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Understanding the difference between EBITDA and Net Income is crucial for anyone involved in finance, whether you’re a business owner, investor, or financial analyst. Both metrics provide insights into a company’s profitability, but they do so in different ways and serve different purposes. Lets understand the differences.
What is EBITDA?
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of a company’s overall financial performance. It strips away non-operational expenses to provide a clearer picture of operational profitability.
Interested in understanding EBITDA and performing income statement analysis with more details. Check out the advanced income statement (and EBITDA) analysis course: P&L and EBITDA analysis course. Specially, if you are involved with presenting income statement and financial results during management meetings, this course is essential to understand the drivers behind EBITDA performance and how to compare and present results vs budget and previous periods.
For example, if a company has a net income of $5 million, interest expenses of $1 million, taxes of $2 million, depreciation of $3 million, and amortization of $1 million, the EBITDA would be:
EBITDA=5+1+2+3+1=12 million dollars
What is Net Income?
Net Income, also known as net profit or the bottom line, is the total profit of a company after all expenses have been deducted from total revenue. This includes operating expenses, interest, taxes, and non-cash items like depreciation and amortization.
Calculation of Net Income
Net Income is calculated as: Net Income=Total Revenue−Total Expenses
For example, if a company reported total revenues of $394 billion in 2023 and total expenses (including cost of goods sold, operating expenses, interest, and taxes) of $300 billion, the net income would be: Net Income=394−300=94 billion dollars
Key Differences Between EBITDA and Net Income
1. Inclusion of Non-Operational Costs
EBITDA excludes interest, taxes, depreciation, and amortization, focusing solely on operating performance. Net Income includes these costs, reflecting the overall profitability of the company after all expenses.
2. Impact of Capital Structure
EBITDA is unaffected by a company’s capital structure (i.e. how the business activities are financed e.g. shareholder’s equity vs debt) since it excludes interest expenses. Net Income, however, is influenced by the capital structure because it includes interest payments.
3. Tax Considerations
EBITDA is before tax, providing a pre-tax measure of profitability. Net Income is after tax, giving a post-tax measure.
4. Non-Cash Items
EBITDA excludes non-cash items like depreciation and amortization, while Net Income includes them. Depreciation and amortization are called non-cash items because they do not represent an actual outlay of cash, but an allocation of the cost of long-term asset. The actual cash outlay could be completely different depending on the terms of acquisition of asset (e.g. advance payments, or stages of payments).
Example
For example, a company reported a net income of $12.6 billion in 2023, with interest expenses of $1.2 billion, taxes of $3 billion, depreciation of $4 billion, and amortization of $500 million, the EBITDA would be:
EBITDA=12.6+1.2+3+4+0.5=21.3 billion dollars
Common Mistakes and Misconceptions About EBITDA and Net Income
1. EBITDA is Not Cash Flow
A common misconception is that EBITDA represents cash flow. However, it does not account for changes in working capital (accounts receivable, accounts payable and inventory) or capital expenditures (such as purchase of land, building etc).
2. Ignoring Interest and Taxes
Some analysts mistakenly use EBITDA as a proxy for profitability without considering the impact of interest and taxes. Note that although excluded from EBITDA calculation, interest and taxes still need to be paid by the company, and impact cash flow and ability to settle due liabilities of a company.
3. Depreciation and Amortization are Non-Cash, But Important
While EBITDA excludes these non-cash items, they are crucial for understanding long-term asset and investment impacts. This is because the company acquisition of long-term assets still requires cash outflow, and most organizations require a certain level of acquisition related outflow on a constant basis, ignoring which could result in incorrect assumptions related to the cash flow of a company, and hence its valuation.
4. EBITDA Overstates Profitability
Because it excludes significant costs, EBITDA can sometimes paint an overly optimistic picture of profitability. You may encounter companies with EBITDA margin of above 20%-30%, but net income % of below 5%, or even negative net income margin.
5. Different Uses, Different Interpretations
Using EBITDA in the wrong context, such as comparing companies with vastly different capital structures, or business landscapes can lead to misleading conclusions.
Some points to consider related to EBITDA
1. Adjusting EBITDA for Non-Recurring Items
To get a clearer picture, adjust EBITDA for non-recurring items like one-time gains or losses. This provides a more normalized view of operational performance.
2. Comparing Across Industries
Use industry-specific EBITDA multiples for more accurate comparisons. Different industries have varying capital and operational structures, impacting EBITDA differently.
3. Linking EBITDA to Operating Cash Flow
To approximate operating cash flow, add changes in working capital and capital expenditures to EBITDA. This provides a more comprehensive view of financial health and cash flow.
Interested in understanding EBITDA and performing income statement analysis with more details. Check out the advanced income statement (and EBITDA) analysis course: P&L and EBITDA analysis course. Specially, if you are involved with presenting income statement and financial results during management meeting, this course is essential to understand the drivers behind EBITDA performance and how to compare and present results vs budget and previous periods.
