The Finance Gem 2023💎 Week #6

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

This newsletter edition is brought to you by Financiario - The Financing Advisory Firm for Growing Businesses. Financiario supports the vision of CEOs and expands the capacity of CFOs, to help companies plan and manage their financing requirements. They prepare strategic financial models and financing memorandums that expedite the closing of financing transactions while positioning for long term profitability, solvency and liquidity. Check out some case studies on their Blog. 

This week's posts at a glance:

• 20 Cost KPIs to choose from, benchmark, forecast, monitor and manage.

• Are you Mastering your Master Budget?

• 5 Incredibly Valuable Excel Tips you Should Know.

• 20 Revenue KPIs to choose from, monitor and manage.

• 7 Finance and FP&A Skills you need to Learn for Management Roles

Without further ado, let's begin:

1️⃣ Understanding financial statements

🎯 Objective: evaluate your organization's or unit’s financial health, identify red flags, measure and monitor performance, allocate resources effectively

🎯 Skills to learn:  >> read and interpret financial statements // >> horizontal/vertical analysis // >> trend analysis

2️⃣ Analyzing ratios and metrics

🎯 Objective: condense and analyze complex financial information to understand business risks and opportunities

🎯 Skills to learn:

>> liquidity ratios (e.g. current ratio) // >> profitability ratios (e.g. gross margin) // >> leverage ratios (e.g. debt-to-equity ratio) // >> debt servicing ratios (EBITDA to payment obligations) //  >>cash flow analysis (operating, financing, investing, free cash flow to equity, EVA) // >> ratio trend analysis

3️⃣ Preparing/Reviewing budgeting and forecasting

🎯 Objective: plan as well as estimate future financial performance based on historical data, trends, pipeline, backlog, and other financial/non-financial information

🎯 Skills to learn: >> incremental budgeting // >> activity based budgeting // >> zero based budgeting // >> statistical analysis

4️⃣ Cost Analysis

🎯 Objective: understand cost behavior and how changes in volume and mix affect profitability

🎯 Skills to learn: >> cost-volume-profit analysis // >> direct vs indirect costs >> // >> product vs period costs // >> costing methods

5️⃣ Investment analysis

🎯 Objective: evaluate the risks and returns of potential investments

🎯 Skills to learn: >> net present value // >> internal rate of return // >> payback period

6️⃣ Presentation and communication

🎯 Objective: impact and influence to coordinate resources and achieve results

🎯 Skills to learn: >> effective listening// >> impact and influence // >> change management

7️⃣ Risk assessment

🎯 Objective: identify, assess, evaluate and respond to financial risks impacting your organization

🎯 Skills to learn: >> market risk //  >> credit risk// >> liquidity risk // >> operational risk

Download the HBR eBook directly here: 

20 Revenue KPIs to choose, monitor and manage to help you drive your business forward.

1// Gross Revenue and Gross Revenue Growth

🎯 The total amount of money you earn from sales before deducting discounts, returns and allowances for such.

2// Net Revenue and Net Revenue Margin

🎯 The total amount of money you earn from sales after deducting discounts, returns and allowances, expressed in absolute terms or as a percentage

3// Gross Profit and Gross Profit Margin

🎯 The residual gross revenue you earn after deductions, returns and allowances, and after paying for direct costs (Cost of Sales or Cost of Goods Sold) expressed in absolute terms or as a percentage

4// Operating Profit and Operating Profit Margin

🎯 The residual gross revenue you earn after deductions, returns and allowances, after paying for direct costs (Cost of Sales or Cost of Goods Sold) and also after paying for Operating Costs (Sales, General, Administrative, Research and Development)

5// Net Operating Profit after Tax and Net Operating Profit Margin after Tax

🎯 The residual gross revenue you earn after deductions, returns and allowances, after paying for direct costs (Cost of Sales or Cost of Goods Sold), after paying for Operating Costs (Sales, General, Administrative, Research and Development) and after paying for Taxes as well.

6// Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)

🎯 The recurring portion of your subscription revenue on a monthly or annual basis.

7// Average Revenue per User (ARPU)

🎯 The average amount of money you earn from each user over a given time period.

8// Customer Lifetime Value (LTV)

🎯 The total amount of revenue you can expect to earn from a customer over their lifetime engagement with them.

