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Legit Numbers 🔢: Budget vs Actuals, Accounting vs FP&A, and more
Legit Numbers 🔢 #03This week's top posts on Your CFO Guy LinkedIn |
Welcome to the 3rd edition of Legit Numbers, where I share my latest finance and accounting posts on LinkedIn in their unabbreviated form. I'm excited to bring you a mix of insightful and thought-provoking posts that cover a wide range of topics, from financial reporting to strategic planning. And if you haven't already, I invite you to check out my new course, Intro to Building a 3 Statement Model, which is designed to help you create accurate and comprehensive financial models that can be applied to real-world scenarios. You'll gain practical skills that will set you apart in the finance industry, and I believe it's a must-have for anyone looking to build a successful career in finance. Thank you for your continued support, and let's dive into this week's Legit Numbers! What we’ll be covering in this edition:
Let's dive in... In fact…if I had to present just one report to a CEO, it would be this one Why? First… let’s start with some definitions: ➡️ What is a Budget vs Actuals report? A Budget vs Actuals report allows you to compare what you THOUGHT was going to happen… …to what ACTUALLY HAPPENED This can be anything in the business, though a profit and loss is most commonly included Next… ➡️ Why is this my favorite report? Well, a number of reasons: 1️⃣ It Adds Credibility The biggest thing you can do to add credibility with this report is to have a STORY for every line… ➡️ Explain what happened ➡️ Explain what you thought would happen and why ➡️ Explain how the 2 differ…or ideally, are aligned 🎯 Of all the exciting feelings I’ve had in my career… Accurately predicting what would happen has been amongst the top 2️⃣ It Allows you to Aggregate the Key KPIS There are a million and one financial reports out there… The Budget vs Actuals is often concise, showing all the key takeaways from the largest areas of the business The truth is a budget vs actuals report can be as detailed as you wish… My favorite method is to start on a summarized level, and then drill deeper into details where needed 3️⃣ You can prepare it with nice DESIGN 🤩 Unlike a Profit & Loss or a Balance Sheet… A Budget vs Actuals often includes various graphs These graphs give you the opportunity to explain what’s happening more easily and allows you to add value to the presentation with some pretty design Don’t undermine how much value stunning design to add to a financial report! Those are my reasons for why the Budget vs Actuals is my favorite report What do you think about the Budget vs Actuals report? Click the image below to download the Budget vs Actuals Excel template These 4 metrics are CRUCIAL to understand They all tell you something different, and have their own time & place 1️⃣ GROSS PROFIT ➡️ What it means ▪️ The amount that’s left over from your revenue after you subtract the cost to deliver your product or service ➡️Where it’s found ▪️ The Profit & Loss ➡️ What’s the formula ▪️ Revenue - COGS ➡️ Why it's important ▪️ It helps you understand the maximum amount of money your business can earn - if you have a negative gross profit, you don’t have a business! 2️⃣ NET INCOME ➡️ What it means ▪️ The net profitability of your business for a specific period of time - IE all income less all expenses ➡️ Where it’s found ▪️ The profit & Loss ➡️ What’s the formula ▪️ Revenue - COGS - Operating Expenses + Other Income - Other Expenses ➡️ Why it's important ▪️ This is the ultimate number that you are generating in profitability from your business - if you keep posting losses, you will need to raise capital to sustain your operations 3️⃣ EBITDA ➡️ What it means ▪️ Earnings before Interest, Tax, Depreciation, and Amortization ➡️ Where it’s found ▪️ No where - it’s compiled separately and is a non GAAP Metric ➡️ What’s the formula ▪️ Net Income + Interest Expense - Interest Income + Taxes + Depreciation + Amortization ➡️ Why it's important ▪️ Many feel that EBITDA is a good approximation for cash flows. It is also commonly used to value businesses 4️⃣ Cash Flows ➡️ What it means ▪️ How much cash went in and out of your bank account ➡️ Where it’s found ▪️ The Statement of Cash Flows (or by taking the ▲ in cash on your balance sheet) ➡️ What’s the formula ▪️ Cash from Operating Activities + Cash from Investing Activities + Cash from Financing Activities (Or ending cash - beginning cash) ➡️ Why it's important ▪️ Cash is king - you can have the most profitable business in the world, but if your expenditures keep outpacing your receipts, you’ll have to raise capital to sustain your operations If I had to focus on one, which would it be? For me...Gross Profit. Everything else falls into place once you have great margins... But ofcourse, there are tons of factors to consider Which one is your favorite? I've aggregated these top 10 infographics so that you don't have to 1️⃣ Accounting vs FP&A Learn about the difference between what an Accounting function does, and what an FP&A function does 2️⃣ P&L vs Cash Flows Learn the difference between a Profit and Loss, and a Statement of Cash Flows 3️⃣ Budget vs Actuals Learn importance of preparing a budget vs actuals, and some important considerations when preparing one 4️⃣ 10 Common