectations as well as Industry Averages
- #13 In the Publicly Traded Market as well as the Government Sector EBITDA is a popular figure. It’s a measurement of Income adjusted for what business consider “noncash” expenses. The author believes stick with Charlie Munger : who said the “horrors” of EBITDA have been understated as has the “disgusting nature of the people that brought that term into the valuation of business.” “Every dime of depreciation expense we report, however, is a real cost. And that’s true at almost all other companies as well,” Buffett wrote. “When Wall Streeters tout EBITDA as a valuation guide, button your wallet.”
- #14 A/P turnover is a key figure. When managing cash flow you have to cognitive of how fast you are paying your vendors or contractors. Specifically you would want to avoid paying outsiders faster than your are paid (see A/R Turn over rate) Accounts Payable Days = Accounts Payable × Month Length ÷ Total Cost of Sales
- #15 A/R turnover is a key figure. When managing cash flow you have to cognitive of how fast you are getting paid by your customers. Lengthy A/R turnover can tell you how your customers feel about paying you as well as how your cash may be limited. Accounts Receivable Days = Accounts Receivable × Month Length ÷ Revenue
- #16 The preferences is to get paid faster than your paying others if you need to manage cash.
- #18 Your financial statements tell a few stories about your business. When reviewing your financial statements you need to understand and monitor the key performance indicators of the business: Key things to know about your business are: Gross Profit Target & Percentage Cost Structure Rates Utilization Rates Realization Rates
- #19 In business, the utilization rate is an important number for firms that charge their time to clients and for those that need to maximize the productive time of their employees. It can reflect the billing efficiency or the overall productive use of an individual or a firm. Looked at simply, there are two methods to calculate the utilization rate. The first method calculates the number of billable hours divided by the number of hours recorded in a particular time period. For example, if 40 hours of time is recorded in a week but only 30 hours of that was billable, the utilization rate would then be 30 / 40 = 75%.
- #20 Realization rate is another important metric for evaluating performance. Realization rates measure the difference between what you record as time and what percentage of that time is paid by the client.
- #23 Overhead Rate: The overhead rate is the total of indirect costs (known as overhead) for a specific reporting period, divided by an allocation measure. The cost of overhead can be comprised of either actual costs or budgeted costs. A company with low indirect costs will have a lower overhead rate, which makes it more competitive with other firms that must apply a larger amount of overhead cost to their products and services. Fringe Rates- A fringe benefit rate is the proportion of benefits paid to the wages paid to an employee. The rate is calculated by adding together the annual cost of all benefits and payroll taxes paid, and dividing by the annual wages paid.
- #26 Your financial statements tell a few stories about your business. When reviewing your financial statements you need to understand and monitor the key performance indicators of the business: Key things to know about your business are: Gross Profit Target & Percentage Cost Structure Rates Utilization Rates Realization Rates
- #29 Your financial statements tell a few stories about your business. When reviewing your financial statements you need to understand and monitor the key performance indicators of the business: Key things to know about your business are: Gross Profit Target & Percentage Cost Structure Rates Utilization Rates Realization Rates