9// Customer Acquisition Cost (CAC)

🎯 The total cost you incur to acquire a new customer.

10// Customer Churn

🎯 The number of customers which cancelled their subscription or which otherwise stopped doing business with your company, measured as a percentage of total customers at the beginning of the period.

11// Customer Retention

🎯 The number of customers which keep/renew their subscription or otherwise continue doing business with your company, measured as a percentage of total customers at the beginning of the period.

12// Revenue Conversion Rate

🎯 The percentage of your online platform/website/campaign visitors who make a purchase.

13// Revenue Concentration

🎯 The percentage of your revenue distribution across your largest customers.

14// Revenue to Operating Cash Flow

🎯 The proportion of sales revenues that your business converted to cash during the period.

15// Recurring Revenue Margin

🎯 The percentage of your revenue that comes from repeat customers

16// Revenue per Revenue Driver

🎯 The amount of revenue you earned per unit of each relevant driver (employees, square footage, market, etc)

17// Sales Volume Variance

🎯 The difference between your actual sales volume and your budgeted sales volume.

18// Sales Price Variance

🎯 The difference between your actual sales price and your budgeted sales price.

19// Sales Mix Variance

🎯 The proportion of different products or services you sell in the total makeup of your revenue during the period.

20// Pipeline Conversion Rate

🎯 The proportion of your sales funnel that converted to revenue during the period.

Excel has a number of functionalities which many of us are familiar with, but here are 5 of my favorites that not many people use.

1️⃣ F5

🎯 Brings up the "Go To" dialog box, which allows you to quickly navigate to a specific cell, range, or defined name in your spreadsheet.

🎯 Used with Crtl + [ it helps you return to the cell you started from

🎯 Used with the Special + Constants + Numbers it can identify hard coded numbers in the worksheet, so you can color code them for easy identification later on.

2️⃣ Watch window (Formulas >> Formula Auditing)

🎯 Used to help monitor changes in cells you want to track

🎯 Especially useful when tracked cell information is in a different workbook

🎯 Can be toggled on an off, as well as dragged to the top or side of your screen and attached to your workbook

3️⃣ Named Ranges (Formulas >> Name Manager)

🎯 Used to make it easier to reference cells in your formulas and use descriptive names instead of cell references.

🎯 Used to improve your ability to read a formula so you know exactly what the formula is doing.

🎯 All named ranges can be pasted as a list so you can see an overview

4️⃣ Data Validation (Data >> Data Tools)

🎯 Used to control what data can be entered into a cell or range of cells and ensure that data entered is accurate and consistent.

🎯 Use the “List” option to create easy drop down menus where input values are either manually input or selected from the sheet

🎯 Use the "Error Alert" section to specify a custom error message that will pop up if an invalid value is entered

5️⃣ Print Headers (Select Header Rows >> Name Box >> name them “print_titles”)

🎯 Used to indicate which rows or columns will be repeated on every page when printing a worksheet.

🎯 Helpful for long vertical models where you want the headers to be printed on all pages

Download the Corporate Finance Institute eBook on Financial Modelling Guidelines here:

Whether you’re in a manufacturing or non-manufacturing business, if you’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:

🎯 It’s a detailed financial plan that allocates resources and shows your income and expense expectations for a year or more into the future.

🎯 It’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.

🎯 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).

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

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

🎯 If you’re a service company, you don’t sell products so you won’t have Production Budgets and Cost Of Goods Sold.

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

🎯 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.

🎯 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.

🎯 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

🎯 Once all your Budgets are completed, you’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.

1// Cost of Goods Sold (COGS) and COGS Margin

🎯 Your direct costs associated with producing a product or delivering a service, expressed in absolute terms or as a percentage of revenue

COGS = Direct Materials + Direct Labor + Direct Overhead

COGS = Opening Inventory + Purchases - Ending Inventory

2// Cost of Goods Sold (COGS) per Manufacturing Employee

🎯 The direct costs you incurred per manufacturing employee, as a measure of the productivity and efficiency of your manufacturing workforce

3// Cost of Goods Sold (COGS) per Sq. FT or Sq. M

🎯 The COGS you incurred per unit of manufacturing space expressed in square feet or meters, as a measure of your space utilization efficiency.

