The Finance Gem 💎 Week #35: Free MBA, Low Profitability, and Accounting Confusion

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• Top 20 Most Misunderstood Accounting Concepts you should know.

• Excel is dead. Long Live Ai?

• Low profitability could signal issues with your sales, pricing, cost control or business model.

• Get a Free MBA Education from the Top MBA Programs in the World

• The Performance KPI Checklist.

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Accrual vs. cash basis accounting:

Accrual accounting records financial transactions when they are incurred, regardless of when the money is actually received or paid

Cash accounting records financial transactions only when the money is received or paid.

Depreciation vs. Amortization

Depreciation is a method of allocating the cost of a long-term physical asset over its useful life.

Amortization is the process of allocating the cost of an intangible asset over its useful life.

Gross profit vs. Net Profit

Gross profit is the difference between revenue and the direct costs of selling a product or service (cost of goods sold or cost of sales)

Net profit is gross profit minus operating expenses.

Gross Profit vs. Gross Profit Margin

Gross profit is the difference between revenue and the direct costs of selling a product or service (cost of goods sold or cost of sales).

Gross Profit Margin is the Gross Profit divided by Revenue.

GAAP vs IFRS

GAAP (Generally Accepted Accounting Principles) is a set of accounting standards. US GAAP is the GAAP used in the United States

IFRS (International Financial Reporting Standards) is a set of accounting standards used globally.

Fair value vs. historical cost

Fair value accounting is a method of accounting that values assets and liabilities at their current market value

Historical cost is an accounting principle that values assets and liabilities at their original cost.

Allowance for Doubtful Accounts vs Bad Debt Expense

The allowance for doubtful accounts (AFDA) is a contra-asset account used to record the estimated balance of uncollectible accounts receivable.

Bad debt expense is the actual amount of accounts receivable that the company has written off and expensed as uncollectible.

Goodwill vs Intangible Assets

Goodwill is an intangible asset recorded as part of a business acquisition and representing the value of a company beyond its tangible assets.

Intangible assets are non-physical assets such as patents, copyrights, trademarks, and brand value, recorded at cost only if they meet recognition criteria and amortized over their useful life.

Capital Expenditures vs Revenue Expenditures

Capital expenditures (or expenses on account of capital) are investments in long-term assets which will support the company to generate Revenue over several periods.

Revenue expenditures (or expenses on account of revenue) are expenses incurred in the normal course of business to support the company to earn revenue in a particular period

Fair value vs. carrying value:

Fair value is an estimate of the price that an asset could be sold for between a willing buyer and seller in an open market.

Carrying value is the value at which an asset is recorded on a company's balance sheet.

Fixed Assets vs Current Assets:

Fixed assets are long-term physical assets used by a company to earn Revenue over several periods.

Current assets are short-term assets that are expected to be converted into cash or otherwise used within one operating cycle, typically a year.

Accumulated Depreciation vs Depreciation Expense

Accumulated depreciation is the cumulative amount of depreciation expense recorded to date

Depreciation expense is the amount of depreciation recorded in a specific period of time.

Contingent Liabilities vs Contingent Assets

Contingent liabilities are potential obligations that may become actual obligations if certain events occur.

Contingent assets are potential assets that may become actual assets if certain events occur.

Deferred Revenue vs. Unbilled (Accrued) Revenue

Deferred revenue is Revenue that has been invoiced but not yet earned (liability)

Unbilled (Accrued) Revenue is Revenue that has been earned but not yet invoiced (asset)

Deferred Taxes vs Current Taxes:

Deferred taxes are estimated future tax obligations resulting from temporary differences between the cost basis of accounting and the tax basis of accounting for various assets and liabilities.

Current taxes are tax obligations that are due and payable in the current period.

Provision vs Reserve

A provision is an amount of money set aside to cover a potential future liability.

A reserve is an amount of money set aside to cover an expected future liability.

