Income Statement

Analyzing Expenses

When you examine your company’s income statement do you find yourself wondering why some expenses seem to have little to do with sales? There are three basic breakdowns of expenses that will help you when analyzing expenses. Read the rest of this entry »


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 »


Misleading Financial Indicators

What do crime statistics and business metrics have in common? I was recently reading about the possible manipulation of statistics for a city’s crime rates, and that got me to thinking about how a similar thing happens with a business’s financial indicators.

Like What?

Sometime a particular statistic is highly misleading. For example, a manager who is responsible for increasing sales may indeed be able to report that Read the rest of this entry »


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.


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 »


Understanding the Operating Cash Flow to Sales Ratio

In my last posting I defined what operating cash flow is and how to calculate it. Now I want to see it in relation to sales.

Why in Relation to Sales

Since selling is the primary activity of a company for producing cash flow, the relationship of operating cash flow to sales is a meaningful one.

Operating Cash Flow to Sales Ratio Defined

To calculate the operating cash flow to sales ratio, which is expressed as a percentage, the following formula is used (where OCF stands for operating cash flow):

Operating Cash Flow to Sales Ratio = OCF / Sales Read the rest of this entry »


Operating Cash Flow Defined

Businesses often focus in on net income and fail to recognize the significance of cash flow (see Cash Flow – The Bottom Line) and what determines cash flow (see Cash Management-It’s Not About the Cash Account). Even when understanding the importance of cash flow and what generates it, there are some additional aspects to understand.

What is Operating Cash Flow

In a future blog I will show how the cash flow statement is created, but for now let’s just identify the three main components of the statement, which are: Read the rest of this entry »


What is Return on Capital Employed?

The return on capital employed is probably not a metric that many small companies calculate, but it can be very revealing about financial health. In some prior postings we looked at several ways of measuring a business’s return. Among those were return on assets and return on equity (see Two Measures of Financial Return). We also look at return a different way in the posting Debt Coverage. See those postings if you want to know more about these very useful measurements.

It is important to understand that there are two main sources of capital; one is Read the rest of this entry »


The Cash Conversion Cycle

If you read my postings on a regular basis I may sound like a broken record with how much I focus on cash. But again, as I’ve said before, “Profit is nothing until it is converted to cash.” See Cash Flow – The Bottom Line. Now I want to delve into how efficiently we convert financial activity to cash.

Cash Conversion Cycle Formula

First we need to identify some abbreviations and definitions: Read the rest of this entry »


Importance of Free Cash Flow

In some previous posting I discussed how important it was to convert profits to cash. See Cash Flow – The Bottom Line for more on this. Now let’s look at cash from a different perspective.

Free Cash Flow Defined

Generally free cash flow is considered to be operating cash flow minus capital expenditures. This recognizes that capital spending for things like equipment is necessary if a company is to remain competitive. These capital expenditures help a company become more efficient or even allow them to Read the rest of this entry »


Importance of Net Profit and Net Margin

Net profit and net margin are two of the most important business metrics. It is essential that they be clearly understood and interpreted.

Net Profit & Net Margin Defined

Net Profit is the bottom line after deducting all expenses of the company. The formula to calculate net profit is:

Net Profit = Sales–(COGS + Operating Expenses + Other Income & Expenses + Taxes)

In the formula above COGS is the abbreviation for for Cost of Goods Sold. For clarification, revenue is sometimes used instead of the term sales, and in the formula above other income & expenses includes Read the rest of this entry »


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