Teaching Elephants to Dance

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Teaching Elephants to
Dance:
Financial Metrics for NonFinancial Executives
Dan Ruchman
May 18, 2009
What is Business?
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Organized
Delivery of products or services
Agreed upon price
Value for value
Profit
What makes for Success?
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Mission
Vision and Values
Goals
Plans
People
Is that all?
Success – the Intangibles
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Desire…
Communication…
Analysis…
Focus…
Wisdom
What We’ll Talk About
• Accountants - Who you are
• Non-accountants – what they
do, and why don’t they care?
• Metrics & Management
• The opportunity
• When the band plays together…
the company being all it can be.
Accounting -- & Balance
• Does this give you comfort?
The accountant,
The friend, and . . .
The dinosaur
Who are You?
• Accountants
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Why you do what you do
Measuring
Communicating
Impacting the bottom line
Who are THEY?
• Non-accountants
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R&D
Marketing
Manufacturing
Sales
General Management
Non-accountants
BABEL?
• Do we all speak different
languages, like the Tower of
Babel, destined for confusion,
miscommunication, miscues,
missteps and costly errors?
Language of the Universe
La matematica è l'alfabeto
nel quale Dio ha scritto
l'universo.
– Galileo Galilei
Language of Business
La finanza è la lingua nel
quale Dio discute degli
affari.
Finance is the language of
business.
Language of Finance
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P&L
Balance Sheet
Cash Flow
Financial Ratios
Footnotes
Investor info, trends, other
numeric but non-financial things
P&L – or Income Statement,
or Stmt of Operations, or
Statement of Earnings
• How much did we sell – goods &
services
• What did it cost us?
• Did we make money?
• Is our business growing?
• Is our profitability good, bad,
improving?
Basic P&L
($ in 000s)
2008
Revenue (Sales)
Cost of Goods Sold (COGS)
Gross Profit
Operating Expenses
Profit Before Tax (PBT)
$25,000
10,000
15,000
10,000
5,000
P&L: A lot of terms in a
short amount of time
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P&L – the income side
P
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Income
Sales – gross, net, etc.
More P&L - Costs
• Product costs – Fixed, Variable
Standard, process, total
Semi-Fixed
FOH
VOH
Internal costs vs vendor costs
Outsource vs buying from sister co
Distribution, warehousing
More P&L – Expenses
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Marketing
Selling
R&D
G&A
The Power of Definitions
Adding value with metrics
P&L – Terms & Ratios
• “Profit Margin”…?
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Gross Margin
Operating Margin
Contribution Margin
Pre-tax vs Post-tax
EBITDA
A word on EBIT…
. . .Earnings Before Irregularities
and Tampering?
Another Word on EBITDA
Earnings Before I Tricked the
Damn Auditor
A Final Word on EBITDA
• Earnings Before:
 Interest
 Taxes
 Depreciation
 Amortization
. . . and it MEANS?
EBITDA
A popular metric designed to
focus on the core operations of
the company, excluding noncash and other items beyond
the control of the operating side
of the business.
… and some CAVEATS
Key P&L Metrics
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Sales growth year-over-year
Earnings growth year-over-year
Gross profit margin percentage
Operating expense % of sales
Profit Margin: Operating, and
Net
Risk versus Reward
The basic concept : If you take
on more risk, you should only be
doing it if you stand a chance of
getting a higher reward.
More on Risk & Reward
• The grocery business
• The restaurant business
• The mob
Return: A Holy Grail
Balance Sheet
• What do we own?
• What do we owe?
• Are we financially strong?
• How does our financial position
compare with last year?
Basic Balance Sheet
2008
($ in 000s)
Assets
Current Assets
10,000
Fixed Assets, less Depreciation
12,000
Total Assets
22,000
Liabilities
Current Liabilities
Long-term Debt
Total Liabilities
Equity
Total Liabilities and Equity
5,000
12,000
17,000
5,000
22,000
Balance Sheet - Terms
ASSETS
• Current Assets
• Accounts Receivable
• Inventory
• Intangible Assets
• Fixed Assets
• Depreciation
Balance Sheet – The
Other Side
LIABILITIES
• Current Liabilities
• Accounts Payable
• Long Term Debt
• Convertible Debt
• Off-Balance Sheet Debt
Balance Sheet: Equity
EQUITY
• Stock – Common vs Preferred
• Retained Earnings
• Diluted stock ownership:
options
Balance Sheet:
Key Metrics
• Liquidity measures
• Current Ratio
• Quick Ratio
• Debt-to-Equity (D/E)
• Negative Equity
Cash Flow
• How much $ did we start the
year with?
• How much $ did we end the
year with?
• Where is cash being used, and
from where is cash coming in?
Cash Flow – Key Terms
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Free Cash Flow
EBITDA
Cash Positive
Cash Negative
Capital Intensive
Cash Burn Rate
Cash Flow – Key Issues
• Burn rate vs Cash Balance vs
Earnings
• Future capital spending needs
• Cash from sale of stock – When?
Why?
• Paydown of debt – When? Why?
Other Key Metrics
• Return on Assets (ROA, RONA,
RNOA)
• Return on Equity (ROE)
• Earnings per share (EPS)
• Price/Earnings Ratio (P/E)
• Free Cash Flow – Be careful!
• Inventory turnover
Concepts
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Accuracy versus Precision
Information is Power: Share it
Know Your Audience
Thinking: The Box
The Price of Miscommunication
The Opportunity
Thinking – Inside, Outside,
Through the Box
A Story
19th Century Shoe Salesmen
Questions to be Answered
• Is the company financially sound?
• Has the right degree of financial
savvy?
• Right balance of bottom line focus
vs market share vs growth vs
customers, vs…?
• Would I invest in this company?
• The Price
• The Challenge
•The Opportunity
Galileo… Updated for
Business
• Mathematics is the language by
which God has written the universe.
− Galileo
• Today’s reality: Finance and
accounting are the language by
which business writes and measures
its successes and it failures.
Why You’re Here
"You are not here merely to make a
living. You are here in order to
enable the world to live more amply,
with greater vision, with a finer spirit
of hope and achievement. You are
here to enrich the world, and you
impoverish yourself if you forget the
errand."
-- President Woodrow Wilson
Teaching Elephants to
Dance
Financial Metrics for NonFinancial Executives
Dan Ruchman
Ruchman & Associates
Creative and Intelligent Solutions for Finance,
Operations & Strategy.
 Lighting the Path to Profitability 
Office: 858.784.0104
[email protected]
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