Finance 101 for Sales and Marketing Professionals: Lesson 4 – Building Financial Statements

I apologize for being a little late with this lesson, so let’s get right to it.  I have talked about many of the operational processes that go into a business and how those transactions affect specific buckets.  When I want to pause and look at the business from a distance, we can back up and assemble a set of financial statements from the buckets that we have been using.  It is really easy.

First, I can build the Income Statement which shows our performance over a period of time.  I have a simple formula that we can use.

                                Revenues – Expenses = Income (which becomes Equity)

Our Expenses are made up of our Cost of Goods Sold and our Selling, General, and Administrative Expenses.  I can expand the formula to include this information:

                Revenues – (Cost of Goods Sold + Selling, General, and Administrative) = Income (which becomes Equity)

We can even take the formula one piece at a time and use the interim result for additional analysis.  The interim number is called Gross Profit. Our fully expanded formula will look like this:

                (Revenues – Cost of Goods Sold) = Gross Profit (- Selling, General, and Administrative) = Income (which becomes Equity)

Now I just need to fill in the numbers from our table to get the results I need:

                ($630,000 – $260,000) = $370,000 (- $170,000) = $200,000

We can even make it look like a financial statement by simply reformatting the formula vertically:

Revenues	$630,000
Less Cost of Goods Sold	$260,000
Gross Profit	$370,000
Less Selling, General, and Administrative	$170,000
Income	$200,000

If I want to compare this statement to others from prior periods or other organizations, I will need to use percentages (of revenue) in order for the comparison to work.  It will look like this:

Revenues	$630,000	100.0%
Less Cost of Goods Sold	$260,000	41.3%
Gross Profit	$370,000	58.7%
Less Selling, General, and Administrative	$170,000	27.0%
Income	$200,000	31.7%

 

I can use the same concepts to create the Balance Sheet which represents a picture of our position at a point in time.  This time I’ll show you the fully expanded formula right away, and instead of using percentages, we will restate our balance sheet in terms of the resources needed to produce each dollar (or euro, etc…) of revenue.  Here is the formula:

(Cash + Accounts Receivable + Inventory) = Current Assets (+ Fixed Assets) = Total Assets (- Accounts Payable and other Liabilities) = Equity (which was adjusted with our income)

I can fill it in from the buckets as follows:

($450,000 + $250,000 + $220,000) =  $920,000 (+ $500,000) = $1,420,000 (- $220,000) = $1,200,000 (The original $1,000,000 plus the income of $200,000)

And represent it as a Balance Sheet below:

Cash	$450,000	$.71
Accounts Receivable	$250,000	$.40
Inventory	$220,000	$.35
Current Assets	$920,000	$1.46
Fixed Assets	$500,000	$.79
Total Assets	$1,420,000	$2.25
Accounts Payable and Other Liabilities	$220,000	$.35
Equity	$1,200,000	$1.90
Liabilities + Equity	$1,420,000	$2.25

 

Now I have a set of financial statements and some ratios (in the percentages and the resources required) that I can use to analyze the business.  It will be important in the next lesson to have built the foundation the way that we have.

In my next post, I will show you how we can analyze financial statements to identify areas of opportunity.  These are the same opportunities that you will need to understand how your own company’s offerings address.  Hopefully things are starting to come together for you.

-Bruce A. Brien, CEO, Stratascope Inc.

Finance 101 for Sales and Marketing Professionals: Lesson 1 – The Framework

I have been asked many times by a countless number of sales and marketing professionals to put the field of “Finance” in basic terms that they will understand.  Finance and accounting can be very complicated, extremely dry, and usually boring.  Sales and Marketing professionals don’t do very well with the combination of complicated, dry, and boring.  If they did, they wouldn’t be in sales.  In any event, I will do my best over the next month, through this blog, to help you build the basic financial and business acumen that you should have to carry a business conversation with your prospects or clients.  I’ll try to put everything into basic terms with examples.  When I can’t, I’ll try to provide you with a clear definition.  Up front, I apologize to the accountants in the audience (some of whom are in my employ) and would ask them not to quibble over my skipping areas that I don’t think are very relevant to sales and marketing professionals.

Let’s begin with the basic financial statements.  Different industries will use different models and formats to record their business.  In order to keep things simple, we will confine our discussion to commercial and industrial manufacturers, distributors, and retailers.  After we have a basic knowledge in place, we can discuss other financial models for professional services, general services, banking, and the non-profit public sector. For most industries, we need to focus on the Income Statement and the Balance Sheet.

The Income Statement tracks an organization’s performance over a period of time.  It tells us how the organization has performed in the past.  Remember, past performance does not guarantee future success, or failure, it only tells us what happened.  The Balance Sheet tracks how well an organization is prepared to address the future.  The Balance Sheet is a position document that shows where the organization is at a point in time, what assets and liabilities (responsibilities) it has available to address the challenges of its marketplace.  Performance and position are the keys to understanding a business’s operational success.

When business transactions occur, they can change both a company’s performance, and its position.  For industrial and commercial industries, the operational areas that can be affected are below:

The Income Statement (performance) breaks down into three operational components as follows:

• Revenues (Often called Sales or, in Europe, turnover) – representing the market value of goods and services that have been shipped or delivered to customers
• Cost of Goods Sold (Cost of Sales) – represents the costs incurred to procure, build, and deliver the products
• Selling, General, and Administrative Costs (Overhead) – represents the other costs to run the business, i.e. sales, marketing, accounting, legal, HR, research and development, and services

There are also other non-operational expenses like depreciation, taxes, and special items that are better left to the accountants.

The Balance Sheet (position) breaks down into five operational components as follows:

• Cash – Cash as well as any other liquid (easily accessible and convertible to cash) investments
• Accounts Receivable – What the customers owe for the products and services they have received
• Inventory – The materials, the work-in-progress, and the finished goods along with any labor and other resources that went into them
• Fixed Assets – The property, plant, equipment, computers, and patents of an organization would all be classified here.
• Accounts Payable – This is the amount that we owe our creditors under basic trade terms (not loans or any interest bearing stuff – leave that to the accountants)

The final non-operational component that we need to be concerned with is equity.  Equity is the beginning and the end of every commercial business.  The owners of the business put equity in to get the business started and any profits (income) left at the end of the period are moved to equity as well.  If the company loses money, it comes out of the equity as well.

That completes the framework that I’ll use to discuss each of the upcoming topics around finance for sales and marketing professionals.

In my next post, I will look at the basic operational transactions that drive a business.

-Bruce A. Brien, CEO, Stratascope Inc.