eLearning

Transcript

Financial Acumen:

Goods & Services

This transcript includes screen shots for all slides and is accompanied by the text of
the narration.

Copyright 2013, FinListics Solutions

Introduction

Notes:
Welcome to Financial Acumen for goods and services companies. The purpose of this course is
to improve your basic financial acumen, help you to better understand why client executives
focus on financial statements, and aid in developing insights into how your solutions impact a
clients financial statement.

Understanding Financial Statements

Notes:
Client executives and investors analyze financial statements to gain insights into how well a
business is managed as well as its performance in the future. They use these insights for a
couple of reasons: one, to identify areas of opportunities and those requiring change; and, two,
to make decisions about investing more or less money in the company or parts of the

Copyright 2013, FinListics Solutions

company. Its critical that you, as a seller, understand your clients financial statements. It
helps you develop an executives perspective on the company. It also can help you identify
potential areas where your solutions add the greatest value. You dont need to understand all
of the accounting aspects about financial statements, its about understanding your clients
performance and where you can help them improve.

There are three modules covering each of the three key financial statements: the income
statement, the balance sheet and the statement of cash flows. In each of the modules, well
explore why they are important to client executives. Well also examine how to read and
interpret them and well explore the key financial metrics associated with each one. For each
of these metrics, well also answer basic questions:
what is it?
what does it consist of?
why do executives care?
and what is the goal?
Each of the modules also includes a mini case study to help you more quickly apply what
youve learned; a quiz is included in each module to test your comprehension of the key
concepts. There is an overview of the financial metrics, or a summary sheet, available using
the Resources feature of this presentation.

Module 1: Income Statement

Notes:
Welcome to Module 1, the Income statement. In this module we examine why the income
statement is important to a companys executives. We also explore key drivers of a clients
financial performance related to the income statement in areas like revenue growth,
profitability, and expense management.

Copyright 2013, FinListics Solutions

Overview

Notes:
The income statement is probably the single most widely used financial statement by
executives and investors. It provides valuable clues into how well a company is managing
some of the key drivers of its overall performance, such as revenue, their operating expenses,
and other expenses and taxes. Subtracting operating expenses, interest, and taxes from
revenue, or sales, leaves us with net income.
An investor will evaluate a company based on how fast their revenue is growing over time, how
well it manages its costs, and the trend in its net income. The results of that evaluation are a
major driver of investors willingness to invest their money in a company; for publicly traded
companies, it will also affect the stock price.
It might be easier to understand the basic structure of an income statement by applying it to
your personal life; click on the bar at the bottom of the page to see an example.
We can very easily use our personal lives to create an income statement. What a company
calls its revenue is what equates to your salary and maybe some investment income; in our
example, thats one hundred thousand dollars. Then, what a company shows as operating
costs and expenses become your non-financial living expenses like food, clothing, and
insurance in our personal example; here, that amount is forty thousand dollars. Interest
expenses for a company turn in to financial expenses in your personal life and are your credit
cards, mortgage, and car payment, which we show as twenty-five thousand dollars. We all
have to pay income taxes and whats left at the very end of this, for a company is net income,
and in your personal life is disposable income. In our example, that leaves you with fifteen
thousand dollars in disposable income, or money that you can do with as you please.

Copyright 2013, FinListics Solutions

Personal Example (Slide Layer)

Income Statement Example

Notes:
Lets review an example of a corporate income statement. We start with revenue, or sales, or
whats also called the top line. From revenue, we subtract cost of goods sold, or those costs
directly related to the goods and services sold in revenue. Deducting cost of goods sold from
revenue leaves gross profit. We then subtract selling, general, and administrative expenses, or
SG&A, to get earnings before interest, taxes, depreciation and amortization, or EBITDA. From
there, we deduct depreciation and amortization to arrive at operating income; then subtract
other income or expense, and interest to get earnings before tax, or pretax income; and finally
we deduct income taxes to get to net income, or whats also referred to as the bottom line.
Click on the question marks next to each line item for more detail and example of whats
included in each category.

Copyright 2013, FinListics Solutions

Revenue is the value of sales of goods and services and can include products and
merchandise; or for a consulting company, it would include the services they provide to
customers.
Cost of goods sold is the cost directly related to the products and services sold and can
include raw materials, and the cost of merchandise or manufacturing; for services companies,
it includes the salaries & wages directly associated with the services provided.
Gross profit is the profit remaining after cost of goods sold is subtracted from revenue.
Selling, general, and administrative, or SG&A, expenses are indirect costs, meaning that
they are not directly correlated to the products, merchandise, and services sold in revenue.
SG&A includes expenses like information technology, sales, marketing, human resources,
advertising, and legal and professional fees.
EBITDA is simply a profit metric and is the companys earnings before interest, taxes,
depreciation, and amortization.
Depreciation is a way to allocate the cost of an asset over its useful life; in much the same
way, amortization measures the consumption of an intangible asset such as a patent or
copyright over a period of time.
Operating income is a profit metric and is also called EBIT, or earnings before interest and
taxes.
Other income is any non-operating income or expense such as interest from investments,
royalties, foreign exchange gains, or rental income on real estate owned.
Interest is the interest expense that a company pays on its debt such as short-term bank
loans or long-term bonds.
EBT is a profit measure of earnings before taxes, or pretax profits.
Income taxes include those taxes paid to federal, state, and foreign authorities.
Net income measures profit remaining after all expenses, interest, and taxes. This is also
commonly referred to as the bottom line and is used in many return measures, such as return
on equity, return on assets, or earnings per share.

