Numbers That Count
When starting up with KPIs it is easy to get lost in a sea of numbers. We need to focus on "numbers that count" -- the information that can give leaders and managers the insight required to make informed and responsible decisions.
Any Accounting 101 student will learn that there are three primary financial statements of primary importance: the Profit and Loss Statement (P&L), the Balance Sheet, and the Statement of Cash Flows. Here is a quick refresher for those who have long since discarded the accounting text and rely on others for day to day financial decisions:
Profit and Loss Statement
The P&L is broken into three general sections:
Income represents all of the good and services SOLD to customers.
Cost of Goods Sold (COGS)
COGS represents what the organization has paid for all of the goods and services SOLD to customers. (Different types of companies have different "charts of accounts". Some companies put labor into their COGS while others strictly have "products" in their COGS.)
Gross Profit is calculated by subtracting the Cost of Goods Sold from Income.
The expenses section of the P&L contains a break-out of each of the items required to operate the business but which are not necessarily something that the business had to buy in order to subsequently sell to a customer. For example, items such as rent, general marketing expenses, administrative staff salaries, etc.
Expenses are sometimes referred to as SGA, which stands for Sales & General Administration.
Net Profit is what is left after Expenses are subtracted from Gross Profit.
The Balance sheet has two sections: Assets and Liabilities/Equity.
The sum of an organization's Assets must be equal to the sum of its Liabilities plus Equity.
Assets include things like cash, Accounts Receivable, physical property (land, computers), and intellectual property (patents, trademarks)
Liabilities include things like Loans payable, Credit Card balances, deferred income, Accounts payablem, taxes due various governing authorities (sales, income, property)
Equity includes the value of stock held by shareholders, retained earnings, Member Draws and Net Income.
Key idea: Assets = Liabilities + Equity
Statement of Cash Flows
Cash flow is the lifeblood of a business. If an organization runs out of cash, the game is over. Cash comes from two primary sources: operations of the business and financing activities.
The Statement of Cash flows displays a handful of high-level items:
- Net cash provided by operating activities (net income adjusted by any changes in A/R, sales tax payable, etc.)
- Financing activities (cash infusion from a loan, dividends/distributions, etc.)
- Net impact on cash for the accounting period
- Cash at the beginning of the accounting period
- Cash at the end of the acounting period