Capital Stock vs Retained Earnings

Capital stock is the total amount of money received by a company from the sale of its shares or stock.

Retained earnings represent the accumulated Net Income from prior periods that is has not been paid out as dividends and instead has been retained in the company.

Lease vs Loan

A lease is a financing agreement where a company buys the right to use an asset whose title may or may not transfer over to it at the end of the agreement.

A loan is a financing agreement where a company borrows money from another.

Useful life vs. Economic life

Useful life is the length of time an asset is expected to be used by a company for the purpose for which it was acquired, determined by management and used to calculate annual depreciation expense.

Economic life is the total length of time an asset is expected to provide economic benefits to a company, which can extend well past the point where it’s been fully depreciated.

Accounting Policy vs. Accounting Estimate

An accounting policy is a guideline established by company management and based on GAAP, which helps provide comparability and consistency in the reporting of transactions and events in the company’s financial statements.

An accounting estimate is a prediction made by management to help record transactions or events where the outcome is uncertain, such as the useful life of an asset or the collectability of accounts receivable.

Think again.

For FP&A, Accounting, and Finance, Excel is essential.

It brings depth and precision, flexibility, ubiquity and versatility.

AI brings automation and insights, processing data and anticipating trends

Together they will transform how we work and what we accomplish in Excel.

➡️ Here are my Top 10 Most Useful Excel Functions for financial modeling:

1️⃣ INDEX-MATCH

⚫ powerhouse combination function that allows you to look up a value in a specific cell within a range and match it with a value in another range.

⚫ helps you look up the monthly revenue figure in a table of sales data, where the product name is in one column and the revenue is in another

2️⃣ SUMIFS

⚫ sums values in a range by filtering data based on several criteria.

⚫ helps you sum up the sales revenue for a particular product or service and over a specific period of time

3️⃣ CHOOSE

⚫ returns a value from a list of values based on a specified index number ⚫ helps you create dynamic models when you have multiple input options and you want to select one based on a particular condition or criteria

4️⃣ COUNTIFS

⚫ counts cells within a specified range based on multiple criteria

5️⃣ XNPV

⚫ calculates the net present value of an investment based on a series of irregular cash flows

⚫ helps you evaluate the profitability of investments with uneven cash flows

6️⃣ OFFSET

⚫ helps you create dynamic ranges by returning a reference to a range that is a specific number of rows and columns from a cell or range of cells.

7️⃣ IFERROR

⚫ helps you avoid errors by returns a value you specify in case a formula calculates to an error.

8️⃣ SUMPRODUCT

⚫ multiplies the corresponding components of arrays or ranges of data to return the sum of the products

9️⃣ XIRR

⚫ calculates the internal rate of return of an investment, based on a series of irregular cash flows

⚫ also helps to evaluate the profitability of investments with uneven cash flows

🔟UNIQUE

⚫ helps you remove duplicates by selecting and returning a list of unique values from a specified range.

Remember, if you're stuck on understanding or performing any of these, just ask an AI for help. 🧠

Here's how to diagnose and address:

Most business problems fall into one of 3 main areas:

1️⃣ Profitability

2️⃣ Cash Flow

3️⃣ Growth

Financial analysis is a key tool in identifying and addressing all three.

Here’s how to address profitability issues:

🎯 Gross Profit Margin: (Gross Profit / Revenue) x 100

This tells you how efficiently you're using raw materials and labor.

Drops could be due to increased costs or ineffective pricing.

Look to renegotiate contracts, trim waste in production, or tweak prices

🎯 Operating Profit Margin: (Operating Income / Revenue) x 100

This shows how much of each dollar of revenues is left after considering COGS and OPEX (operating expenses).

If it's dropping , your indirect costs may need a review because you're lacking operating flexibility.

🎯 Net Profit Margin: (Net Income / Revenue) x 100.

This is what's left after all expenses and taxes are paid.

