UNDERSTANDING PROFIT AND LOSS STATEMENTS AND THE PART YOU PLAY

Transcription

1 UNDERSTANDING PROFIT AND LOSS STATEMENTS AND THE PART YOU PLAY Larry Powell Gainey s Concrete Products WHAT WILL WE COVER TODAY? Statement of Income Discuss possible ways to improve the Statement of Income process to improve information flowing from it and to make it more timely and relevant to day to day business operating decisions. Let s consider this a discussion, not a lecture Your thoughts and contributions are welcome and appreciated as we explore together. NPCA 1

2 TYPICAL USERS OF INCOME STATEMENTS Banks/Other Lenders/Bonding Agents In addition to Balance Sheets and Cash Flow information, these users are typically looking at Income Statements for level and consistency of earnings to demonstrate the ability to service debt and/or bonded obligations Tax Authorities (Federal, State, maybe Local) For tax purposes, Income Statements are often different from your normal GAAP statements because of things like depreciation expense timing differences, non-deductible expenses, etc. TYPICAL USERS OF INCOME STATEMENTS (CONTINUED) Owners/Managers of your company At a high level, the Income Statement is used as a gauge of actual performance over time vs the company strategic plan. At a more near term and more detailed operations level the Income Statement (usually compared to budgets and recent prior periods) is used to monitor operating results (and hopefully levels of profitability). This is what we will explore today. NPCA 2

3 PRODUCT LINES EXAMPLE Sanitary & Stormwater Products Transportation Products Landscape & Building Products Utility & Industrial Products Water & Onsite Wastewater Products These product line categories come from the NPCA survey report. You may use different terminology, group your product lines differently, or even have different product lines. For our discussion today when we talk about product lines this is provided to give guidance on the meaning of product lines. COMPARING ACTUAL RESULTS TO STRATEGY Frequency is often once a year Income statements are generally more summarized than monthly/annual internal statements you may use. Multiple years are presented, generally 3-5 years. Analysis is provided (revenue growth % s, margin/income % s, % of sales for each cost category, etc). Allows a high level look at whether your company is achieving operating results consistent with your plan. NPCA 3

4 SOME INCOME STATEMENT RELATED COMMENTS Obviously the Income Statement is the accounting compilation of business operational (revenues/cost) activities. But, it is a historical record, recorded only after the actual activities have occurred. Day to day operational activities are guided by more detailed (and more timely) information. Examples-- 1) quoting prices/jobs requires knowing your product costs, delivery costs, and expected profit and 2) plant operations like staffing levels (labor costs) to fulfill production schedules and related info to measure productivity (hours worked, yards produced etc). So, the question is How do you make the Income Statement a more useful tool for providing information that better informs decision making in day to day operations? INCOME STATEMENTS-GETTING MORE & BETTER INFORMATION FASTER First, irrespective of what accounting system you use or it s capabilities, you must get the books closed quickly each month. This never happens informally. There must be a disciplined, documented process throughout the company for every person/area that provides information to accounting for recording transactions. Next, general ledger accounts must be set up in the detail wanted/needed to get the information owners/managers desire. For Revenues and Cost of Goods Sold, it is important, especially if you have multiple product lines, to structure the accounts to reflect business/product line activity (sales & costs) to the extent practical/desired to do so. NPCA 4

5 INCOME STATEMENTS-GETTING MORE & BETTER INFORMATION FASTER (CONT D) It is especially important that your manufacturing costs properly reflect your plant operation. A guiding principle in this process might be Question- What is our business? Answer- We manufacture and sell reinforced concrete in various shapes and sizes. Greg Roache. About Revenues Is tracking actual average selling price/yard by product line over periods of time useful or desirable information? Do you record revenues and track yards sold by product line? Are resale items sold recorded by product line? Are delivery revenues recorded by product line? INCOME STATEMENTS-GETTING MORE & BETTER INFORMATION FASTER (CONT D) About Cost of Goods Sold Raw Materials (everything incorporated into finished product) Is actual average material cost/yard over recent time periods by product line useful or desirable information? Do you record raw material cost and track yards sold by product line? Resale items Are cost of resale items sold recorded by product line? Other Cost of Goods Sold categories, as applicable Same questions as above. NPCA 5

