Josh Aharonoff
Jul 13, 2023
Welcome to this week's Legit Numbers!
This week, we'll explore the EBITDA metric, master the Month End Close process with my comprehensive checklist, and guide you through revenue forecasting.
Get ready for practical insights.
What we’ll be covering in this edition:
Is EBITDA a good metric?
The Month End Close Checklist ✔️
How to forecast revenue
Let's dive in...
That depends on who you ask…
and what you use it for.
First…
➡️ What is EBITDA?
EBITDA stands for Earning before Interest, Taxes, and Depreciation
It’s a very common term you’ll hear in Finance & Accounting
➡️ How do you calculate EBITDA?
Like the name suggests…
Start with Net Income
[+] add back your interest expense
[-] subtract out your interest income
[+] add back your taxes
[+] add back your depreciation
[+] add back your amortization
OK…now that we know what EBITDA is and how to calculate it…is it a good metric?
➡️ Pros to EBITDA
✅ Can be a good proxy for free cash flows → although not perfect, EBITDA can be a good measure of a companies free cash flows
✅ Simplifies Comparisons → EBITDA helps you compare businesses in a similar industries against one another
✅ Valuing a company - it’s common to use EBITDA as a multiple in order to get to a valuation
✅ Focuses on operating performance → EBITDA removes metrics that aren’t part of the normal course of business
✅ Widely accepted → everyone knows the term EBITDA
✅ Useful for high growth companies → since depreciation & amortization are not included, it tells more of a story related to profitability & growth
➡️ Cons to EBITDA
❌ Ignores changes in working capital → EBITDA doesn’t account for changes in items like inventory, accounts payable, or accounts receivable
❌ Is not a GAAP metric → EBITDA is not a metric that you’ll find in a Profit & Loss
❌ Vulnerable to Manipulation → you’ll often times hear of an alteration of EBITDA, that can be misleading
❌ Fails to consider capital structure - EBITDA won’t show you how the company is capitalized, and how much debt needs to be repaid
❌ Does not Represent cash flow → EBITDA can wildly differ from your actual cash flows
❌ Lacks industry specific considerations → your EBITDA won’t inform you of whether it’s a strong or weak indicator of performance in your industry
❌ Ignores the Quality of earnings → income from recurring sources are more attractive than non recurring sources, but EBITDA won’t inform you of this
❌ Excludes important expenses → Taxes, Interest, Depreciation, and Amortization can all be material expenses that the business faces
What do you think?
Closing out your books can take a loooong time
and there can be a LOT of steps in volved
But if you keep a strong check list…
you can ensure that you never miss a step
Here’s my checklist:
➡️ IMPORT → here is where we import all relevant transctions & details to our accounting software
✔️ Sync transactions from bank to accounting ledger
✔️ Sync transactions from credit card to accounting ledger
✔️ Import remaining transactions via CSV import
✔️ Upload check details
✔️ Collect all bills from vendors
✔️ Collect all invoices from sales team
✔️ Collect employee expense reimbursement claims
✔️ Collect receipts for transactions above $1,000
➡️ CLASSIFY → now it’s time to classify all transactions with the relevant details
✔️ Classify transactions by category
✔️ Upload receipts for transactions above $1,000
✔️ Classify transactions by class
✔️ Enter notes & memos on transactions
➡️ RECONCILE → here we confirm that the information we have matches to our other data sources
✔️ Download Bank statements & save to directory
✔️ Download Credit Card statements & save to directory
✔️ Complete bank reconciliations
✔️ Record Bank vs ledger differences
✔️ Import & reconcile activity into workpapers
➡️ CALCULATE & BOOK → now we get to our adjusting journal entries..the heart and soul of a month end close!
✔️ Calculate Prepaid expenses
✔️ Calculate Accrued Expenses
✔️ Calculate Depreciation
✔️ Calculate Intercompany Accounts
✔️ Calculate Accrued Interest
✔️ Calculate Amortization
✔️ Calculate Deferred Revenue
✔️ Calculate Security Deposits
➡️ REVIEW → once we’ve entered in all of the information above, it’s time to zoom out and confirm that all looks good. This is what separates the senior hires from the junior hires
• Make it tidy
✔️ Review parent accounts and reclass to child accounts where necessary
✔️ Review new accounts and consolidate into existing accounts where necessary
• Identify anomalies
✔️ Review prior month profit & loss against this month
✔️ Review prior month balance sheet against this month
✔️ Review prior month cash flows against this month
• Measure performance
✔️ Compare key results to budget
➡️ PRESENT → Congrats! You made it this far. Now it’s time to present your findings
✔️ Import summary into slide deck
✔️ Edit slide deck for pretty design
✔️ Update commentary with meaningful insights
✔️ Prepare calls to action
✔️ Meet with CEO & Management
✔️ Present to Board of Directors
✔️ Present for fundraise
That’s my checklist for month end - what’s yours?
PS: Grab a copy of this checklist in Excel right here:
https://www.yourcfoguy.com/templates/month-end-close-checklist
This is the BIGGEST area of focus in all the financial models I build…
and for good reason.
Revenue forecasts are like snowflakes ❄️
no 2 forecasts are the same…every company does it differently
Here’s my framework that I’ve developed after building over 100 financial models in my career
➡️ Revenue Sources Framework → E•P•N
Your revenue can come from one 3 sources:
1️⃣ E→ Existing Customers
Here you analyze your current customer contracts
Ask yourself the following questions
• When will these contracts come up for renewal?
• What is the likelihood for renewal?
• Will they expand / contract before the contract is up?
2️⃣ P→ Pipeline customers
Here you analyze the customers who are warm in your pipeline
Ask yourself the following questions:
• What is the close likelihood of each contract?
• When will the contracts close?
You then take the contract value * the close likelihood...
and forecast out the sale on the projected close date
3️⃣ N→ New Customers
These are customers you’ve never interacted with…
but can expect to in the future
Here, you move onto the 2nd Framework, the Revenue Growth Framework
➡️ Revenue Growth Framework → A•R•S•R
This is all about how you use your business model to close new customers, resulting in new sales
1️⃣ A→ Acquire
Here you measure the channels that you use to acquire customers
Common ones can be:
• Sales reps
• Digital marketing
• Organic
• Partnerships
2️⃣ R→ Retain
Now you measure how long this customer will be with you
Are they monthly? Annually? Month to month?
Once you have this info, you can understand how much you can generate in sales from them
3️⃣ S→ Sell
Now that you know how long your customers are with you, you can analyze how often you’ll generate sale from them
This can be sales from your New Customers, or sales from your Active Customers
4️⃣ R→ Record
Now is when you record all the activity that will hit financial statements
Common ones include
• Revenue
• Deferred Revenue
• Cost of Goods Sold
• Inventory
• Accounts Receivable
• Commissions
===
With this framework in place, you can literally forecast out the details behind ANY business model
I hope you gained valuable insights into EBITDA, Month End Close processes, and Revenue Forecasting with this week's edition of Legit Numbers!
If you have any questions or need further assistance, feel free to reach out. I reply to all my emails personally :)
Till next Thursday!