Management Business Reviews (MBRs) are a crucial aspect of any organization’s decision-making process. These periodic meetings bring together key stakeholders to assess the company’s performance, review financial results, discuss strategies, and make informed decisions. In this article, we will delve into the significance of MBRs and provide valuable insights on how to successfully present financial results during these critical meetings.
Understanding Management Business Reviews (MBRs):
MBRs, also known as Business Performance Reviews (BPRs) or Executive Business Reviews (EBRs), are structured meetings that typically occur monthly, quarterly, or annually. Almost every business organization conducts these types of meetings in some form. Their primary objectives include:
Performance Assessment: Evaluate the company’s overall performance against predefined goals and key performance indicators (KPIs).
Strategy Alignment: Ensure that current activities align with the company’s strategic objectives.
Issue Identification: Identify challenges, roadblocks, and opportunities for improvement.
Decision-Making: Make informed decisions based on the data and insights presented.
Key Components of a Successful MBR:
To conduct a productive MBR, consider the following components:
1. Clear Agenda:
Define a well-structured agenda outlining the topics to be discussed. Include time slots for each item to maintain focus and manage time effectively. It is a good idea to develop a template (e.g. using PowerPoint), that is shared with business and financial leaders, to be followed. This helps ensure consistency and alignment. Specially, if there are multiple business units having separate business reviews.
2. Financial Reports:
Financial results are a MUST have for all management business reviews. Present comprehensive financial reports, including income statements, balance sheets, and cash flow statements. Highlight key financial metrics and variances from previous periods or targets. Whether you are a Finance professional or business leader, it is essential that you know and understand your numbers. This comes with time and experience, but there is a base level of technical know-how that is required to explain financial reports. Here is a course we have developed to analyze and explain income statement and EBITDA performance in management meetings. Click on https://ebitda.thinkific.com/courses/learn to access the course at a special (heavy) discount for the readers of this article.
3. Operational Metrics:
Incorporate operational metrics that provide a holistic view of the business. These may include customer satisfaction scores, employee productivity, or market share data. Again, it is key to understand the calculations, how the KPIs are calculated in your organization, any issues with data accuracy and how to interpret those KPIs.
4. SWOT Analysis:
Conduct a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to assess the internal and external factors affecting the company’s performance. You should always have a SWOT analysis available for discussion. It is a good idea to keep it as a LIVE document and update based on the most recent circumstances (both external and internal).
5. Strategy Review:
Review the current strategic initiatives and their progress. Discuss any necessary adjustments to align with changing market conditions or organizational goals. Strategies can and should be adjusted based on market conditions. Regularly reviewing strategies helps the business stay ahead of the competitors and market fluctuations.
6. Action Items:
Document action items arising from the meeting, assign responsibilities, and set deadlines for implementation. Ensure follow-up in subsequent MBRs.
Successfully Presenting Financial Results in an MBR:
Now, let’s focus on how to effectively present financial results during an MBR:
1. Know Your Audience:
Understand the background and knowledge level of the participants. Tailor your presentation to address their concerns and interests. There usually are some current issues or hot topics related to each business unit. Make sure those are addressed. Be thoughtful in presenting the analysis or update on the issue. How can you use visualizations and charts to convey the message more concisely.
2. Use Visual Aids:
This point is obvious. Utilize charts, graphs, and tables to illustrate financial data. Visual aids make complex information more digestible and memorable. The better you are at doing this, the more knowledgeable and competent you will be perceived. This could be the differentiating factor between your presentations and others in the organization.
3. Focus on Key Metrics:
Highlight key financial metrics that align with the company’s goals and strategies. These may include revenue growth, profitability, cash flow, and return on investment. Most leaders already like to see certain metrics and KPIs and request for them. Make sure those are included, but think outside the box. What additional information that is relevant and insightful can you add. Again keep it simple and intuitive. Less is more.
4. Explain Variances:
If there are significant variances from previous periods or targets, provide explanations. Was the variance due to external factors, changes in market conditions, or internal decisions? This can be a tough area for many finance and non-finance leaders. We have developed a thorough course on explaining income statement variances vs budget and prior year. This course helps you explain variances in amounts and percentages e.g. change in gross profit % or EBITDA %. We highly recommend you take this course by clicking on https://ebitda.thinkific.com/courses/learn
5. Tell a Story:
Narrate the financial results as a story. Always keep this in the back of your mind. Can you convert the numbers, tables, charts and graphs into a story? Explain how the numbers translate into real-world impact, both positive and negative.
6. Provide Context:
Offer context for the financial results. Discuss industry trends, competitive positioning, and market dynamics that may have influenced the numbers.
7. Discuss Risk Mitigation:
Address any financial risks and mitigation strategies. This demonstrates foresight and proactive planning.
