The Finance Gem 💎 Week #63: Profit, Margins and Cash Flow

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  • 4 Finance Gems 💎 remember to vote your favorite in the poll section

    • Gross Profit is not Contribution Margin.

    • Controllership vs FP&A vs. Strategic Finance

    • The Controller’s First Year Checklist

    • FREE Cash Flow Masterclass

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  1. Gross Profit is not Contribution Margin

Gross Profit is not Contribution Margin.

Gross Margin is also not Contribution Margin.

So then what is Contribution Margin? And how do you use it?

⚫ Gross Profit is often used interchangeably with Gross Margin, through one is an absolute difference (amount) and the other is a relative difference (percentage).

⚫ The real comparison is between Gross Profit and Contribution Margin.

➡️ Note that Gross Profit is what gets reported externally in compliance with local GAAP, but Contribution Margin is what management can use internally to improve pricing and profitability analysis

They may seem alike, but they are distinct metrics with unique insights for profitability analysis.

🎯 Gross Profit is the revenue from the sales of a product or service, less all direct costs (COGS or COS)

☑️ Formula: Gross Profit (GP) = (Revenue/Selling Price - COGS)

☑️ Considers direct materials, direct labor, and manufacturing fixed and variable overheads.

☑️ Excludes: variable costs unrelated to production, such as sales commissions or shipping costs.

☑️ Used to understand the profitability of the entire product or service portfolio

🎯 The Contribution Margin (CM) is the sales price of one unit of a product or service, less all unit variable costs (direct materials, direct labor, and indirect product costs).

☑️ Contribution Margin (CM) is (despite its name which suggests a ratio) a measure of absolute value calculated in currency units ($).

☑️ Formula: Contribution Margin (CM) = (Sales Price per unit - Variable Cost per unit)

☑️ Considers direct materials, direct labor, variable manufacturing overhead, variable selling and variable marketing.

☑️ Used to make decisions related to individual product or service pricing and sales mix, because it shows the incremental profit generated by each additional unit sold.

  1. Controllership vs FP&A vs. Strategic Finance

Controllership vs FP&A vs. Strategic Finance

These three functions are part of the same CFO Office, and they work as a team, but they couldn’t be more different in focus, skills and responsibilities.


🎯 focuses on accounting and financial reporting

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

🎯 roles: Controller, Assistant Controller, Accounting Manager

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

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

🎯 professional designations:

1. CPA (Chartered Professional Accountant /Certified Public Accountant)

2. CMA (Certified Management Accountant)

3. CGMA (Chartered Global Management Accountant)

4. ACCA (Association of Chartered Certified Accountants)

FP&A (Financial Planning and Analysis):

🎯 focuses on insights into financial performance for strategic decision-making

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

🎯 roles: FP&A Manager, Financial Analyst, Budget Analyst

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

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

🎯 professional designations:

1. CPA (Chartered Professional Accountant /Certified Public Accountant)

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

3. CFA (Chartered Financial Analyst)

4. CMA (Certified Management Accountant)

5. CGMA (Chartered Global Management Accountant)

6. CTP (Certified Treasury Professional)

7. CFP (Certified Financial Planner)

8. CAIA (Chartered Alternative Investment Analyst)

Strategic Finance:

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

🎯 provides insights into investment decisions, mergers and acquisitions, and capital raising

🎯 roles: Director of Strategic Finance, Corporate Development Manager, Treasury Manager

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

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

🎯 professional designations:

1. CPA (Chartered Professional Accountant /Certified Public Accountant)

2. CFA (Chartered Financial Analyst)

3. FRM (Financial Risk Manager)

4. CAIA (Chartered Alternative Investment Analyst)

5. CBV (Chartered Business Valuator)

6. CFP (Certified Financial Planner)

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  1. The Controller’s First Year Checklist

The first year as a new controller can be tough.

New company dynamics, systems upgrades, inherited discrepancies

Meeting reporting deadlines, building relationships and leading the team.

All staying focused on timely reporting, consistent compliance,

And accurately budgeting, and diligently managing 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 & Forward 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.

Download a copy of the checklist here.


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Step 2: Check out the links below and learn these 4 essential cash flow topics.

1// How to connect Cash with Profit:

2// The 3 Main Cash Flow Drivers:

3// Cash Inflows and Outflows:

4// Cash Flow Statement: Direct or Indirect:

5// The Cash Conversion Cycle:

6// The Business Cash Flow Dashboard for CFOs:

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8// Cash Flows in Capital Budgeting:

9// 16 Cash Flow KPIs:

10// The Master Budget Flow:

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