Intro to Financial Acumen. Round Table Guide August 22, 2018

Transcription

1 Intro to Financial Acmen Rond Table Gide Agst 22, 2018

2 Table of Contents Bdget 3 Key Components Bdget Drivers Gross Profit 5 Calclation & Definition Why its measred Profit Levers 6 Variable vs. Fixed Expenses Retrn on Investment (ROI) 7 EBITDA 8 Calclation & Definition Why its measred

3 Bdget Basics A bdget is a forecast of what yo expect to happen. It incldes: Income statement (how mch to yo expect to make) Balance sheet (what I own, what I owe and what I have invested) Cash flow (when is cash coming in and going ot) Key components: Revene projections how mch do I plan to sell next year? Expense estimates what is my best estimate of what it is going to cost to deliver? Direct Costs Overhead Costs Staffing plan who needs to be hired to achieve these plans? What trnover may happen? Capital investment plan what investments are needed to make yor plans happen? Fixed Assets Technology

4 What is a Bdget Driver? A bdget driver is A variable that reslts in a change in a component of the bdget An inpt that affects the otcome of the bdget Start by thinking What operational changes do I want to make and what cold go wrong? What operational changes do I need to make in order to hit specific targets? Examples If I add more sales people How mch more revene shold I expect to achieve? How long does it take a sales rep to ramp p? How strained will my profit & loss be dring the ramp period how can we make room to afford it? If I lanch a new prodct... How mch marketing cost will be reqired and how does it drive my revene? Do I get reslts this year or next? Do I need more staff onboard as a reslt? In which departments?

5 What is Gross Profit? Gross Profit = Revene - Cost of Goods or Services Sold (COGS) Gross profit is a key metric to nderstand the efficiency/health of the bsiness model Calclates money earned from directly operating the bsiness before considering administrative expenses Gross Profit = Gross Margin (synonymos) Revene is the total amont of sales Examples: Carrier = Premims Earned TPA = Services Revene, Claims Management Revene COGS/COSS are the expense directly related to prodcing prodcts or services the materials that go into a prodct, and the costs to convert materials into an actal prodct all direct costs reqired to close a claim labor that is directly related to making a prodct OR providing a service Gross profit does not inclde Overhead Operating expenses sch sales & marketing, office spplies, exective and administrative salaries

6 What Levers Can Be Controlled? Fixed vs Variable Expenses Two type of expense: Variable costs: change with the level otpt (e.g. shipping cost per nit) or based on a bsiness decision (e.g. rnning an ad campaign) Fixed costs: stay at the same level whatever the level of bsiness activity is (at least over the short term) Yo can control: What yo have not yet committed to spending (both fixed and variable) Yo can manage: Variable costs - to ensre that sch costs are efficient and delivering reslts Yo can leverage: Fixed costs - to ensre that the optimal otpt is achieved before investing in new, incremental fixed costs (i.e. headcont, office space) Cost Fixed Variable Ad Campaign Travel Depreciation of Eqipment Rent Office Spplies Salaries

7 What is ROI (Retrn on Investment)? ROI = % Gain (Gain from Investment- Cost of Investment)/ Investment ROI is the what s in it for the investment yor make How mch is gained in the ftre by spending money now Used as tool for trade off decisions by management Measre efficiency of investment Factor in time vale of money for longer term investments Simple Example: $10,000 investment in marketing drives $100,000 in additional revene that contribted an additional profit (gain) of $15,000 ($15,000 - $10,000) / $10,000 = 50% retrn Qestions to ask If I invested that $10,000 elsewhere in the bsiness, what wold the retrn be? Which investment has the greater retrn; where is or $$ best invested?

8 EBITDA: Why is it important? EBITDA = Earnings Before Interest, Tax, Depreciation and Amortization Measres performance withot having to factor in: Financing decisions (interesting expense or income) Acconting decisions (depreciation and amortization) Tax environments (tax rates vary by company) EBITDA Allows investors to nderstand a company s overall operating efficiency Makes it easier to compare companies, indstries, etc. Revene Cost of Sales Eqals: Gross Profit Operating Expenses Depreciation / Amortization Operating Profit (EBIT) Interest & Taxes Eqals: Net Income Revene Cost of Sales Eqals: Gross Profit Operating Expenses Eqals: EBITDA