Flash Report » Profitability Section

The Purpose Of The Profitability Section

This section gives you an estimate of how much money the company has made during the period. It is important to emphasize the word “estimate” for several reasons. First, the Flash Report itself was not meant for complete accuracy. We cannot overstate this enough.

Use the Flash Report when it is timely and mostly accurate – (80-90%) is good enough.

Second, derive profitability from the estimate of the volume throughput for that period. This makes sense as sales and productivity are often a function of volume throughput (i.e. # of barrels, # of gallons, etc.). Another option is to obtain the values for Revenue, Cost of Goods Sold (COGS), Gross Profit, Overhead, and Net Income directly from your accounting system.

The second method is the simplest. But you must account for the hidden risk. You may not have entered all the items associated with sales and cost/expenses into your accounting system during that time period. Thus, there is a risk that the numbers you use may not even be “mostly accurate”. It may or may not be.

Backing into your profitability estimate can help remove that risk.

Now, you just need to make sure that you have a good grasp of how many units were sold as well as the associated costs.

Note, the metrics in the Productivity Section can be an excellent guide in helping you to start estimating the profitability of the firm.

Who Produces The Profitability Section?

The controller/CFO sets it up. Then someone in the client’s accounting department inputs the information into the template. Regular monitoring should be done by the Owner(s)/Management of the client firm.

Here are some ideas on how to get things started:

Option 1: Obtaining information directly from your accounting system.

If you are obtaining revenue and cost information directly from your accounting system, then anyone with the proper authorization can obtain the numbers.

Option 2: Backing into the profitability numbers

The controller/CFO as well as the key person(s) in charge of operations.

Initially, it may be wise to have both parties involved.

Operations will have the feel for units sold. Finance/Accounting may have a better grasp for costs.

Later on, you may decide to create a system where such numbers are automatically reported by someone as part of that person’s responsibilities.

[box] Business Leaders: The Flash Report is a great way to have your operations and accounting departments work together. Use this tool as an opportunity to break down any silos that may exist. [/box]

How To Produce The Profitability Section

For those choosing to obtain numbers directly from the company’s accounting system, it will be relatively simple to obtain. Just go to the Income Statement section to retrieve information regarding Revenue, Cost and Expense. However, please understand the risks as described above in the Goals section.

You may be taking on some hidden risks by going directly to the Income Statement for the profitability information.

Not all the information pertaining to sales and costs/expenses for that period may have been entered.

For those of you electing to indirectly arrive at profitability using sales volume and unit costs and unit price, please refer to the following steps:

Step 1

Obtain data on the # of units sold, cost per unit, and estimate of monthly expenses. Having a good understanding of the unit economics of the firm will be key to making this step easier. Initially, this may be somewhat challenging to be able to collect. However, over time it will become easier.

Here are some helpful tips:

  • # of Units Sold: The operations department will need to keep records to record how many units have been sold. There is no short cut here. However, if you can know 80-90% of the # of units sold, then that is enough.
  • Unit Sales Price: Sales and Accounting will need to keep good records on prices. Please note that sometimes, prices may have changed in the middle of the period.
  • Unit Sales Cost: Sometimes you can easily determine the cost using vendor invoices. If it becomes difficult, a helpful way is to look at historical P&L Statements. For instance, if COGS was 60% of sales last year, then you can estimate COGS for this year as 60% of current revenue.

You can estimate the COGS amount for this period by seeing what historically the were as a percentage of revenue. 

Step 2

Plug in the data for Revenue, COGS, and Overhead Expense. Sum up as per the example in the Basic Format section.

Step 3

Review and monitor your results. Graphing the results may also be a very effective method to see what is going on in the business process.

Variations Of The Profitability Section

In the spirit of flexibility, customize the Flash Report to fit each company’s needs. The basic format is just that – a basic platform to help get you started.

For the Profitability Section, some companies have also done the following:

  • Report just the Gross Margin and/or Net Income.

(You can do this, but this does not excuse you from understanding the underlying unit economics. You still have to do your homework).

  • Include profitability on a per employee basis.

 

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