Adjusting Journal Entries Learn about 10 common adjusting journal entries that are performed during a month end close, and what they mean 5️⃣ 4 Accounting Fundamentals Learn the 4 fundamentals to accounting: ➡ The Financial Statements ➡ The Accounting Equation, ➡ Debits & Credits ➡ Cash vs Accrual 6️⃣ The Financial Statements Learn about the 3 financial statements: ➡ The Profit and Loss ➡ The Balance Sheet ➡ The Statement of Cash Flows 7️⃣ EBITDA Learn what EBITDA means, how to compile it, why it's so popular, and some common misconceptions 8️⃣ EBITDA vs Cash Flows Understand the difference between EBITDA and Cash Flows (no, they are not the same) 9️⃣ Gross Profit vs Net Income vs EBITDA vs Cash Flows Understand the difference between these 4 important metrics, and why they are important to use 🔟 Debits & Credits Learn the fundamentals of how Debits & Credits work...the foundation to Double Entry accounting Did any of these infographics resonate with you? Click the image below to see my top 10 Finance & Accounting Infographics Accounting & FP&A each contains key responsibilities… and together they make up your Finance & Accounting 🤝 Here’s an overview on what Accounting does Accounting 🔸Financial Reporting - “closing out"your financial statements in your accounting software (often known as bookkeeping) 🔸AP - coordinating & processing bill payments to vendor 🔸Invoicing - sending invoices to customer, and coordinating collections 🔸Payroll - onboarding employees, approving & processing payroll, coordinating with state tax agencies (parts of this function may be handled under HR) 🔸Taxes - annual federal & state income tax filings, Delaware franchise tax, sales tax (typically not done in house at a startup) 🔸 Audit - coordinate audit with external auditing firm (usually done after Series B) But that’s just one side of the coin. The other function is just as crucial… Financial Planning & Analysis (FP&A) 🔹 Projections - adding forecasted figures for all areas of the business (revenue, cash flows, ARR) 🔹 Data analysis - analyzing data to optimize for better costing / profitability 🔹 Budget vs Actuals - comparing what you had projected vs what actually took place. (My favorite area of FP&A) 🔹 Board reporting - providing the board of directors with key summaries on what’s happening…another one of my favorites 🔹 Fundraising - wowing investors, and showing them how you’ll be 100x’ing each month for the rest of eternity 🤑 What are some other things that you’ve seen in with Accounting vs FP&A? Month End Close is one of the most common tasks for an accounting function. ➡ What Exactly is a Month End Close? While many may define this differently, to me, a month end close is a RECONCILIATION & SIGN OFF on a company’s financial statements ➡ What are the Steps in a Month End Close? Here are my preferred steps: 1️⃣ CLASSIFY ALL TRANSACTIONS TO GL ACCOUNTS All of your bank & credit card transactions should automatically flow through to your accounting software, allowing you to easily start classifying to your General Ledger accounts When classifying accounts, keep these tips in mind: ⏩ Include a vendor / customer name on all transactions to allow for further reporting & analysis ⏩ Bulk classify transactions for the same vendor that belong to the same category to save time and stay efficient ⏩ Put all transactions you are unsure of to uncategorized expense / income, and revisit at the end. Don't let it hold up your month end close! 2️⃣ RECONCILE ALL BANK & CREDIT CARD ACCOUNTS Bank reconciliations are IMO the most important piece of a month end close - without it, you don't have any credibility on the numbers being presented Bank recs are a matching of the balances / transactions from your bank & credit card statements to your general ledger balances 3️⃣ BOOK ADJUSTING JOURNAL ENTRIES Here comes the real work in a month end close - adjusting journal entries. Common ones are Prepaid expenses, Deferred Revenue, Depreciation....the list is endless The key here is to have rock solid workpapers, typically in excel, helping you both validate & calculate the adjustments / balances 4️⃣ CONFIRM ACCURACY & FINAL REVIEW Here, it's time to zoom out and review all of your work - this is an important step! I like to first start by scanning the month over month P&L, Balance Sheet, and Cash Flows for anomalies 🤔 Do any accounts show large swings in balances? 🤔 Are there any new accounts that can be merged with existing accounts? 🤔 Do any accounts have missing values? From there, I'll do a final review on all transactions posted to ensure everything is coded correctly Once you've completed the steps above - you're all set! And you can then move onto distributing the financials, performing analysis, and so much more Those are my tips for closing out the month - everyone does it differently What has been your experience? Click the image below to access the guide Thank you for reading through this edition of Legit Numbers. I hope you found the featured posts informative and thought-provoking in enhancing your financial knowledge and skills. Your input is valuable in helping me improve and provide relevant content that meets your needs. Please feel free to leave a comment on my LinkedIn or send me a direct message with your thoughts. Catch you next week! |
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