4// Operating Expenses (OPEX) and OPEX Margin

🎯 The operating costs associated with your operation of the business, expressed in absolute terms or as a percentage of revenue

5// Operating Expenses (OPEX) per Non-Manufacturing Employee

🎯 The OPEX you incurred per non-manufacturing employee (sales, administration, engineering), as a measure of the productivity and efficiency of your non-manufacturing workforce

6// Operating Expense (OPEX) per Sq. FT or Sq. M

🎯 The OPEX you incurred per unit of SG&A space, as a measure of utilization efficiency for the sales and administration workspace.

7// Total SG&A Expense and SG&A Margin

🎯 The Selling, General and Administrative expense associated with your operation of the business, expressed in absolute terms or as a percentage of revenue.

8// Total Payroll Expense to (COGS + OPEX)

🎯 The total Payroll expense (manufacturing and non-manufacturing) relative to your total costs (COGS and OPEX), as a measure of the proportion of your total expenses absorbed by employee compensation and benefits.

Note that SG&A is a subcomponent of OPEX, and Payroll is a subcomponent of SG&A.

9// R&D Expense and R&D Expense Margin

🎯 The Research and Development expense incurred, expressed in absolute terms or as a percentage of revenue, as a measure of your innovation spend relative to the revenues generated in your business.

10// Sales and Marketing Expense and Margin

🎯 The Sales and Marketing expense you incurred, expressed in absolute terms or as a percentage of revenue, as a measure of how well your company is using its sales and marketing resources to drive up revenue.

11// Total Operating Cost

🎯 The total of direct and indirect, product and period expenses you incurred.

This measure is used to calculate your Operating Profit and determine your residual revenues after paying for all business expenses except Interest and Taxes.

12// Total Fixed Cost

🎯 The sum of all your business fixed costs, used to calculate your company’s break even point and determine the level of revenue or number of unit sales you need to break even and start earning a profit.

Note that Total Cost is also used to calculate your operating leverage, which is the proportion of fixed vs variable costs in the business.

13// Variable Cost per Unit

🎯 The sum of all your variable costs divided by the number of units produced, used to calculate your company’s contribution margin per unit and analyze the level of profitability across your various products, lines, customers and geographies.

Note that Variable Cost per unit is also used to calculate your company’s break even point and determine the level of revenue or number of unit sales required to break even and start earning a profit.

14// Client Acquisition Cost (CAC)

🎯 The cost of acquiring a new customer for your business, calculated by dividing the total Sales and Marketing expense by the number of new customers acquired during the period.

15// Cost per Click

🎯 The cost of acquiring a single click on your paid business advertisement, calculated by dividing your total advertising campaign cost by the number of clicks received, and used to determine the efficiency and return of your digital advertising expenditures.

16// Inventory Holding Cost

🎯 The total cost of carrying inventory in your business, including costs associated with storage and handling, obsolescence and spoilage, waste and inefficiencies, theft, insurance and also financing costs as part of a credit facility.

17// Accounts Payable Carrying Cost

🎯 The total cost of carrying a balance in your supplier accounts, mostly related to the cost of foregone early payment discounts offered.

These can easily annualize to 6x+ more than the annual interest costs than would otherwise have been incurred borrowing with a bank or similar lending institution to settle the AP early.

18// Accounts Receivable Carrying Cost

🎯 The total cost of extending credit to your customers, including costs associated with staff processing and collecting AR, financing costs incurred to borrow the funds owed by your customers in order to settle your own AP and operating business expenses, and bad debt costs associated with uncollectible accounts.

19// Average Cost of Debt

🎯 The total interest expense associated with borrowing money, averaged across all your credit facilities and weighted based on their relative proportion in your total borrowed capital.

Note it’s typical to exclude short term debt such as operating lines of credit from this calculation, when they are revolved regularly and average utilization is low.

20// Average Cost of Equity

🎯 The Cost of Equity is a function of the risk free rate offered in your market, as well as the risk premium that would be required by an investor to accept the risk of investing in your business.

Note that additional risk premiums are typically added and further increase the average cost of equity calculated for small companies, companies in volatile industries, or companies with a weak management team and products nearing the end of their lifecycle.

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