Economic Statement Analysis for Sales plus Marketing Executives

While it is not necessary to be a qualified accountant to design a Strategy for Sales Perfection, a basic understanding of what is involved in monetary analysis is essential for anyone in sales and marketing. It is too tempting, and often too easy, to use “blue skies” thinking in planning product sales and marketing activities. It is actually easier to spend money without fully realizing the return one is getting for this. It is critical that sales and marketing executives be more disciplined and analytical in the way they go about planning, executing and evaluating the sales and marketing plans and strategy. Amazing introducing more discipline into the process is by having a basic understanding of the financial implications of decision making, and exactly how financial measures can be used to monitor and control marketing operations. The purpose of this particular text is to provide exactly that, and the first chapter deals generally with an introduction to the activities involved in economic analysis.

The Income Statement

The particular P&L (profit and loss) declaration otherwise known as the income statement is usually illustrated below. This is an abbreviated version as most income statements contain much more detail, for example , expenses are typically outlined based on their individual.

G/L ledger account:

The income statement steps a company’s financial performance more than a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating plus non-operating activities. It also shows the web profit or loss incurred over the specific accounting period, typically over the fiscal quarter or year. The income statement is also known as the “profit and loss statement” or “statement of revenue and expense. ”

Sales – These are defined as overall sales (revenues) during the accounting period. Remember these sales are net of returns, allowances and discounts.

Discounts – these are discounts gained by customers for paying their particular bills on tie to your firm.

Cost of Goods Sold (COGS) – These are all the direct costs that are related to the product or rendered support sold and recorded during the accounting period.

Operating expenses – Such as all other expenses that are not included in COGS but are related to the operation of the business during the specific accounting period. This account can be most commonly referred to as “SG&A” (sales general and administrative) and includes expenses such as sales salaries, payroll fees, administrative salaries, support salaries, and insurance. Material handling expenses are commonly warehousing costs, maintenance, administrative workplace expenses (rent, computers, accounting charges, legal fees). It is also common practice to designate a separation of expense allocation for marketing and variable selling (travel and entertainment).

EBITDA – earnings before income tax, devaluation and amortization. This is reported as income from operations.

Other revenues & expenses – These are almost all non-operating expenses such as interest earned on cash or interest compensated on loans.

Income taxes – This account is a provision for income taxes for reporting purposes.

The Components of Net Income:

Operating income from continuing operations – This comprises all revenues net of returns, allowances and discounts, less the cost and expenses related to the generation of such revenues. The costs deducted from income are typically the COGS and SG&A expenses.

Recurring income before curiosity and taxes from continuing functions – In addition to operating income from continuing operations, this component contains all other income, such as investment earnings from unconsolidated subsidiaries and/or additional investments and gains (or losses) from the sale of assets. To be included in this category, these items must be recurring within nature. This component is generally regarded as the best predictor of future earnings. However , non-cash expenses such as devaluation and amortization are not assumed to become good indicators of future capital expenditures. Since this component will not take into account the capital structure of the organization (use of debt), it is also used to value similar companies.

Recurring (pre-tax) income from continuing operations — This component takes the company’s financial structure into consideration as it deducts interest expenses.

Pre-tax earnings from continuing operations – Included in this category are items that are either unusual or even infrequent in nature but cannot be both. Examples are an employee-separation cost, plant shutdown, impairments, write-offs, write-downs, integration expenses, etc .

Net income from continuing operations – This element takes into account the impact of fees from continuing operations.
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Non-Recurring Items:

Discontinued operations, extraordinary items and accounting changes are all reported as separate items in the income declaration. They are all reported net of taxes and below the tax collection, and are not included in income through continuing operations. In some cases, earlier revenue statements and balance sheets need to be adjusted to reflect changes.

Income (or expense) from discontinued functions – This component is related to revenue (or expense) generated due to the shutdown of one or more divisions or functions (plants). These events need to be isolated so they do not inflate or deflate the company’s future earning potential. This type of nonrecurring occurrence also has a nonrecurring tax implication and, as a result of the tax implication, should not be included in the tax expense used to calculate net income from continuing operations. That is why this revenue (or expense) is always reported net of taxes. The same is true regarding extraordinary items and cumulative effect of accounting changes (see below).

Amazing items – This component relates to items that are both unusual and infrequent in nature. That means it is an one time gain or loss that is not expected to occur in the future. An example is environmental remediation.

