Your friend the income statement.
Instead, continue executing your creative work and focus on how you can use the financial statements when the accounting is done. Ultimately, they provide valuable insight for you to make informed management decisions.
Let's consider one financial report, the income statement, also known as the profit-and-loss (P&L) statement. This report provides a sense of how well the company created and captured value from its customers during a specific period of time.
Reading a P&L statement as a non-financial manager can sometimes be like learning a new language. The following explanations should help as you review the numbers, derive their meaning and turn your analysis into actions.
Each P&L statement begins with total revenue listed at the top. This number reflects the total amount of value created and captured from customers. Your focus in an agri-marketing role is to look for opportunities to create more value for customers.
COST OF GOODS SOLD
Just below revenue is a line for the cost of goods sold, which results from the material, labor and allocated overhead needed to bring inventories to their present location and condition. These are considered variable costs because businesses only incur them if products and/or services are sold.
GROSS PROFIT MARGIN
To determine the total value that a company added above its cost of inputs, managers can calculate the firm's gross margin percent (just divide the gross profit margin by revenue). This percentage allows you to compare your business to peers, but remember that this percentage will vary significantly by location in the supply chain (e.g., food processors vs. grocery stores).
Sales, general and administrative costs represent the company's fixed costs or overhead. This is where costs related to management, marketing and employees reside. Managers can reduce these costs by optimizing workflow processes.
EARNINGS BEFORE INTEREST, TAXES DEPRECIATION AND AMORTIZATION (EBITDA)
The numbers listed for EBITDA are the cash flows available to pay for the company's physical and financial capital needs, such as lenders, the Internal Revenue Service or equity holders.
After knocking off a few letters from EBITDA, accountants end up at the company's net income. This money belongs to equity holders, who are last to receive compensation. In poor years, they don't receive compensation. In significantly poor years, they lose money. However, they enjoy the upside of boom years.
Looking at the P&L statement illustrates the money coming in (sales) versus the expenses required to generate those sales. It gives you a sense of what is working and what you need to reevaluate Luckily, you don't have to know how to create financial statements, but taking some time away from your creative work or calling on customers to analyze them can help you understand whether the campaigns you are executing are effective for your company.
AG FINANCE FOR NON-FINANCE MANAGERS
If you are interested in learning more about using financial statements to make informed decisions, consider attending the Agribusiness Finance for Non-Finance Managers seminar. You will improve your finance skill set by learning how to analyze and extract data from P&L statements, balance sheets and cash flow statements.
Profit and Loss Statement Three Months Ended March 31 2012 2011 Revenue $1,128,118 $17118,167 Cost of -8,129 -4,783 good sold Gross profit 1,119,989 1,113,384 Fixed Costs Research & development 154,146 153,329 Sales & marketing 13,831 8,668 General & administrative 103,145 102,025 Total fixed costs 271,122 264,022 Interest income 126 976 Net income 848,993 850,338
Mike Gunderson is a faculty member with the Center for Food and Agricultural Business at Purdue University. He can be reached at mag79@ufledu.
Megan Sheridan is the marketing director at the Center for Food and Agricultural Business. She can be reached at firstname.lastname@example.org.
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|Title Annotation:||Insights from Purdue University|
|Author:||Gunderson, Mike; Sheridan, Megan|
|Date:||May 1, 2012|
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