The Finance Gem 💎 Week #34: Financial Analysis, Profitability, and Cheat Sheets

Welcome to a new edition of The Finance Gem 💎

weekly strategic finance gems to accelerate your career and grow your business

Newsletter | Masterclass | Shop

• 12 Profitability KPIs You Should Know, Analyze and Monitor

• Financial Analysis is not crunching numbers.

• The first year as a new controller can be brutal.

• The Best [Finance} Teams excel because of a very well kept secret.

• 12 Financial Skills All Managers Need

All this and more Let’s dive in!

• The Finance Gem 💎 Referral Program is here - share this high value newsletter with your network and earn great rewards! Scroll to the end.

• New pricing options available for The Cash Flow Masterclass. Learn more

• Interested in Promotions and Free Finance Webinar, add your name to the list.

• Reading for the first time? Please subscribe here.

The Financial Modeling Educator is a free email series that explores the intersection of Financial Modeling, Private Equity, and FP&A to help make you a better Financial Modeler.

Here’s what they are and how to interpret them:

➡️ Gross Profit Margin Ratio: Reveals how efficiently a company produces its goods.

A high ratio can indicate a competitive advantage in procurement, production or strong pricing power.

➡️ Contribution Margin: Evaluates the company's ability to cover variable costs with its sales revenue.

Essential for pricing strategies and break-even analysis.

➡️ Operating Profit Margin Ratio: Provides a look at profitability from regular business operations, excluding interest and taxes.

Indicates how well the company manages its operating costs.

➡️ Net Profit Margin Ratio: Shows the overall profitability after all expenses.

Indicates the company's ability to manage all its expenses, including operations, interest, and taxes.

➡️ Return on Assets (ROA) Ratio: Demonstrates how well the company utilizes its assets to generate profit.

Higher ROA implies better asset efficiency.

➡️ Return on Equity (ROE) Ratio: Highlights the profitability relative to shareholders' equity.

Critical measure for investors to see the return on their investments.

➡️ Return on Investment (ROI) Ratio: Evaluates the effectiveness of a particular investment in producing a positive return.

Helps in assessing investment decisions and comparing them against other opportunities.

➡️ Return on Capital Employed (ROCE) Ratio: Assesses how effectively a company uses its capital.

Factors-in both equity and debt, providing a comprehensive view of capital efficiency.

➡️ Earnings per Share (EPS) Ratio: Indicates the portion of a company's profit allocated to each outstanding share.

A vital metric for shareholders to understand their earnings share.

➡️ Price-to-Earnings (P/E) Ratio: Compares the company's stock price to its earnings per share.

Helps investors gauge the stock's market valuation relative to its earnings potential.

➡️ Dividend Yield Ratio: Shows the return on investment for a stock based on dividends.

Helps income-focused investors evaluate the potential income from a stock relative to its price.

➡️ Dividend Payout Ratio: Displays the portion of earnings a company distributes as dividends.

Provides insight into the company's reinvestment vs. dividend distribution strategy.

Financial analysis is not crunching numbers.

It is the transformation of raw data into actionable insights.

It is the strategic alignment of your business goals with your finance strategy.

And it is the most powerful tool you have at your disposal for solving your business problems.

Here are 7 essential business challenges which you can solve with the help of Financial Analysis.

➡️ How much debt should the company raise to optimize the debt-to-equity ratio while maintaining flexibility given their strategic objectives?

• Capital Structure Influence: The right debt-to-equity ratio can significantly reduce a company's cost of capital, potentially increasing shareholder value.

• Strategic Flexibility: Overleveraging can restrict a company’s ability to invest in new opportunities or sustain economic downturns.

• Market Perception: An optimal level of debt indicates disciplined financial management which will enhance the company's reputation among investors, creditors, and analysts,

➡️ How can the company restructure its balance sheet to meet its current or projected financial obligations?

• Liquidity Management: Restructuring ensures that the company can meet its short-term obligations without facing financial distress.

• Risk Management: Aligning the maturity profile of assets and liabilities can minimize refinancing risks.

• Operational Efficiency: Streamlining the balance sheet might highlight non-core assets for divestiture, leading to better capital allocation.

