What is Your Profitability?
- Using Financial Records to
Improve Business
Performance
Dr. Wen-fei Uva
Senior Extension Associate
Department of Applied Economics and Management
Cornell University
Ithaca, NY 14853
Modified by Georgia
Agricultural Education
Curriculum Office
July, 2002
Modified by
Leanne Brown
March 2007
What We Are Going to Do
Today?
 What Is in Financial Analysis?
 Calculating Your Costs.
 Evaluating Your Profitability
What Is in Business
Management?
The ability to use resources in an
efficient manner so as to maximize
returns to meet:
 Business goals
 Personal goals
Achieving your goals requires
Financial Management
What Is Financial
Management?
The ability to allocate financial
resources in the areas which
generate the greatest returns.
Financial Management
Decisions
You Need to Make:
Making Business Decisions
 Are
your sales covering your costs?
 Which
product lines generate the most
income?
 Should
you operate year-round or shut
down in the winter?
 Contributions
 Optimum
 Goal
to fixed costs
mix of product lines
setting and increased efficiency
Are Your Financially
Healthy and Wise?
Do You Perform Financial Analysis?

Cost analysis - costs to operate the
business and profitability

Ratio analysis - Gross Margin Return
On Investment, Return on Asset,
Inventory Turns

Enterprise analysis - What is your
most profitability product line?
Are Your Financially
Healthy and Wise?
Do you know how your business
compare with industry benchmarks
 How do you compare to other firms in
the industry? - Gross Margin, Inventory
Turns, Profit Margin
 Set performance goals
 Track your performance over time (trend
analysis)
Repeat process annually
Calculating
Production Costs
 A Record Keeping System for
You
 Pricing for Profit
Expenses Records
Variable costs:
cost items that vary with
production volume (Direct and Indirect).

Costs of plant materials, pots, soil, hourly
labor, advertising.
Fixed costs:
cost items that do not vary with
production volume (Overhead costs).

Costs of rent, property taxes, management
salary and family living expenses.

Allocate these costs to each product could
be tricky (by floor space, time in store, etc.)

25 to 50% of total costs.
Expenses Records - cont.
Marketing costs:
 Advertising, packaging, shipping,
billing, and special promotion, display,
etc.
 It could also be assigned to variable and
fixed costs, but why look at it
separately?
 Production efficiency vs. marketing
efficiency
 5 to 15% of total costs
Financial Statements and
Performance Measures
 Income statement, balance
sheet, cash flow budget
 Liquidity, solvency, profitability,
financial efficiency, repayment
capacity measures
Ownership Records
Asset Inventory
 Business assets, ownership type,
control arrangement, opportunity costs
Ownership Arrangement
 Resource sharing, owner compensation,
responsibilities
Estate Plan
 Exit/entry and retirement plans (will,
trust, insurance, buy-sell agreements)
Pricing for Profit
Price
(Revenue)
Contribution
Variable Costs
Break-even
Fixed Costs
Profit
Calculate Costs
- Direct Variable Costs
Direct Variable Costs
Seeds or plants
Potted soil
Fertilizer and Chemicals
Packaging material
Direct labor
TOTAL FOR THIS PRODUCT LINE
$ Amount
$ 750
100
50
150
2,000
$ 3,050
Calculate Costs
- Indirect Variable Costs
Indirect Variable Costs
$ 8,000
2,075,000
$/Sq. Ft. Week
$ 0.00386
Trucking
2,400
2,075,000
0.00116
Telephone
1,000
2,075,000
0.00048
500
2,075,000
0.00024
Fuel
1,000
2,075,000
0.00048
Heating for Greenhouse
2,000
450,000
0.00444
65,000
2,075,000
0.03133
2,000
Annually or
special event?
0.0096
Electricity
Water
Hourly Labor
Advertising
$ Amount
Total Sq. Ft. Week
2,075,000
TOTAL
0.05159
Calculate Costs
- Fixed Costs
Fixed Costs
$ Amount
Total Sq. Ft. Week
$/Sq. Ft. Week
Management Salary
50,000
2,075,000
0.02410
Interest
15,616
2,075,000
0.00753
Depreciation
5,497
2,075,000
0.00265
Insurance
5,102
2,075,000
0.00246
Building and Equipment M/R
2,779
2,075,000
0.00134
Property Taxes
8,025
2,075,000
0.00387
10,879
2,075,000
0.00524
Office Supplies
2,991
2,075,000
0.00144
Professional Fee
2,123
2,075,000
0.00102
Misc.
4,000
2,075,000
0.00193
Leases and Rental
Family Expenses & Bank
Principal Payments
20,000
TOTAL
0.05157
Calculate Enterprise Profitability
Revenue
Price per Unit
$ 3.25
Units Sold (Take into consideration shrinkage)
4,800
TOTAL REVENUE
$ 15.600
Expenses
Direct Variable Costs (COGS)
$ 3,050
Indirect Variable Costs (100,000 SFW * $0.05159/SFW) =
$ 5,159
Fixed (Overhead) Costs (100,000 SFW * $0.05157/SFW) =
$ 5,157
TOTAL EXPENSES
ENTERPRISE PROFIT
$ 13,366
2,134
Breakeven Analysis
Variable Costs per Unit
Sold
($3,050 + $5,159) / 4,800 Consider discontinue
= $1.71
if below this
number
Overhead Costs per Unit
Sold
$5,157 / 4,800 = $1.07
Need to cover this
number
Total Cost per Unit
$1.71 + $1.07 = $2.78
Breakeven price
Profit per Unit Sold (4,800
pots)
$1.01
Profit per Unit Grown
(5,000 pots)
$0.97
Profit Equation
VOLUME (PRICE-COST)
=
PROFIT
 4,800 pots* ($3.25/unit - $2.78/unit) = $2,256
 4,800 pots* ($3.00/unit - $2.78/unit) = $1,056
 10,254 pots* ($3.00/unit - $2.78/unit) = $2,256
 For $250,000 in sales, a 4% price increase (4
cent increase for every dollar) give you $10,000
more profit.
Evaluating Business
Profitability
 Financial Ratios
 Efficiency Measures
Financial Ratios
 Profitability Ratios
 Gross Margin: (Revenue - Variable Costs) 
Revenue -- (around 50%)
 Profit Margin: (Revenue - Total Costs) 
Revenue -- (around 10-15%)
 Return on Assets
 Net Business Income  Average Total Assets
 How efficient are you using your resources to
produce income.
Financial Ratios
 Inventory Ratio (3.5)
 Cost of Good Sold  Average Inventory
 How fast are you turnover your inventory
 Liquidity
 Current Ratio: Current Liability  Current
Assets
 Your ability to cover current debt (liability)
 Solvency
 Debt-to Asset Ratio: Total Liability  Total Assets
 The percentage of the business’s assets to which
creditors have claim.
Efficiency Measures
 Operating Efficiency
 Sales per Full Time Worker Equivalent
 Net Income pre FT Worker Equivalent
 Sales per Square Foot
 Cost Efficiency
 Labor as percent of sales
 Operating expenses as percent of sales
 Costs per square foot (or square foot week)
 Profitability
 Net Income per Owner
 Net Income per Owner Hour
 Net Income per Square Foot