Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18,...

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Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009

Transcript of Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18,...

Page 1: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Teaching Elephants to Dance:

Financial Metrics for Non-Financial Executives

Dan RuchmanMay 18, 2009

Page 2: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

What is Business?

• Organized• Delivery of products or services• Agreed upon price• Value for value• Profit

Page 3: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

What makes for Success?

• Mission• Vision and Values• Goals• Plans• People• Is that all?

Page 4: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Success – the Intangibles

• Desire… • Communication… • Analysis…• Focus…• Wisdom

Page 5: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

What We’ll Talk About

• Accountants - Who you are• Non-accountants – what they do,

and why don’t they care?• Metrics & Management• The opportunity• When the band plays together…

the company being all it can be.

Page 6: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Accounting -- & Balance

• Does this give you comfort?

Page 7: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

The accountant,

The friend, and . . .

The dinosaur

Page 8: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Who are You?

• Accountants• Why you do what you do• Measuring • Communicating• Impacting the bottom line

Page 9: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Who are THEY?

• Non-accountants• R&D• Marketing• Manufacturing• Sales• General Management

Page 10: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Non-accountants

Page 11: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

BABEL?

• Do we all speak different languages, like the Tower of Babel, destined for confusion, miscommunication, miscues, missteps and costly errors?

Page 12: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Language of the Universe

La matematica è l'alfabeto nel quale Dio ha scritto l'universo.

– Galileo Galilei

Page 13: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Language of Business

La finanza è la lingua nel quale Dio discute degli affari.

Finance is the language of business.

Page 14: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Language of Finance

• P&L• Balance Sheet• Cash Flow• Financial Ratios• Footnotes• Investor info, trends, other

numeric but non-financial things

Page 15: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

P&L – or Income Statement, or Stmt of Operations, or Statement of Earnings

• How much did we sell – goods & services

• What did it cost us?• Did we make money?

• Is our business growing?• Is our profitability good, bad,

improving?

Page 16: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Basic P&L

($ in 000s)2008

Revenue (Sales) $25,000

Cost of Goods Sold (COGS) 10,000

Gross Profit 15,000

Operating Expenses 10,000

Profit Before Tax (PBT) 5,000

Taxes 1,000

Profit After Tax $4,000

Page 17: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

P&L: A lot of terms in a short amount of time

• P&L – the income side• P• L• Income• Sales – gross, net, etc.

Page 18: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

More P&L - Costs

• Product costs – Fixed, VariableStandard, process, totalSemi-FixedFOHVOHInternal costs vs vendor costsOutsource vs buying from sister coDistribution, warehousing

Page 19: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

More P&L – Expenses

• Marketing• Selling• R&D• G&A

The Power of DefinitionsAdding value with metrics

Page 20: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

P&L – Terms & Ratios

• “Profit Margin”…? Gross Margin Operating Margin Contribution Margin Pre-tax vs Post-tax EBITDA

Page 21: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

A word on EBIT…

. . .Earnings Before Irregularities

and Tampering?

Page 22: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Another Word on EBITDA

Earnings Before I Tricked the Damn Auditor

Page 23: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

A Final Word on EBITDA

• Earnings Before: Interest Taxes Depreciation Amortization

. . . and it MEANS?

Page 24: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

EBITDA

A popular metric designed to focus on the core operations of the company, excluding non-cash and other items beyond the control of the operating side of the business.

… and some CAVEATS

Page 25: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Key P&L Metrics

• Sales growth year-over-year• Earnings growth year-over-year• Gross profit margin percentage• Operating expense % of sales• Profit Margin: Operating, and Net

Page 26: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Risk versus Reward

The basic concept : If you take on more risk, you should only be doing it if you stand a chance of getting a higher reward.

Page 27: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

More on Risk & Reward

• The grocery business

• The restaurant business

• The mob

Page 28: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Return: A Holy Grail

Page 29: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Balance Sheet

• What do we own?• What do we owe?

• Are we financially strong?• How does our financial position

compare with last year?

Page 30: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Basic Balance Sheet

2008

($ in 000s)

Assets

Current Assets 10,000

Fixed Assets, less Depreciation 12,000

Total Assets 22,000

Liabilities

Current Liabilities 5,000

Long-term Debt 12,000

Total Liabilities 17,000

Equity 5,000

Total Liabilities and Equity 22,000

Page 31: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Balance Sheet - Terms

ASSETS• Current Assets• Accounts Receivable• Inventory• Intangible Assets• Fixed Assets• Depreciation

Page 32: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Balance Sheet – The Other Side

LIABILITIES• Current Liabilities• Accounts Payable• Long Term Debt• Convertible Debt• Off-Balance Sheet Debt

Page 33: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Balance Sheet: Equity

EQUITY• Stock – Common vs Preferred• Retained Earnings• Diluted stock ownership: options

Page 34: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Balance Sheet:Key Metrics

• Liquidity measures• Current Ratio• Quick Ratio

• Debt-to-Equity (D/E)• Negative Equity

Page 35: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Cash Flow

• How much $ did we start the year with?

• How much $ did we end the year with?

• Where is cash being used, and from where is cash coming in?

Page 36: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Cash Flow – Key Terms

• Free Cash Flow• EBITDA• Cash Positive• Cash Negative• Capital Intensive• Cash Burn Rate

Page 37: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Cash Flow – Key Issues

• Burn rate vs Cash Balance vs Earnings

• Future capital spending needs• Cash from sale of stock – When?

Why?• Paydown of debt – When? Why?

Page 38: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Other Key Metrics

• Return on Assets (ROA, RONA, RNOA)

• Return on Equity (ROE)• Earnings per share (EPS)• Price/Earnings Ratio (P/E)• Free Cash Flow – Be careful!• Inventory turnover

Page 39: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Concepts

• Accuracy versus Precision• Information is Power: Share it• Know Your Audience• Thinking: The Box• The Price of Miscommunication• The Opportunity

Page 40: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Thinking – Inside, Outside, Through the Box

Page 41: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

A Story

19th Century Shoe Salesmen

Page 42: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Questions to be Answered

• Is the company financially sound?• Has the right degree of financial

savvy?• Right balance of bottom line focus vs

market share vs growth vs customers, vs…?

• Would I invest in this company?

Page 43: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

• The Price

•The Challenge

•The Opportunity

Page 44: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Galileo… Updated for Business• Mathematics is the language by which

God has written the universe.−Galileo

• Today’s reality: Finance and accounting are the language by which business writes and measures its successes and it failures.

Page 45: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Why You’re Here

"You are not here merely to make a living. You are here in order to enable the world to live more amply, with greater vision, with a finer spirit of hope and achievement. You are here to enrich the world, and you impoverish yourself if you forget the errand."

-- President Woodrow Wilson

Page 46: Teaching Elephants to Dance: Financial Metrics for Non- Financial Executives Dan Ruchman May 18, 2009.

Teaching Elephants to Dance

Financial Metrics for Non-Financial Executives

Dan RuchmanRuchman & Associates Creative and Intelligent Solutions for Finance, Operations & Strategy. Lighting the Path to Profitability Office: 858.784.0104 [email protected]