➡️ What level of profitability is required over the next periods to support the company’s target valuation?

• Investor Expectations: Achieving profitability targets is crucial to retain investor confidence and equity value.

• Operational Implications: Specific profitability levels might require the adoption of cost controls, operational efficiencies, or strategies to enhance revenue.

• Future Financing: Consistent profitability underpins a company's ability to secure future financing on favorable terms.

➡️ How sustainable is the company’s current growth rate?

• Quality over Quantity: It's vital to identify if growth arises from sustainable sources or one-time events.

• Operational Strain: Excessive growth can strain resources; financial analysis can anticipate these challenges.

• Competitive Analysis: Assessing growth relative to peers offers insights into market share dynamics and competitive positioning.

➡️ What potential headwinds are affecting the company’s profitability?

• Macro-economic Factors: Elements like changing interest rates, currency fluctuations, and broader economic trends can impact profitability.

• Industry Dynamics: Aspects like regulatory shifts, new market entrants, or disruptive technologies can change industry profitability norms.

• Internal Challenges: Internal inefficiencies, outdated technologies, or misaligned strategies can be profitability drags.

➡️ What is the company’s projected margin of safety for covenant compliance?

• Stakeholder Trust: Upholding covenants fosters creditor trust and can reduce borrowing costs.

• Financial Health Indicator: Monitoring this margin allows early detection of potential financial distress.

• Strategic Implications: Covenant breaches might bring about financial penalties or necessitate accelerated debt repayments, which can impede other strategic plans.

➡️ What valuation drivers should the company prioritize given its strategic positioning?

• Strategic Alignment: Matching financial drivers with broader strategic aims ensures consistent decision-making and messaging.

• Peer Benchmarking: Recognizing valuation drivers prevalent within the industry can provide insights into investor expectations.

• Future Readiness: Emphasizing drivers like digital transformation or ESG (Environmental, Social, Governance) factors can prime a company for future challenges and opportunities.

The first year as a new controller can be brutal.

New company dynamics, upgrading systems, inherited discrepancies

Meeting reporting deadlines, building relationships and leading the team

To accurately report, consistently comply, accurately budget, and diligently manage cash.

Here is a checklist of the most essential areas for new Controllers to focus on in their first 365 days, to help them hit the ground running.

➡️ 0-30 days: Get Acquainted with Financial Operations

- Review and understand core financial documents and workflows.

- Engage with key financial teams and departments.

- Familiarize with financial systems and policies.

➡️ 31-90 DAYS: Strengthen Systems & Compliance

- Develop a vision and identify areas for process improvement.

- Foster a culture of transparency and re-evaluate financial controls.

- Collaborate with teams for training and internal audits.

➡️ 91-180 DAYS: Optimize Processes & Develop the Team

- Strengthen financial processes, from data integration to forecasting.

- Mentor teams, address discrepancies, and provide leadership insights.

- Ensure compliance and assess potential financial risks.

➡️ 181-365 DAYS: Reflect, Analyze & Plan

- Review and refine financial strategies based on past operations.

- Engage with stakeholders and align with business goals.

- Prepare for future challenges and stay updated with regulations.

The Best [Finance} Teams excel because of a very well kept secret.

It’s called DISC and it will 10x your Business.

Building a top-tier team is tough.

But there’s a secret to getting it right.

It's understanding basic human behavior.

Why we naturally click with some and not others.

Why some people favor calm and steady progress.

Why other people thrive on challenges and momentum.

The DISC profile is a behavioral assessment tool that categorizes individuals into one of four personality types:

🎯 Dominance

🎯 Influence

🎯 Steadiness

🎯 Conscientiousness

Use it to improve teamwork, communication, and productivity

Especially within Finance teams.

Here’s how:

➡️ Dominance (D) - The Assertive Type

>> thrive on challenges, results-oriented, strong-willed, and forceful

🎯 How to optimize in Finance: assign Dominant Profiles to roles & tasks that require quick decisions, such as crisis management or urgent financial forecasting.

