Posts Tagged ‘financial statements’

Make Profit Count

Ever wondered why a company that seemed to be doing so well suddenly failed? Often times the reason is that management took their eyes of the ball, with the ball being defined as cash. I touched on this earlier in Cash Flow – The Bottom Line. Basically the issue comes down to realizing that in order to make profit count it is essential that profit is converted to cash.

Cash is Critical

Without adequate cash a company will be hard-pressed to pay bills. I’ve had clients and been an employee of companies that were very profitable on paper. But, that’s on paper only. If you looked only at Read the rest of this entry »

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Problems of Delaying QuickBooks Start

If you are planning to use QuickBooks, delaying will only make it more difficult. Here are some reasons why.

Setup While Operating

If you decide not to implement QuickBooks at the beginning of a fiscal year, you will likely find that there is a real conflict later between staying current with your existing accounting system and doing what is necessary to start using QuickBooks. Although you can install QuickBooks with a Read the rest of this entry »

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The Farce of Allocation

If you have a company with multiple product lines or divisions then you may have encountered the age-old difficulty involved in allocation of overhead. This is an area that often creates heated debate.

An Example

Imagine a company with two clear product lines, A and B. In this same company there are administrative roles that are handled by the corporate office, which has no direct connection to Read the rest of this entry »

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QuickBooks Two Sided Items Save Time

One of the main benefits to delving into QuickBooks in detail is to accomplish things in less time. Two sided items are one of those shortcuts. In the posting Two Common QuickBooks Mistakes I indicated just a little of the problems that can occur in QuickBooks. Not taking advantage of some very helpful features is another.

What are Two Sided Items

In QuickBooks two sided items are items that will impact more than one account. Some items by default are two sided. For example, when you Read the rest of this entry »

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Actual Company Debt

Do you really know your actual company debt? This may seem like a silly question, but there is more to it than you may think. Let me explain.

Leases

There is a proposal from U.S. and international accounting regulators to change how a company should record and account for what is referred to as operating leases. Here I just want to consider the impact on the lessee. First, let’s look at some Read the rest of this entry »

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Understanding the Statement of Cash Flows

A number of my recent postings have been related to definitions of financial terms, financial ratios, and how to make use of them. Among these, a large percentage related to cash and the various things that impact it. In my posting Cash Management-It’s Not About the Cash Account I pointed that to manage cash we needed to get away from focusing so much on the cash account. To understand how cash is generated and used, let’s take a look at the flow of activity that impacts the cash balance. Understanding the statement of cash flows will help accomplish that. Read the rest of this entry »

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Understanding the Debt Ratio

Most of my recent postings have concerned how businesses are financed and how to measure the returns on those investments. Understanding the debt ratio will help you better understand the financing of a business.

What is the Debt Ratio?

The formula for calculating the debt ratio is:

Debt Ratio = Total Liabilities / Total Assets

(Note that this is expressed as a percentage)

Using a sample balance sheet from an earlier posting, let’s see that calculation. Read the rest of this entry »

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What is Debt Really?

Take a look at your company’s balance sheet and see if you identify everything that is debt. Is there anything hidden?

A Simple Example

Let’s consider the balance sheet below and see if we can form some conclusions.

what is debt

When we look at this balance sheet we could come to several conclusions. One, we might consider debt to be only 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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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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