Looking at Profits and Losses Like a CEO

Looking at Profits and Losses Like a CEO

The tools laid out in Mark Kuta’s "Think Like a CEO" will provide you with the analysis you will need to cover most of the cases you find yourself in front of. These are the financial metrics that you should know like the back of your hand. Remember that with these metrics you will be focusing on what your C-Level prospect worries about every single day. Frame your discussions around your understanding of these, and you become a “trusted advisor” rather than just a sales person.

You can learn to analyze the data that you get just by reading through the company’s website. There you can get a really thorough financial breakdown, more thorough than in the 10-K report filed with the SEC. Then when you meet with the C-level executive, you can get the conversation to revolve around his specific challenges.
As Mark Kuta quotes himself, you can begin to sound like, “It looks like your penetration strategy has yielded solid results. How are you dealing with the challenges of your top line increasing 36 percent year over, while gross margins tighten?”, instead of dealing with generalities.

You force your mind to study a group of five or so metrics. In this case, you have the balance sheet. Break it down into five categories: the fixed assets, the net working capital, the long term debt, changes in goodwill and intangible assets and leverage. You can define leverage as the total assets divided by the total equity.

The trend in top line growth, is one thing they obviously want to see this trending up.
Why this is important to a C-Level executive? Most all CEO’s watch the sales numbers closely. The fact of the matter is, many Wall Street analysts look for growth on the “top line” as much as they do on the bottom line.
The trend in gross profit margin is a way to quickly see how the company is performing relative to its internal productivity and the market is to look at the gross profit dollars as a percentage of revenue, or gross margin.
Ideally, this trend should at least match the percentage increase in top line growth. You can also look at the operating profit margin to get a quick view of how the company is performing. While the gross margin number tells us market conditions and the direct labor productivity of the company, the operating margin tells us the general overhead productivity of the company.

Increasing interest expense puts an additional earnings debt on the company. Companies that incur debt to acquire businesses or invest in businesses need to make sure that these investments return more than the company’s cost of capital. Net margin needs to be analyzed within the confines of the entire business. If operating margins – EBIT - stay the same year over year, but net profit margin increases, something happened in-between that needs to be analyzed. Perhaps the company sold off a division. That’s how you "Think Like a CEO".

Howard Gibson writes on business and real estate topics, and recommends you read Mark Kuta's book, "Think Like a CEO" .

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Looking at Profits and Losses Like a CEO
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