The Finance Gem 2023๐Ÿ’Ž Week #17

Accounting vs. Finance

Welcome to this week's edition of The Finance Gem ๐Ÿ’Ž where I bring you my unabbreviated Linkedin insights you loved - so you can save them, and those you missed - so you can enjoy them.

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Without further ado, let's begin:

Accounting vs. Finance Cheat Sheet

Accounting and Finance and not the same.

๐ŸŽฏ They define value differently.

๐ŸŽฏ They have different objectives

๐ŸŽฏ They have different perspectives

๐ŸŽฏ They require different technical skills.

๐ŸŽฏ Knowing how they differ will help you appreciate how each of them ads value.

๐ŸŽฏ Knowing how they work together will help advance your career.

The ๐…๐ข๐ง๐š๐ง๐œ๐ž ๐ฏ๐ฌ. ๐€๐œ๐œ๐จ๐ฎ๐ง๐ญ๐ข๐ง๐  ๐‚๐ก๐ž๐š๐ญ ๐’๐ก๐ž๐ž๐ญ ๐ข๐ง๐œ๐ฅ๐ฎ๐๐ž๐ฌ:

๐ŸŽฏ Accounting vs. Finance Differences across Scope, Focus, Timeframe, Regulatory environment and Tools of their trade

๐ŸŽฏ Accounting vs. Finance Designations to learn what they mean and what to pursue

๐ŸŽฏ Accounting vs. Finance Careers to learn about their work

๐ŸŽฏAccounting vs. Finance in the CFO Office

๐ŸŽฏ Accounting vs. Finance KPIs to help you learn what to monitor

๐ŸŽฏThe Accounting Budget Flow to help you learn how budgets are built

๐ŸŽฏ20 Confusing Accounting Topics to help you differentiate between them

๐ŸŽฏ10 Essential Finance Skills for Managers to help prioritize what to learn

๐ŸŽฏ The Financial Analysis Scorecard to help structure your financial analysis

๐ŸŽฏ5 Key EBITDA Ratios to help you make better use of EBITDA

Controllership vs. FP&A vs. Strategic Finance

Controllership vs FP&A vs. Strategic Finance

Do you know the differences?

These three functions are part of the same CFO Office, and they work as a team, but they couldnโ€™t be more different in focus, skills and responsibilities.

**Controllership:**

๐ŸŽฏ focuses on accounting and financial reporting

๐ŸŽฏ responsible for ensuring that financial statements are accurate, timely, and compliant with local GAAP

๐ŸŽฏ roles: Controller, Assistant Controller, Accounting Manager

๐ŸŽฏ competencies: accounting and financial reporting, budgeting and forecasting, internal controls, regulatory compliance

๐ŸŽฏ key relationships: other finance functions, other departments (operations, sales, procurement)

๐ŸŽฏ professional designations:

1. CPA (Certified Public Accountant)

2. CMA (Certified Management Accountant)

3. CGMA (Chartered Global Management Accountant)

4. ACCA (Association of Chartered Certified Accountants)

5. CIA (Certified Internal Auditor)

**FP&A (Financial Planning and Analysis):**

๐ŸŽฏ focuses on insights into financial performance for strategic decision-making

๐ŸŽฏ responsible for providing guidance on strategic business decisions based on financial data and analysis

๐ŸŽฏ roles: FP&A Manager, Financial Analyst, Budget Analyst

๐ŸŽฏ competencies: financial modeling, data analysis and visualization, budgeting and forecasting, strategic thinking, communication and influence

๐ŸŽฏ key relationships: other finance functions, other departments (sales, operations, procurement)

๐ŸŽฏ professional designations:

1. FP&A (Certified Corporate Financial Planning & Analysis Professional)

2. CFA (Chartered Financial Analyst)

3. CTP (Certified Treasury Professional)

4. CFP (Certified Financial Planner)

5. CAIA (Chartered Alternative Investment Analyst)

**Strategic Finance:**

๐ŸŽฏ focuses on the long-term financial planning and analysis of the company

๐ŸŽฏ provides insights into investment decisions, mergers and acquisitions, and capital raising

๐ŸŽฏ roles: Director of Strategic Finance, Corporate Development Manager, Treasury Manager

๐ŸŽฏ competencies: financial analysis and modeling, strategic thinking, investment evaluation, mergers and acquisitions, capital markets, corporate banking, communication and leadership

๐ŸŽฏ key relationships: other finance functions, other departments (legal and operations) to execute investment and acquisition opportunities

๐ŸŽฏ professional designations:

1. CFA (Chartered Financial Analyst)

2. FRM (Financial Risk Manager)

3. CAIA (Chartered Alternative Investment Analyst)

4. CBV (Chartered Business Valuator)

5. CFP (Certified Financial Planner)

Controllership vs. FP&A vs. Strategic Finance - Oana Labes, MBA, CPA

Margin vs. Markup

Do you know your Margin from your Markup?

โ–ถ๏ธ Margin shows how much of a product's sales price you got to keep.

โ–ถ๏ธ Markup shows how much over cost you've sold the product for.

๐ŸŽฏ Let's dig deeper into each of these . Note weโ€™ll be looking at per unit calculations, but you can easily extrapolate formulas to calculate totals:

1// Margin (or Gross Profit Margin in this case) is the proportion of a productโ€™s Sales Price that exceeds the Product Cost.