8. Offer Solutions:
If there are financial challenges or underperformance, propose solutions. Engage the participants in a constructive discussion about potential actions.
9. Q&A and Discussion:
Encourage questions and discussions throughout the presentation. Be prepared to provide detailed answers and engage in productive dialogues.
10. Summarize Key Takeaways:
Conclude the financial presentation by summarizing the key takeaways, action items, and decisions made during the meeting.
Conclusion:
Management Business Reviews are essential for organizations to assess their performance, align strategies, and make informed decisions. Effectively presenting financial results during an MBR requires thorough preparation, clear communication, and a focus on key metrics and actionable insights. By following these guidelines, financial professionals can contribute to more productive and insightful MBRs, ultimately driving the success of the organization. Remember that MBRs are not just about numbers; they are a platform for collaboration, problem-solving, and strategic planning.
If you would like to take the first step towards really understanding income statement performance and present variance explanations during MBRs, check this video out. It should help you significantly.
A career as a financial analyst can be rewarding and challenging, offering the opportunity to analyze and interpret financial data and make informed recommendations to help businesses and organizations make sound financial decisions. But is a financial analyst career right for you? Here are some things to consider:
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
Do you have an aptitude for math and finance? Financial analysis involves working with numbers and financial data, so it’s important to have strong analytical and problem-solving skills. If you have a natural aptitude for math and finance, or if you have a degree in a related field such as economics or business, you may be well-suited for a career as a financial analyst.
Do you enjoy working with data? Financial analysts spend much of their time analyzing financial data, so it’s important to enjoy working with numbers and finding patterns and trends. If you enjoy working with data and are comfortable using tools such as spreadsheets and financial software, you may be well-suited for a career as a financial analyst.
Do you have strong communication skills? Financial analysts need to be able to clearly and effectively communicate their findings and recommendations to both technical and non-technical audiences. If you have strong communication skills and are comfortable presenting information in a clear and concise manner, you may be well-suited for a career as a financial analyst.
Do you have a strong attention to detail? Accuracy is crucial in finance, and financial analysts need to have a strong attention to detail in order to avoid errors and ensure that financial information is reliable. Attention to detail is important in finance, as even small mistakes can have significant consequences. If you have a high level of attention to detail and can work accurately and efficiently under pressure, you may be well-suited for a career as a financial analyst.
Do you have strong time management skills? Financial analysts often have to juggle multiple tasks and meet tight deadlines, so the ability to manage time effectively is important. If you have strong time management skills and are able to prioritize tasks and work efficiently, you may be well-suited for a career as a financial analyst.
Do you have an interest in business and finance? A career as a financial analyst can be rewarding for those who are interested in understanding how businesses and organizations operate and make financial decisions. If you have an interest in business and finance and enjoy staying up-to-date on economic and market trends, you may be well-suited for a career as a financial analyst.
Are you willing to continuously learn and grow? The finance industry is constantly evolving, and financial analysts need to be able to adapt to new technologies and techniques. If you are open to learning and are willing to continuously improve your skills, you may be well-suited for a career as a financial analyst.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
If you have a strong aptitude for math and finance, enjoy working with data, have strong communication and attention to detail skills, and are interested in business and finance, a career as a financial analyst may be a good fit for you. By continually learning and growing, financial analysts can position themselves for success in an ever-changing industry.
If you would like to learn these skills, including help with Microsoft Excel, accounting and financial analysis, make sure you connect with us through one of the following channels.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
In this video, I explain vertical analysis of income statement (in Excel) by comparing the real income statements of Coca Cola and Pepsi.
What is vertical income statement analysis?
Vertical analysis is a top to bottom analysis of income statement where amounts for all line items in the income statement are converted to a percentage of a base amount (usually total revenue or Net Sales). This analysis is done to see the relative size of each type of income or expense with respect to the revenue (base).
When is Vertical Analysis used?
Vertical analysis of income statement can be used when trying to understand the size and significance of the components of income statement (hence reflected in percentage), and also to compare financial statements of difference companies either in the same or different industries, which may or may not be of similar size or revenue base. Converting amounts into percentage gives a particularly good idea for comparison, as you will see in the video above. Although Pepsi’s total revenue is more than double Coca Cola’s revenue, you can still compare the two income statements and analyze them to make informed decisions.
Vertical Analysis vs Horizontal Analysis
While vertical analysis looks at the components of income statements and their relative size, horizontal analysis looks at changes in the financial statements over a period of time. It is usually reflected in terms of year over year growth or decline.
