Income Statement

Productivity of Fixed Assets

I remember a client a few years ago who tended to make what he considered bargain purchases of equipment. Often the purchases were large enough that they needed to be capitalized. Unfortunately much of what he bought turned out to be useless and ended up sitting around the building like an over-grown paperweight. He may have still thought these purchases were a good idea, but they certainly weren’t producing a decent return. In fact, they were producing no return whatsoever and were nothing more than a waste of financial resources. So, what should you expect out of your fixed assets? Read the rest of this entry »

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Two Measures of Financial Return

Recently I’ve been focusing on financial ratios and how they can help you measure performance. You’ve probably heard the old advice on a personal level, “If you’re not using something, maybe you need to get rid of it.” Another way to look at this is whether the benefits you derive outweigh the cost of ownership or produce a positive result. An example would be Read the rest of this entry »

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Two Sales Measurements

Sales, sales, sales! We need more sales is the common cry. But stop and ask if you are getting those sales efficiently. Here are a couple of financial measurements.

Advertising Results

There are numerous measures of advertising results, but here I want to focus on advertising to sales. Advertising to sales in calculated as:

Advertising to Sales = Advertising Expense / Sales

This is expressed as a percentage. Sounds simple enough, doesn’t it? But what is this telling you? Basically this is Read the rest of this entry »

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Debt Coverage

In the posting Why Debt Ratios Matter we looked briefly at what debt really is, one way of measuring it, and how the mix of debt and equity played a role in how appropriately a business was financed. Now let’s look at servicing debt, also known as debt coverage.

What Determines Debt Coverage?

Think about this from a personal perspective. Imagine you took out a loan to buy some furniture for your home, and it was one of those loans where you only paid interest for the first year. Starting in the second year you would be required to start Read the rest of this entry »

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Understanding Gross Profit

Gross profit is defined as Sales – COGS with COGS standing for Cost of Goods Sold. The formula is simple enough, but really understanding gross profit involves more than just knowing how to calculate it.

Gross Profit Margin

This calculation for gross profit margin is (Sales – COGS) / Sales and is expressed as a percentage. This formula, like the one for gross profit, is very straight forward. However, the gross profit margin does tell us some things that the gross profit itself does not. Let’s look at an example. In the example we will look at two different months for the same manufacturing company. We will also assume that the company has no ending inventory at month end for both months.

gross profit calculation

Some Analysis

When you look at this example, at first nothing seems to be all that significant. Sales in month 2 were less so you naturally expect your gross profit to be less. But look at the gross profit margin. For the first month it is 40% but in month two it drops to 33%., a decrease of 7%. That is significant. Now see the analysis of cost of goods sold. As you can see the variable cost as a percentage of sales is the same for each month but less in dollar amount for month two. However, the fixed cost remains the same in dollars but jumps 7% as a percentage of sales. Since there was no ending inventory, all of the fixed costs of manufacturing had to be absorbed both months.

This analysis demonstrates the significance of the amount of sales on the gross profit and the gross profit margin percentage. A key to understanding gross margin is to understand that the level of sales and your ability to control fixed costs can have a dramatic impact on your profitability. We are starting to get into break-even analysis here, but I will leave details of that for another article.

Do you understand gross profit and gross profit margin? Understanding this is critical to making sense of you income statement. Even more important is know what you can do to help improve both of these key measures.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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Some Key Financial Indicators

If you are attempting to manage a business you must have timely and meaningful financial indicators. Many companies do this with some sort of financial dashboard, but whatever your method, here are a few things to be on top of.

Some Balance Sheet Data

Keep up with some key balance sheet data. This should be done at a minimum monthly, but preferably weekly or even daily, depending on the particular piece of information. Here are some of the key financial indicators to track: Read the rest of this entry »

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5 Tips About the Income Statement

I’m amazed at how often someone looks at their company’s income statement and immediately zeroes in on the bottom line; the net profit. Of course, the net profit is important, but if you stop there you will miss some useful information that can be obtained from this statement. Here are 5 tips about the income statement.

Patterns and Trends

It helps to dig into the individual lines on the income statement. For example, suppose you are a distributor. Take a look at Read the rest of this entry »

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Balanced Approach to Financial Management

I remember a partner in a small CPA firm telling a story from early in his career. He said he had been given the task of creating a balance sheet for a client. When it was in balance he declared, “It balances, so it must be correct.” Of course the balance sheet must balance, but he quickly learned there was a lot more to it than that.

Balance Does Matter

One of the first areas where a company often displays a lack of balance is on the importance of the different financial statements. The income statement shows the results of activities over a specific period of time, while the Read the rest of this entry »

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Income Statement Snapshot

When you read your Income Statement (Profit and Loss Statement) what is your process? Do you just look to see if you made a profit? Try digging a little deeper.

The Big Picture

In the post Balance Sheet | A Different Look we took a look at how we first examine a balance sheet from an overall perspective, much like we look at a family photo. As this is done certain items will Read the rest of this entry »

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