โ˜‘๏ธ Margin = (Product Sales Price - Product Cost)/ Product Sales Price

โ˜‘๏ธ Margin = Gross Profit per Product / Product Sales Price x 100

Note that Margin is calculated as a percentage.

Meanwhile, Gross Profit is calculated as an amount.

To get the Gross Profit Margin you need to divide Gross Profit per Product by the Sales Price per Product and multiply by 100.

2// Markup is the proportion by which you increase the Product Cost to arrive at the Sales Price.

โ˜‘๏ธ Markup = (Product Sales Price - Product Cost)/ Product Cost

โ˜‘๏ธ Markup = Gross Profit per Product / Product Cost x 100

Note that markup can be calculated based on a product's variable cost or based on its total (absorption) cost.

โ˜‘๏ธ Marking up the variable cost could result in under costing and underpricing the product, which in turn may increase revenues at the expense of reduced profitability and cash flows. Use Cost-Volume-Profit analysis to determine the number of units you will need to sell to break even.

โ˜‘๏ธ Marking up the absorption cost could result in over costing and overpricing, which in turn could reduce revenues also at the expense of reduced profitability and cash flows. Be especially careful with the fixed manufacturing depreciation expense which gets included in the full/absorption cost of a product.

๐ŸŽฏ To calculate your margin if you know your markup:

โ˜‘๏ธ Margin = Markup /(1+Markup)

๐ŸŽฏ To calculate your markup if you know your margin:

โ˜‘๏ธ Markup = Margin / (1-Margin)

๐ŸŽฏ Hereโ€™s an example:

Assume a product with a Cost of $20 has a Sales Price of $24.

Margin = (Product Sales Price - Product Cost)/ Product Price = ($24 - $20)/ $24 = 17%

Markup = (Product Sales Price - Product Cost)/ Product Cost = ($24 - $20) / $20 = 20%

If you know the Margin is 17%, then the Markup will be 0.17 / (1-0.17) = 0.20 or 20%

If you know the Markup is 20%, then the Margin will be 0.2 / (1+0.2) = 0.17 or 17%

๐ŸŽฏ How to use Margin and Markup:

โ˜‘๏ธ Both Margin and Markup calculate the difference between price and cost.

โ˜‘๏ธ Margin relates that difference to the product Price.

โ˜‘๏ธ Markup relates that difference to the product Cost.

โ˜‘๏ธ If you know the Product Cost, use Markup to determine an appropriate selling Price.

โ˜‘๏ธ If you know the Product Gross Profit, use it to determine the Gross Profit Margin and track profitability over time.

โ˜‘๏ธ And because Price is (ideally) always larger than Cost, remember that Markup will always be the larger metric.

Margin vs. Markup - Oana Labes, MBA, CPA

Are you Mastering your Master Budget?

Whether youโ€™re in a manufacturing or non-manufacturing business, if youโ€™re going to be successful you will need a Master Budget.

Here are 10 critical things to know about your Master Budget and its flow:

๐ŸŽฏ Itโ€™s a detailed financial plan that allocates resources and shows your income and expense expectations for a year or more into the future.

๐ŸŽฏ Itโ€™s built off historical trends, known changes in the present, anticipated future changes and extrapolations of existing data, all of which you should be able to support with appropriate evidence.

๐ŸŽฏ It includes an Operating Budget and several Financial Budgets, including a full set of Budgeted Financial Statements (income statement, balance sheet and cash flow statement).

๐ŸŽฏ It starts with the Sales Forecast for the period which presents your anticipated sales volumes in units.

๐ŸŽฏ Your Sales Forecast drives the Revenue Budget, which drives both the Production Budget (for manufacturers) and the SG&A Budget

๐ŸŽฏ If youโ€™re a service company, you donโ€™t sell products so you wonโ€™t have Production Budgets and Cost Of Goods Sold.

Instead you will typically have Cost of Sales (COS).

๐ŸŽฏ If however you do have a Production Budget, it will drive the next 3 Budgets for Direct Labor, Direct Materials and Manufacturing Overhead.

These in turn will drive your COGM and your COGS.

๐ŸŽฏ Your SG&A Budget is driven by your Sales Forecast and all non-manufacturing expenses.

These include sales, marketing, research and development, and general administration.

They also include your non-manufacturing overhead.

๐ŸŽฏ Your Operating Budget will further drive 3 other inter-connected budgets:

>> Your Investment or CAPEX Budget, which will list expected cash invested in or driven from fixed asset purchase and sale transactions

>> Your Financing Budget, which will list expected cash paid or received from debt or equity financing transactions

>> Your Cash Budget, which will list your total expected receipts and disbursements for the period

๐ŸŽฏ Once all your Budgets are completed, youโ€™ll finally be able to get a unified view of your projected future performance through your Budgeted Income Statement, Balance Sheet and Cash Flow Statement.

The Budget Flow - Oana Labes, MBA, CPA

Next steps for you to consider:

  1. Upgrade your strategic finance skills with my Cash Flow Masterclass! Use it to drive sustainable business growth and accelerate your career. Check it out at oanalabes.com

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Thanks so much for reading. See you next week.

The mother of Cash and EBITDA - compliments of Nicolas Boucher