If it's dropping, but your other margins are fine, look into tax and debt cost optimization.

If it's dropping alongside one of your other margins, your business model and capital structure may need an overhaul.

35 Free Video Courses with links.

Stanford, MIT, Yale, LSE, Wharton, Harvard.

I’ve curated a list of exceptional MBA courses into a full graduate business degree curriculum for you.

35 Video Resources (courses and playlists) covering most of what you would expect in a top tier MBA program.

You can start today and learn from some of the best MBA programs in the world.

1. Business & Strategy:

- Game Theory (Yale)

- Entrepreneurship (MIT)

- Business Plans (MIT)

- Business Models (Harvard)

- Business Lectures (Stanford)

2. Economics:

- Principles of Microeconomics (MIT)

- Microeconomics for Managers (MIT)

- Macroeconomics (MIT)

3. Leadership and Organizational Behavior:

- Organizational Culture (Stanford)

- Human Resources Management (IIT)

- Leadership (Wharton)

- Leadership vs. Management

4. Finance:

- Blockchain & Money (MIT)

- Corporate Finance (NYU)

- Introduction to Corporate Finance

- Financial Management for Managers Playlist (IIT Roorkee)

- Financial Theory (Yale)

- FinTech (MIT)

- Financial Markets (Yale)

5. Ethics:

- Business Ethics (Harvard)

6. Communication:

- How to Speak (MIT)

- How to Write (UChicago)

- How to Communicate (Stanford)

7. Negotiation:

- The Art of Negotiation (LSE)

- Negotiation (Stanford)

8. Accounting:

- Financial Accounting Fundamentals (MIT)

9. Operations Management:

- Operation Management (IIT)

10. Investing:

- Valuation Techniques (NYU)

- Acquisitions (Wharton)

- Private Equity (Wharton)

- Private Equity LPs & GPs (Wharton)

- Venture Capital (Wharton)

11. Statistics:

- Introduction to Probability (MIT)

- Introduction to Statistics (MIT)

12. Marketing:

- Marketing Management (MIT)

Download a copy of the fille below. Remember to click File » Make a Copy.

Profitability sets the goal.

Costs define the constraints.

Profitability measures success.

Costs evaluate your efficiency.

Your Performance depends on both.

So don’t just manage your Profitability.

Monitor, Analyze and Manage your Costs.

Here’s a 2 step approach to consider:

1. Profitability Management:

1. Assess your revenue streams to identify the most lucrative ones.

2. Optimize pricing strategies to ensure maximum profit margins.

3. Diversify sources of income to spread risk.

4. Leverage high-performing assets to capitalize on profitable opportunities.

5. Analyze profitability trends to foresee potential future growth areas.

6. Reinvest profits wisely to fuel sustainable growth.

7. Benchmark against industry standards to ensure competitive positioning.

➡️ How to select Profitability KPIS:

1. Prioritize KPIs that align with your business's strategic goals.

2. Segment your profitability metrics to address different revenue streams

3. Simplify your selection to focus on key drivers rather than all possible metrics.

4. Review the selected KPIs regularly to ensure their continued relevance.

2. Cost Management:

1. Scrutinize all expenditures to identify any wastage or redundancies.

2. Negotiate with suppliers to secure the best prices without compromising on quality.

3. Streamline processes to increase operational efficiency.

4. Monitor overheads closely to avoid unnecessary expenses.

5. Investigate any sudden spikes in costs.

6. Implement cost-saving technologies and practices.

7. Benchmark against industry averages to identify areas of improvement.

➡️ How to select your Cost KPIs:

1. Highlight KPIs that directly impact your bottom line.

2. Categorize cost metrics into fixed, variable, and semi-variable to target cost-saving initiatives effectively.

3. Prioritize KPIs that offer actionable insights rather than generic information.

4. Re-evaluate and adjust KPIs based on changing business conditions and goals.

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

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Thanks so much for reading. See you next week.

Oana

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