Course: If you would like to learn in detail, how to calculate sales variances and the impact they have on sales $, profit $ and profit margin %, and how to explain performance vs budget and prior periods, click on the link for a detailed video course (at a special price). You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel templates. https://www.udemy.com/course/learn-financial-analysis-of-variances-in-profit-and-sales/?couponCode=YOUTUBE10
Hope you find the information in the video helpful. If you like to watch more videos in accounting, financial analysis and controller ship, videos that help you directly in doing your job, subscribe to my channel. If you liked the video, I would love if you could LIKE it and leave a comment. If you have any questions or feedback, again leave a comment. Lets stay connected at #learnaccountingfinance.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
Learn how to sort pivot table data from largest to smallest values and vice versa for multiple columns including Customer names, months and Values. In this video, I will explain the basics and advanced uses of Sorting Pivot Table Data.
Sort Pivot Table values from Largest to Smallest:
We start with very simple sorting of Customer Names based on the largest value of Sales amount. Then we start adding other fields in the pivot table and see how it impacts the Sorting.
Sort Pivot Table Manually
E.g. we add the countries in the Pivot Table report, and manually change the order resulting in Manual Sorting of the Data.
Sort Pivot Tables by Subtotals and Grand totals
We can also sort Pivot Table based on subtotal values or Grand Total values. Just click on the Cell for the field you are looking to sort and then click the sort ascending or Descending button for this to work.
Checking Pivot Table Sort Settings
We can also check current Pivot Table Sort settings by right clicking on any field and Value and then clicking on Sort à More Sort Options. This shows exactly how the current sorting is setup in the Pivot Table.
Sort Pivot Table by Months and Dates
We also take a look at how we can sort dates or months in Pivot Tables. By default, if the dates or months are entered in correct format, the Pivot Table will sort them based on Oldest to Newest. However, we can change that setting and Sort based on values for each date as well as sort from Newest to Oldest date or month.
Issues with Sorting, Errors in Sorting data
Sometimes, you may not be able to sort values when there are no subtotals or Grand Totals to click and Sort on. In this case, you can still sort Pivot tables data even though you do not add the subtotals. You can do this by right clicking on the Field you want to sort by values, and then click on Sort, and then More Options. Then Choose Ascending or Descending Sort option. Finally, select the value field you want to sort based on, from the Drop down selection available.
Hope you find the information in the video helpful. If you like to watch more videos in accounting, financial analysis and controller ship, videos that help you directly in doing your job, subscribe to my channel. If you liked the video, I would love if you could LIKE it and leave a comment. If you have any questions or feedback, again leave a comment. Lets stay connected at #learnaccountingfinance.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
How to lookup and have an exact match between two columns where the spellings are different with all kinds of spelling mistakes, spaces and characters? In this video, I will show how you can use Excel fuzzy lookup tool to solve this time consuming problem.
Often you find yourself comparing two reports or data sets where the names or text strings are similar but do not match exactly. As a human, you can tell that they are the same, but you cannot look up data using the exact match features of Vlookup or Xlookup. In this case, the Fuzzy lookup tool comes in handy. In this video, I show you how to install and use the Add-in to lookup Company names, or Customer Names from two separate data sources, so that you dont have to spend time manually finding the names and then copying and pasting the values from one table to the other.
I have used this method when trying to compare sales reports from two different sources which have the customer names, one report has the freight costs by customer and the other report has the sales by customer. When I try to bring the two together by using a vlookup or an Xlookup, I am unable to do that because the names do not exactly match. In addition, the differences in spelling do not follow a set pattern, so I cannot even use wildcard matches or be creative about using additional Excel formulae to help with the lookup. In this case technology becomes really useful. My recommendation is to use the Fuzzy lookup tool or add-in which can be downloaded from the Microsoft website and installed in Excel. This is such a time saver. I will show in the video the setup of the tables to use the fuzzy logic add-in as well as the use of the “Similarity threshold” to help lookup majority of the company names in the example. By the way, the sample data includes Revenues and Net Profits for 25 of US top Fortune 500 companies by revenue. You can also download the sample Excel from the link provided. Hope this video helps!
Hope you find the information in the video helpful. If you like to watch more videos in accounting, financial analysis and controller ship, videos that help you directly in doing your job, subscribe to my channel. If you liked the video, I would love if you could LIKE it and leave a comment. If you have any questions or feedback, again leave a comment. Lets stay connected at #learnaccountingfinance #lookupnames #spellingdifference
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
Learn how to use Excel XLOOKUP and what this function can do for you. In this video, I will share 7 practical ways in which you can use the new XLOOKUP function which serves as a perfect replacement for both VLOOKUP and XLOOKUP.
We start with a real life work situation where you have to respond with data requests quickly. The first situation being where the General Manager is asking for Sales for specific customers within 5 minutes. Not only do you provide him the information requested within 5 minutes, but you go above and beyond to provide additional information that he may be interested in. In the second example, your Manager is asking you to complete and send the sales commission file based on annual sales and commission plan. You use XLOOKUP Match mode functionality to quickly respond to the Manager with the completed sales commission report.
In the third example, you have been asked by the Purchasing Manager to provide him help with pulling the most recent purchase price from a long list of materials and purchase history. You use the Search Mode argument of the XLOOKUP function to reverse the order of the data and provide by material SKU, the most recent purchase price and earn bragging rights.
In the fourth example, the external auditors have asked you to provide information related to customers, in a layout which is the opposite of how your sales data is set up. Knowing well that XLOOKUP can replace horizontal lookup or HLOOKUP, you quickly pull the information in the requested format and respond to auditor’s request.
Finally I share a tip that I have personally been using since the VLOOKUP days which would help you avoid XLOOKUP error, when by mistake the data ranges (lookup array and return array) are not aligned. This tip actually saves a lot of time as well and has been one of my favorite tips.
If you have more questions, or would like to learn about advanced ways of using XLOOKUP, please leave a comment. If you enjoy the information provided in the video, please do not forget to press Thumbs Up
In this article, we will describe and explain some of the terms most commonly used during discussions of financial performance and business meetings. Understanding what these terms means is essential if you are a new or potential Corporate Finance professional such as a Financial Analyst in the FP&A department, or even a new Accounting and Finance professional. It helps significantly in the job interview process as well if you are interviewing for a job in such Finance roles as you are expected to know what they mean and demonstrate experience of their use.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
The key financial and business terms we will discuss in this article are as follows:
MTD, QTD, YTD
Plan, Budget, Forecast, LE
Gross Profit, Net Profit, EBIT and EBITDA
Variance, Favorable and unfavorable variance
YoY, vs LY, vs Bud
MTD – represents Month to Date. The ‘To date’ captions are usually used to represent financial performance or activities for a period of time. MTD will always be followed by the name of a month e.g. “MTD August” means results or performance from the start of August (i.e. 1st August) to the current date of the month of August. However, MTD is more commonly used to refer to the entire month, and can also be used to refer to a month that has already finished. For example, if you are currently in the month of August, then ‘MTD April’ will represent the financial performance for the entire month of April.
QTD – represents Quarter to Date. QTD represents the performance from the start of the Quarter to the current date. E.g. if the company’s financial or fiscal year runs from January to December, and you are looking at the performance of Q4 (ie October to December), QTD would represent performance for the period starting from October 1st to the current date. If the current date is December 15th, then QTD will represent the period from Oct 1st to Dec 15th (roughly 2.5 months).
YTD – represents Year to Date. This term refers to the financial performance, KPIs or activities from the the start of the year to the current date. Again, most commonly, this term is used to refer to the period from the start of year to the end of the most recent month. Similar to MTD, YTD is also followed by month. So, for example, “YTD March” refers to the results related to the period starting from the 1st of January and finishing on March 31st. It is important to remember that the fiscal year or reporting year of some companies may not be the standard January to December period. For example, for a company, the financial reporting year may start from July and end in June of the next year. In this case, the YTD period will start from July, and in this case, YTD September will only reflect the performance for the three months period from July to September.
Note: If you would like to learn in detail, how to calculate sales variances and the impact they have on sales $, profit $ and profit margin %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel templates.
Plan or Budget – Most companies have an annual budget cycle, where well before the start of the year, an extensive and thorough exercise is conducted to plan and quantify the expected (or desired) financial results of the next year. The final outcome of the exercise is called “Budget” or “Plan”, and is represented in the form of budgeted income statement, budgeted balance sheet, and often a budgeted cash flow statement. However, a lot of detail may be available as back up to the numbers reflected in these budgeted financial statements. For budgeted income statement, it is common to start with YTD actual performance of the current year, and then add forecast for the rest of year. The full year forecast (including YTD actual numbers) for the current year then becomes the basis for the next year budget. Budgeted balance sheet and budgeted cash flow statements follow the budgeted income statement with additional assumptions for the budget year.
Forecast – The budget or plan is prepared usually once a year. However, things change quickly, therefore many organizations have forecasts in place as well. A forecast is an estimate of the financial performance, but is typically less extensive and thorough when compared with the budget exercise. The frequency of forecasting also varies. Some companies revise forecasts every month, while others may revise them every quarter or even every six months. It is important to note that while forecasts are revised frequently, the budget remains the same. Therefore, when comparing actual results, often the comparison is done both against the Plan (Budget) as well as the current forecast. This is because budget is not rendered completely irrelevant as a result of the availability of a Forecast. Some bonuses and commissions might still be linked to the original budget, and therefore keeping an eye on the performance vs budget is important.
LE – represents Latest Estimate. This term is used to define the most recently communicated or approved estimate of financial performance, specially related to sales. It is similar to a “forecast”, but different in that a forecast is usually submitted at the start of a quarter or a month, but latest estimate can be provided in the middle of a month or quarter as well. A typical example would be, for example at the start of the month of January, a sales forecast is submitted, lets say of $100,000 for the month. However, every Monday, the forecast is reviewed, and then based on new information, the forecast for the month is revised. Lets say, on the 15th of January, based on actual sales so far and information provided from Sales team, it now appears that sales for the month of January by the end of the month will be $120,000. This will be presented in the form of Latest Estimate (LE). So the forecast is still $100,000, but the latest estimate is now $120,000. Usually, a separate column is used to reflect latest estimate next to budget, forecast or prior year actual numbers.
Note: Not all organizations use Latest estimate, and often the term Forecast is used interchangeably with latest estimate.
Gross Profit – Gross Profit can be calculated with the following formula:
Gross Profit = Revenue – Cost of goods/services sold
where revenue represents the proceeds from the sale of products or services, and Cost of goods/services sold represents the cost of producing or procuring the goods, or in the case service, the cost of rendering the service related to the revenue earned.
What is important is that for the calculation of gross profit, other expenses required to operate the business (also known as Operating expenses) are not deducted from revenue. Gross profit only looks at the profit when considering costs of product or service, and not the operating costs of business. Here is a video I created explaining Gross profit, and the difference between Gross profit and Net profit in more detail…
Net Profit – Net Profit considers all the costs including cost of operating business such as selling, general and admin costs including taxes and interests etc. So, Net profit can be calculated with the formula below:
Net Profit = Gross Profit – Operating costs – interest and taxes
or Net Profit = Revenue – Cost of goods/services sold – Operating costs – interest and taxes
Net profit is also referred to as the bottom line, as this is literally found at the bottom of the income statement, and also reflects the overall net profitability of the business.
FYI: Revenue is often referred to as “Top line” as most income statements start with Revenue at the top.
EBIT – represents Earnings Before Interest and Tax, and is a very commonly used measure of the financial performance EBIT reflects the net profit or net income of a business excluding a) interest and b) tax expense, and can be represented with the formula:
EBIT = Net Profit plus (Interest and Tax expense)
What is the importance or use of EBIT? EBIT simply shows you the operational performance of a business before considering interest and tax expense. Think of it this way … if you are an investor looking to invest in a company, you are interested in knowing the EBIT from operations of a company because the interest and tax expenses may not remain the same when you buy the business. You may have extra cash available and might not need the same level of borrowing as the existing business, or the taxation rules that apply to you may be completely different. By looking at EBIT, you can tell exactly what a business can make from its operations on its own before factors such as interest and tax are taken into account.
EBITDA – represents Earnings Before Interest, Tax, Depreciation and Amortization. In calculating EBITDA, we remove depreciation and amortization expenses in addition to interest and tax expenses. Depreciation and amortization are often referred to as ‘non-cash’ expenses. This is because, the actual outlay of cash has often already taken place in the past. Depreciation is a systematic allocation of the cost of fixed assets over the useful life of the asset. So, for example, if a building is purchased at the cost of $1 million, and the useful life of the building is determined to be 25 years. Although the total cost of purchase ($1 million) may have been paid in year 1, a portion of the cost will be recorded in the income statement every year till the completion of the 25 years. Similarly, amortization is the allocation of cost of intangible periods over a pre-defined period of time.
Why is EBITDA important? When looking at the net profitability of a business, depreciation and amortization create two problems; 1) timing difference between the actual cash flow and the recording of expense in the income statement (as in the example above), and 2) different companies my use different methods or assumptions when calculating depreciation and amortization. As a result of these problems, it is often a good idea to take a look at EBITDA, specially when comparing two or more companies for their operational performance. EBITDA helps you compare the performance of companies by excluding the impact of financial, accounting and taxation decisions.
YOY – represents Year over Year. This usually represents a comparison of prior year to current year. You will hear the phrase ‘Year over year growth’ or ‘year over year decline’. A YoY growth of 2% in sales e.g, represents that sales have increased by 2% vs last year. The formula for this will be:
YoY Sales Growth = (Current year Sale – Prior year sale ) / Prior Year Sale
However, the calculation does not need to be for the entire 12 months period. You can also have YoY growth or decline for a period of three months, six months or any number of months or days. For example, you may compare the sales of January to March period of last year with the same period (January to March) of the current year. The key is to compare the same number of months, when doing this comparison.
Variance – Variance simply represents difference. It can represent difference from target, difference of previous performance, difference from estimate or expectation and difference from budget.
Unfavorable Variance – For example, if the target for a sales representative for a month was to make a 100 sales of a given product. but the actual sales he or she made in that month turned out to be 90, the variance in this case is -10. It is denoted by a minus or negative sign because it is an unfavorable variance. This is because the more a sales representative can sell, the better it is for the company as well as the sales representative. Therefore, selling less than target is an unfavorable variance and is a negative situation denoted by a negative sign.
Favorable Variance – If, however the actual sales were 105 units, this would be a favorable situation and the variance would be represented by a positive sign, being +5 units.
Note that the higher the sales or income vs target, the more favorable the variance is. However, the higher the expenses are vs target the more unfavorable the variance, as expenses have an unfavorable impact on the profitability of a company.
vs LY and vs Bud – vs LY represents Versus Last Year (often also referred to as versus prior year), and vs Bud represents Versus Budget. Both of these terms are used to compare against actual current year performance. So, for example, vs LY would represent the difference between actual results this year, and the results for the same period last year. Similarly, vs Bud will represent the difference between actual results this year, and the amount budgeted for the current year. As an example, if actual revenue for current year was $10,000, budgeted revenue for current year was $12,000 and revenue from last year was $7,000. Then, in this case variance vs last year is +$3,000 (because actual sales in the current year are higher) and variance vs budget is -$2,000 (because actual sales in the current year are below the budgeted amount).
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
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We also have a YouTube channel (called LearnAccountingFinance) with helpful accounting and finance, Microsoft Excel and Finance career related videos. You can find our channel by clicking on the link LearnAccountingFinance.
When I first started analyzing and presenting financial results to my organization’s leadership, I had no idea what I was doing wrong. I just felt something was not OK. I was not making a good impression. I would leave the meetings with this empty feeling. It was a little embarrassing, and painful at times. Can you relate?
This guilty feeling helped me, however, as I decided to learn and improve my financial analysis and presentation skills. That was a great decision, as things only got better from there. In this article, I will share with you four key mistakes that many beginner and often advanced finance professionals make when presenting financial results in management meetings. I will provide solutions as well, so that you can rectify these mistakes immediately, and become an indispensable and successful finance professional that you deserve to be.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
#1: Presenting Numbers, Not telling Stories
The number 1 mistake that most beginner financial analysts, accountants, controllers and sometimes even CFOs make is present the results in the form of tables and numbers, year over variances and percentages. It is as if they are reading the results on the slides.
What is wrong with that, you ask? The problem with this approach is that it is much harder to comprehend. People loose focus quickly of what you are saying. They will not remember or even understand much of what you are saying. Even though, you may have provided some good information, your audience will not be able to absorb it. May be that is why, accountants and finance professionals are sometimes seen as boring. We do not leave an impression by sharing financial results in this format. Most of what we say during such meetings is forgotten before the meeting is over. The biggest problem with this approach is that the key message (if we had any) is lost in the details.
Note: If you would like to learn in detail, how to calculate sales variances and the impact they have on sales $, profit $ and profit margin %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel templates.
Solution:
Presenting results is your opportunity to shine. Each slide of your presentation should have a key message. That key message should also be the title of your slide. Your overall presentation should be a collection of key messages that can be narrated in the form of a story. If you structure your presentation this way, presenting it will be much easy. You will always know what to say and where you are going. It will be a coherent and thoughtful analysis with key takeaways for your audience. They will love what you have to say and remember it. Some may even get inspired!
#2: Too many Ideas in one Place
A lot depends upon the setting you are in. Is it a short, 15 minutes financial results update?, or a longer, more detailed business review? However, when we prepare our presentation slides, often we do not think carefully about what goes into each slide. Often, we lump multiple ideas or topics into one slide. This results in confusion, and our message is too broad. We seem to be jumping from one topic to another and then back quite frequently.
Solution:
To avoid this situation, always create one slide for each topic. If more than one topic or issues are to be discussed, create separate slides for each one of them. Your audience finds it difficult to comprehend more than 5 objects on one slide any way. This includes a combination of pictures, tables and text. So, try to limit the number of objects to 5.
Do not include long textual paragraphs and definitions. Use minimal amount of animations, only to emphasize key points. For example, if your key message in a slide is mainly about Sales price increase and its impact on profit margin, you are better off not including numbers for Selling, general and admin expenses. If you are comparing prior year vs current year, you do not need to include budget or plan numbers in that slide.
If you have a lot to cover but not much time available, rather than skimming through each slide quickly, skip a few slides, focus on hammering home the key message on a lesser number of slides instead of going through all of your material.
#3: Data Issues and related Disclaimers:
One of the most common problem that we accountants and finance professionals face is the availability of reliable data that can be used confidently to analyse and explain results. While your colleagues and leadership may appreciate that, the truth is they still expect you to come up with conclusive explanations regardless. I struggled with this one a lot initially. I thought that letting everyone know where the data has holes will help everyone understand that they cannot completely rely on the information. And therefore, should not make business decisions solely on the basis of the available analysis. The problem with this is that they still have to make decisions. They want you to provide them some conclusive guidance and you are not helping them by telling them that they cannot rely on the information you provided. It is like watching a movie without an ending. It can get pretty frustrating.
Solution:
Although there is no easy fix for this problem, the first step is to acknowledge the challenge your audience is facing. The next step is to identify what elements of the financial information can be relied upon to a reasonable degree. You can always look at the data available from multiple angles and validate so that you can conclude to a reasonable level of certainty.
You have to take this as a challenge, and deal with the uncertainty. This is a key area where accounting and finance professionals can and should add value. Anybody can look at reports and summaries. Where we add value, is that despite problems with data, we can validate the information and make suggestions. This comes with time and experience, but you have to start by taking on this challenge. Trust me! you will discover that you have not challenged yourself enough in the past. Even the incomplete and crappy data gives you some valuable insights that you can share with your leadership. You only get better as you practice this skill.
#4: Most credible source of financial results and analysis
This represents the other side of the balance for finance professionals, and is also a key job requirement. If you are in the accounting or finance profession, specially if you are involved in presenting financial results, this is an absolute must for you. When companies need new products or improvements in existing products, they look to engineers. When they need talented people to hire, they look to HR. Similarly, when they need accurate financial information and advice, they look to finance professionals like You and I to guide them and solve their problems. Do you provide accurate reports, analysis and commentary?
Your organization’s IT system may be generating automated reports for managers. Do the managers ask you if they have doubts on numbers in a system generated report? If it is not you, then may be, you have not established the credibility that is an absolute must.
Solution:
If you are not there yet, do not worry. You really need to upgrade your skills such as financial analysis, variance analysis, data analysis as well as Microsoft Excel. You need to develop a thorough and clear understanding of cost and management accounting. Once you get better with these skills, your quality of work improves. Quality reports and analysis combined with your presentation skills such as those discussed in points #1 and #2 will make you an exceptional Finance professional who becomes the Go To person for management.
By the way, if you are serious with honing all of these skills, I recommend that you connect with me. I will be sharing with you, much of what I learnt about detailed financial analysis, presenting financial results, profitability and variance analysis (sales and cost of sales) and lots of advanced Excel. In addition, I will also be sharing my experience on how to find and successfully interview for the right job, how to get promoted quickly and become indispensable finance resource for any organization you work for. Make sure to sign up by clicking here for my email list and receive career transforming tips and information.
Conclusion
When done correctly, analyzing financial results and business performance, and then presenting it can be an extremely rewarding experience. Especially, when you know you are adding value and making a difference. Your suggestions will be well respected. You will influence small and large business decisions. As you get better with this skill, you will find colleagues and business leaders from other functions relying more and more on you. You will be invited to more meetings and formal and informal discussions. Your advice will be sought. Even, your boss will value you more. Trust me! this is a great feeling.
If you do not already, you will begin to love your work. The fact that you become part of cross functional meetings and informal discussions will help you understand the business even better. You can gain operational insights which will generate more ideas in your head to analyse information differently and present new insights. It just keeps getting better. Your job will be secure and discussions around increment and promotion will become much easier, as everyone from HR to Sales, Operations and Finance functions will be seeing your contributions. No matter who the decision makers are, they will have only good things to say about you. You need to consider the advise given above, however, and start taking action on it immediately. Focus on development of your key skills such as variance analysis, accounting, Excel and presentation. I have seen a significant change in my income and accomplishments since making these improvements. I think I can help you with this. Make to sure to connect with me by signing up with your email address. Lets connect! Click here to subscribe to my email list.
Waterfall Chart (also known as Bridge Chart) is a highly effective visual method to present changes, both positive and negative, between a start and an end point. The values of the starting and end points are shown as bar graphs, and the gap or change between the two points is bridged by smaller, color coded bar graphs. The size of each bar graph is directly dependent on its value. Here is a great video tutorial on creating a fully automated waterfall chart in Excel 2013, or earlier.
Would you like to work with me to get one on one training, or to solve your specific workplace challenges, book your 15 minute consultation here: https://calendly.com/learnaf
Note: If you would like to learn in detail, how to calculate all income statement variances and the impact they have on sales, gross profit and ebitda, both in $ and %, and how to explain performance vs budget and prior periods, click here for a detailed video course (at a special price for readers of this post) showing exactly how this is done. You will also learn how to analyse and present the results of the variances to management and will be able to download solved variance calculation Excel files.
Why use a Waterfall Chart?
Well, this is because it is one of the best visual representation of changes, growth or transition from a start point to end point. It clearly shows what items contributed the most to the change from a starting point and an end point. If color coded properly, it also shows, which items have impacted positively and the ones that have impacted negatively.
Be careful though, not to add too many items in the breakdown or bridge because it becomes complicated for the readers to distinguish the key items. The main point of the waterfall chart is to highlight key contributors to growth or change between two points. A good practice is to keep the items between 5 to 7, but certainly try not to let them exceed 10 items.
Are you an accountant or finance professional looking to improve your financial analysis and presentation skills? Make sure you connect with me by subscribing to my email list, Click here to subscribe to my email list.
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