6 INCOME STATEMENTS-GETTING MORE & BETTER INFORMATION FASTER (CONT D) Having the type of actual revenue and cost of goods sold information we discussed opens the door to margin analysis that could be useful. If, at a minimum or as a first step, you can get manufactured product revenues and cost of raw materials aligned by product line you can then do margin analysis that gives more insight into the reasons for period to period margin (profitability) changes. You may consider to add an additional statement to your owner/manager financial reporting---margin Analysis by Product Line A couple of examples follow EXAMPLE OF CONTRIBUTION MARGIN ANALYSIS A B C D E F G H I J Analysis of Change 2017 vs change Price Cost Volume Total Sales-cubic yards 5,025 4, Sales dollars $ 4,607,925 $ 4,510,500 $ 97,425 $ (65,325) $ 162,750 $ 97,425 Average $/cubic yd $ $ $ (13.00) Cost of Goods Sold Raw Material costs $ 1,290,219 $ 1,256,174 $ 34,045 $ (10,888) $ 44,933 $ 34,045 Average $/cubic yd $ $ $ (2.24) Contribution Margin $ 3,317,706 $ 3,254,326 $ 63,380 $ (65,325) $ 10,888 $ 117,817 $ 63,380 % 72.0% 72.2% Formulas Used Above Sales $ Change E11*C8 E8*D11 Raw Material $ Change D8*E15 E8*C15 NPCA 6

7 EXAMPLE OF GROSS MARGIN ANALYSIS A B C D E F G H I J Analysis of Change 2017 vs change Price Cost Volume Total Sales-cubic yards 5,025 4, Sales dollars $ 4,607,925 $ 4,510,500 $ 97,425 $ (65,325) $ 162,750 $ 97,425 Average $/cubic yd $ $ $ (13.00) Cost of Goods Sold Raw Material costs $ 1,290,219 $ 1,256,174 $ 34,045 $ (10,888) $ 44,933 $ 34,045 Average $/cubic yd $ $ $ (2.24) Manufacturing Labor $ 875,505 $ 852,485 $ 23,020 $ (7,470) $ 30,490 $ 23,020 Average $/cubic yd $ $ $ (1.54) Manufacturing Overhead $ 1,234,900 $ 1,217,835 $ 17,065 $ (25,941) $ 43,006 $ 17,065 Average $/cubic yd $ $ $ (5.35) Gross Margin $ 1,207,301 $ 1,184,006 $ 23,295 $ (65,325) $ 44,300 $ 44,320 $ 23,295 % 26.2% 26.2% GENERAL LEDGER COST ACCOUNTS Payroll cost accounts Salaried and Hourly Manufacturing Direct and Indirect Straight Time and Overtime For each payroll cost account you use, also set up the applicable payroll tax, workers compensation, and fringe benefit accounts. Avoid catch-all accounts. When they change and need explanation, too much time is often needed to analyze them. Contra accounts. NPCA 7

8 HOW YOUR INCOME STATEMENT BECOMES MORE RELEVANT TO GUIDING BUSINESS ACTIVITY Producing income statements fast is always better Comparing actual selling prices and actual margin % s, especially by product line, to expected prices and margins used in your price setting and quoting activity will allow you to see whether you are achieving what you expect. Trends in volumes, selling prices, and margins, especially by product lines, are easier to detect and respond to when/if necessary. General ledger accounting properly aligned with plant & administrative operations and which categorize each major type of cost in sufficient detail makes it easier for owners/managers to stay on top of cost changes and more prepared to explain variances vs what was expected. PRODUCTIVITY METRICS Manufacturing Marketing & Sales Accounting Other NPCA 8