The Balance Sheet

The balance page provides information on what the company possesses (its assets), what it owes (its liabilities) and the value of the business to its stockholders (the shareholders’ equity) as of a specific date. It is called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or even getting it from shareholders (shareholders’ equity).

Assets are economic resources that are expected to produce economic benefits for their owner.

Liabilities are obligations the organization has to outside parties. Liabilities represent others’ rights to the company’s money or services. Examples include bank loans, debts to suppliers and debts to employees.

Shareholders’ equity is the value of a business to its owners all things considered of its obligations have been met. This net worth belongs to the owners. Shareholders’ equity generally reflects the amount of capital the owners have invested, in addition any profits generated that were eventually reinvested in the company.

The balance sheet must follow the following formula:

Total Resources = Total Liabilities + Shareholders’ Equity

Each of the three segments of the balance sheet will have many balances within it that document the cost of each segment. Accounts such as money, inventory and property are on the particular asset side of the balance linen, while on the liability side you can find accounts such as accounts payable or even long-term debt. The exact accounts on a balance sheet will differ simply by company and by industry, as there is absolutely no one set template that precisely accommodates the differences between varying forms of businesses.

Current Assets – They are assets that may be converted into cash, sold or consumed within a year or less. These usually include:

Money – This is what the company has within cash in the bank. Cash is reported at its market value at the reporting date in the respective currency where the financials are prepared. Different cash denominations are converted at the market conversion rate.

Marketable securities (short-term investments) – These can be both equity and/or debt securities for which a ready market exists. Furthermore, management needs to sell these investments within a single year’s time. These short-term opportunities are reported at their market value.

Accounts receivable – This signifies the money that is owed to the organization for the goods and services it has provided in order to customers on credit. Every business has customers that will not pay for the items or services the company has provided. Management must estimate which customers are unlikely to pay and create an account known as allowance for doubtful accounts. Variants in this account will impact the reported sales on the income statement. Accounts receivable reported on the balance sheet are net of their realizable value (reduced by allowance with regard to doubtful accounts).

Notes receivable : This account is similar in character to accounts receivable but it can be supported by more formal agreements such as a “promissory notes” (usually a short-term loan that carries interest). Furthermore, the maturity of notes receivable is generally longer than balances receivable but less than a year. Information receivable is reported at the net realizable value (the quantity that will be collected).

Inventory – This particular represents raw materials and items that are around for sale or are in the process of becoming made ready for sale. These items can be valued individually by several different indicates, including at cost or market value, and collectively by FIFO (first in, first out), LIFO (last in, first out) or average-cost method. Inventory is highly valued at the lower of the cost or market price to preclude overstating earnings plus assets.

Prepaid expenses – These are payments that have been made for services that the company expects to receive in the near future. Common prepaid expenses include rent, insurance costs and taxes. These expenses are valued at their original (or historical) cost.

Long-Term assets — These are assets that may not be converted into cash, sold or consumed inside a year or less. The heading “Long-Term Assets” is usually not shown on a company’s consolidated balance sheet. However , all items that are not included in current assets are considered long-term resources. These are:

Investments – These are assets that management does not expect to market within the year. These investments range from bonds, common stock, long-term records, investments in tangible fixed resources not currently used in operations (such as land held for speculation) and investments set aside in specific funds, such as sinking funds, pension funds and plan-expansion funds. These types of long-term investments are reported on their historical cost or their market value on the balance sheet.

Fixed possessions – These are durable physical attributes used in operations that have an useful living longer than one year.

This includes: Equipment and equipment – This type represents the total machinery, equipment plus furniture used in the company’s operations. These types of assets are reported at their particular historical cost less accumulated depreciation.

Buildings or Plants – These are buildings that the company uses for its operations. These assets are depreciated and therefore are reported at historical cost less gathered depreciation.

Land – The property owned by the company on which the company’s buildings or plants are sitting on. Land is valued at historical cost and is not depreciable under U. S. GAAP (generally accepted accounting principles).

Other property – This is a special classification with regard to unusual items that cannot be included in one of the other asset categories. Examples include deferred charges (long-term prepaid expenses), non-current receivables and advances to subsidiaries.

Intangible assets – These are resources that lack physical substance yet provide economic rights and benefits: patents, franchises, copyrights, goodwill, trademarks and organization costs. These possessions have a high degree of uncertainty in regard to whether or not future benefits will be realized. These are reported at historical cost net of accumulated depreciation.

Author: katsura-haruna

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