➡️ Influence (I) - The Social Type

>> optimistic, lively, and social, enthusiastic, and high-spirited

🎯 How to optimize in Finance: assign Influence Profiles to roles that require communication between departments or with external stakeholders, where they can can translate this data into understandable and engaging narratives.

➡️ Steadiness (S) - The Stable Type

>> dependable and consistent, even-tempered, patient, humble, and tactful

🎯 How to optimize in Finance: assign Steadiness Profiles ton roles that demand consistency and methodical attention to detail.

➡️ Conscientiousness (C) - The Analytical Type

>> detail-oriented, analytical, reserved, precise, and methodical

🎯How to optimize in Finance: assign Conscientious profiles to roles that necessitate in-depth analysis, precision, and a methodological approach.

➡️➡️➡️ Here’s how certain profiles naturally connect:

D and I types might get along because of shared dynamism and energy

S and C types could relate due to their shared work consistency.

➡️➡️➡️And here’s where certain profiles naturally disconnect:

D types may be impatient with S or C types slow or overly cautious approach

S or C types might feel overwhelmed or bulldozed by the forceful approach of D types

I types might struggle to understand the reserved nature of C types.

C types might find I types' enthusiasm too overwhelming.]

1// Financial Statement Analysis

🎯 Understand and examine the basic financial statements (income statement, balance sheet, and cash flow statement) to assess your company's financial performance and position, and to identify relevant trends and patterns.

2// Budgeting and Forecasting

🎯 Create and manage a budget, and forecast future financial performance to anticipate risks and opportunities, make informed decisions and ensure the long-term profitability and sustainability of your company.

3// Break-even analysis (B/E)

🎯 Determine the point at which your company's revenues will equal its costs to identify when the your company will become profitable.

4// Cost-Volume-Profit (CVP) Analysis

🎯 Understand how changes in costs, volume, and price will impact your company's profitability.

5// Capital Budgeting (NPV, ROI)

🎯 Evaluate and select long-term investments in new equipment and facilities to optimize performance and ensure your company's continued growth and profitability.

6// Working Capital Management (W/C)

🎯 Balance collections, inventory stocks and payments to reduce your Cash Conversion Cycle without damaging client and supplier relationships, and without foregoing sales opportunities.

7// Financial Ratio Analysis

🎯 Calculate and interpret critical financial ratios (liquidity ratios, profitability ratios, debt service ratios and solvency ratios) to get insight into different aspects of your company's financial health.

8// Performance management

🎯 Establish goals, monitor progress, and provide feedback to align employee and organizational goals and increase your effectiveness as a manager.

9// Risk Management

🎯 Identify and manage financial risks (credit risk, market risk, and liquidity risk) and their impact on your company performance to ensure its long-term stability and profitability.

10// Leverage/Service/Coverage

🎯 Make informed decisions about both debt and equity financing to ensure your company has the appropriate funding and capital structure to support growth.

11// Performance Metrics (KPIs)

🎯 Monitor and manage profitability and cash alongside other relevant metrics like production efficiency, quality costs or customer net promoter score to improve your decision making in support of the strategic objectives of your business.

12// Business/Unit/Asset Valuation

🎯 Understand valuation drivers at the asset, unit/division and business levels to impact them effectively and improve your ability to achieve desired results.

As always, if you have suggestions or feedback, simply reply to this email.

If you’re enjoying this newsletter, please forward it to a friend. It only takes 3 seconds. Writing this took 4 hours.

Plus, you’ll get exclusive finance gem rewards like cheat sheets and checklists!

1. Upgrade your strategic finance skills with The Cash Flow Masterclass, my highly reviewed, on-demand video course.

2. Work with me. Tap into my 20+ years of strategic finance & business intelligence, and get coaching for your own career. Availability is very limited. Book here.

3. Get growth business advisory for your organization with short, medium and long term financial planning, and big-picture financial models so you’re always finance-ready. Reach out here.

4. Sponsor a future issue of The Finance Gem 💎and get your brand in front of an exceptional audience of strategic finance, accounting, sales and technology professionals and executives.

5. Train your team on strategic finance concepts and elevate their knowledge, decision-making and productivity. Reach out here.

Thanks so much for reading. See you next week.

Oana

: