Josh Aharonoff
Jul 27, 2023
Welcome to another exciting episode of Legit Numbers!
This edition is all about mastering profitability on your Profit & Loss statement, acing the month-end close process, and presenting financial data like a pro.
Get ready to level up your financial expertise and enhance your business decision-making.
What we’ll be covering in this edition:
4 Levels of Profitability on the Profit & Loss
How to perform a Month End Close?
7 ways to present Financial Data
Let's dive in...
Your Profit & Loss is designed to tell you one thing…
Your PROFITS (or losses 😥)
That can be expanded into showcasing the details in your…
REVENUE → the amount of recognized sales
EXPENSES → the amount of recognized costs
There are generally 4 different ways that you can understand your profitability…
each with a different purpose and story to tell.
Let’s dive into each:
1- Gross Profit
Formula → Revenue - COGS
This tells you how much is left after each sale
To me, this may be the most important metric on your P&L
Because if your margins are negative…
No matter how high your sales are, it won’t fix your problem
2- Net Operating Income
Formula → Gross Profit - Operating Expenses
This is often times equated with EBITDA…
and is a good preview of things before your net income
But Net Operating income can be very different compared to EBITDA (ex: if a company has Depreciation in COGS)
It’s in essence your net income, before your net other income items (which may or may not be significant)
3- Net Other income
Formula → Net Other Income - Net Other Expenses
This formula represents the profitability of your OTHER income & expense accounts
These accounts represent activity outside of your normal course of operations
They can be significant, or significant, depending on various factors in the company
4- Net Income
Formula → Net Operating Income Net Other Income
This represents your bottom line profit
It in essence is what’s left over after you take out ALL of your EXPENSES from ALL of your INCOME
Note: This account can be showed both BEFORE tax, and AFTER tax…depending on the business
5- BONUS: EBITDA
Formula → Net Income + Interest Expense - Interest Income + Taxes + Depreciation + Amortization
This is a popular metric, and is often used to value a company, and estimate it’s free cash flows
While it’s a helpful metric, it also has it’s limitations, as it doesn’t always closely align to free cash flows
It’s also not a GAAP metric, hence you won’t find it on the P&L!
Those are 4 metrics to analyze different levels of profitability on the P&L
What other metrics would you add to analyze profitability?
Month End Close is one of the most common tasks for an accounting function...
and it’s also one of the most important tasks.
Below you’ll find a link to my MEGA GUIDE (80+ pages) on everything I know about how to perform a month end close…
something I’ve developed after closing the books for 100s of companies.
But first…
➡ What Exactly is a Month End Close?
While many may define this differently…
to me, a month end close is the
PREPARATION…
RECONCILIATION…
& SIGN OFF on a company’s financial statements
➡ What are the Steps in a Month End Close?
1- 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
⏩ Attach receipts & documentation on any large transactions (typically above $1k)
⏩ 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!
2- RECONCILE ALL BANK & CREDIT CARD ACCOUNTS
Now it’s time to reconcile your transactions.
A reconciliation is simply taking the balance from one location (IE, your accounting software)…
and TYING it to another location (IE, a bank statement).
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!
3- 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
4- CONFIRM ACCURACY & FINAL REVIEW
Here, it's time to zoom out and review all of your work.
I like to first start by scanning the month over month financials
🤔 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, etc.
Those are my tips for closing out the month.
What has been your experience?
To view the complete guide, click the image below
Reconciling numbers is a big part of Finance & Accounting…
so is forecasting
But if you don’t have a way of PRESENTING your findings…
your work can go unnoticed.
Even the simplest data can add tremendous value when presented correctly…
and there are only a few core concepts to understand in order to do so
Let’s dive into each concept:
1- The Donut
This is great for displaying a % of something - you may recognize the style from your your apple watch on the battery meter
My favorite use for this chart is with a budget vs actuals (ex: 80% hit on revenue target)
2- The Pie Chart
This is best for showcasing the split between different categories
In this example, I chose to split opex by category
3- The Bar Chart
Bar Charts help you showcase data across a timeline
In this example, we are showcasing ending cash
4- The Line Chart
Line charts are similar to bar charts in that they help you showcase information across a time period
I am extra fan of line charts when you have multiple series, and you want to show them intersect
In this example, we showcase the breakeven point, when profits intersect with costs
5- The Combo Chart
This chart is a combination of charts 2 and 3, and is great to showcase 2 different series, ideally on a different axis (ex: Revenue on one axis, gross margin on another)
6- The KPI
This one is entirely custom, and is one of my favorite ways of conveying financial data
In this case, we’re showcasing our performance on various KPIs, compared to last year
7- The Table
This may be the most common method of showcasing data - but it doesn’t have to be boring!
Common uses are a summarized P&L, Balance Sheet, or Cash Flows
What are some other ways that you present financial data?
Looking to get a copy of this Excel dashboard? Grab that right here
I hope you enjoyed 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!