Copyright 2013, FinListics Solutions

Quiz Question 1
(Multiple Choice, 10 points, 1 attempt permitted)

Notes:
Which one of the following best describes why executives and investors focus on the income
statement?
Choice one: It shows how fast revenues are growing and provides insights into increasing
growth
Choice two: It provides insights into the management of revenue & expenses, and potential
areas for improvement
Choice three: It shows how well a company is managing its assets and areas to explore further
Choice four: It provides valuable insights into a company's ability to generate cash and its
liquidity

Copyright 2013, FinListics Solutions

Quiz Question 2
(Matching Drag and Drop, 10 points, 1 attempt permitted)

Notes:

Test your knowledge by dragging each income statement item on the right and dropping it on
the matching description on the left. Your income statement item choices on the right are:
Cost of goods sold
Other income or expense
Revenue
Selling, general, and administrative

Match them to one of the following examples:

Sales and marketing expense, and information technology expense
Products, merchandise, consulting
Raw materials & manufacturing
Royalties, interest income, foreign exchange adjustments

Copyright 2013, FinListics Solutions

Module 1A: Revenue Growth

Notes:
Welcome to Module 1A, revenue growth.

Overview

Notes:
Click on each of the buttons below to answer the following questions. What exactly is revenue
growth? Why do executives focus on it? Whats the goal?
Revenue is the value of products and services sold, net of any discounts and returns; its
commonly referred to as the top line. Revenue growth measures the period-over-period
percentage change. The period for comparison is typically either a year or a quarter.

Copyright 2013, FinListics Solutions

Revenue growth illustrates an executive ability to convert operating expenses and

investments in both physical and human capital into revenues for both new and existing
products or services.
Typically the higher the growth in revenue, the better. However, the executives goal is not just
to grow revenue for the sake of growing revenues. They could easily do that by lowering
prices, for example, but the objective is to deliver value-added revenue that maximizes the
overall performance of the company.

Example

Notes:
Now that you know why revenue growth is important and how we measure it, click on the
Answer button to see how its calculated.
Our example companys revenue was two billion seven hundred forty-nine million dollars in
2012; their 2011 revenue was two billion five hundred eighty nine million. We subtract the
2011 revenue from 2012 revenue and divide that difference by 2011 revenues, which gives us
revenue growth of 6.2 percent.

Copyright 2013, FinListics Solutions

Performance by Industry

Notes:
Now lets look at revenue growth by industry. Weve taken ten general industries like consumer
packed goods, industrials, retail, and telecom to give you an idea of the average revenue
growth in each one of these industries. These are median five year averages for companies
around the globe.
There are some good illustrations of why we need to consider industry factors and influences
when analyzing growth. For instance, Petroleums median revenue growth is the highest at
16.4 percent; however, this doesnt necessarily mean that consumers were buying more oil
and gas, this is just a reflection of whats happened to oil and gas prices.
Alternately, if we look at Industrials, theyre showing a five-year average median growth rate of
11.6%, but if we were to look at the sub-industries that make up the broader industry, we
would see that building products had a much lower growth as a result of whats happened to
residential and commercial building in recent years. On the other hand, the agricultural
products that are also a part of industrials have had a phenomenal growth rate, but its not due
to increased volume; their growth has come from the fact that these companies have had to
pass along their increased raw material and commodity prices to their customers in the form of
higher selling prices.
Finally, Media and Entertainment has the lowest growth rate of this group of industries. Their
slow growth is largely due to challenges in the publishing and advertising industries; publishers
are struggling with threats to subscription revenues in the form of competition from online
content, and advertisers have suffered during the prolonged economic downturn as their
customers typically cut their advertising budgets.

Copyright 2013, FinListics Solutions

Quiz Question 1
(Multiple Choice, 10 points, 1 attempt permitted)

Notes:
What is the definition of revenue growth?
Choice one: Change in current period's revenue expressed as a percentage of current period's
revenue
Choice two: Sum of percentage change in advertising sales plus percentage change in
subscription fees
Choice three: Change in current period's revenue expressed as a percentage of previous
period's revenue
Choice four: Current period's revenue expressed as a percentage of previous period's revenue

Copyright 2013, FinListics Solutions

Quiz Question 2
(Multiple Choice, 10 points, 1 attempt permitted)

Notes:
Which one of the following best describes the goal of managing revenue growth?
Choice one: Maximize the value since it's one of the most important drivers of performance &
increasing profits
Choice two: Grow as much as possible within the company's funding ability
Choice three: Optimize revenue growth in the context of a company's overall goals and
strategies
Choice four: Manage growth to be at least as high as the industry average

Copyright 2013, FinListics Solutions