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Fast Paced Financial Analysis
by Rusty Luhring, Fall 2006
I have a client who relies on me for general business advice, and who likes for me to look at the books at the close of each month. His controller sends me two CSV files exported from Quickbooks – one with the Standard Income Statement and the other with the Standard Balance Sheet report – each with 24+ months of history.
I do eat my own dog food – or in my case, use my own software for doing financial analysis. The first thing I do is load the files into SurvivalWare Desktop, and see what if any new accounts have been added. That leads to questions such as “What is this new Aflac account? Why wasn’t it there before?”
I use a slight variation of the All Purpose Model in SurvivalWare. I did some customization to try and capture some of their unique needs, such as tracking gross sales and deferred revenue. (I have a handful of other clients for which I’ve done customizations. Look for a product that will allow you to do your own customizations early next year).
The next thing I do is look at Sales. For the Sales number, I like to see if what shows up in the books is the same thing the Sales VP touted a week earlier. The model calculates a gross sales figure by taking “GAAP Revenue” from the books, and adding any increase in “Deferred Revenue” from the balance sheet. (It should also add back “Returns and Allowances”, but I haven’t gotten around to making that change to the model.) This number should equal the Sales VP’s number for “Invoiced Sales.” There is a huge difference this month. It turns out that there is a large number in “Returns and Allowances.” This is something we need to look into. If the number is valid, it bears some management scrutiny.
Based on a graph, GAAP Revenue seems to have leveled off this year, although it is still 42% ahead of last year on a year to date basis.
Next stop is gross margin. Commissions seem to be a little high. The new tiered commission plan is starting to have an impact.
Now for a look at expenses. First a graph of Total Operating Expenses. Things look reasonable, although they seem to have come down in August from July.
I like to eyeball the expense categories while looking at several months of numbers side by side. Most look OK. There is a marketing category that suspiciously has a zero in August after averaging about $3,000 per month for January through July. Were the books closed a little too soon? (It turns out the number was legitimate – but it doesn’t hurt to raise the question).
Cash looks good and healthy: 80 days+ in cash. Wouldn’t we all like to run a company with 80 days cash in the bank!
Now for cash flow. This is one of the really nice things about SurvivalWare Desktop: I can click on the Cash Flow tab and look at what is contributing to (and draining from) cash flow. Just like the expenses, it is nice to look at several months side by side. When I see something, I drilldown on it to look at the detail.
Why did the model calculate an Income Tax Payment for August when I know that there is nothing due until September? In fact, the controller had asked me to do a quick review since the books were being sent to the CPAs to calculate the estimated tax payment due September 15th.
There was an Income Tax Expense booked for August. But the liability account, Income Taxes Payable did not go up by a like amount. The other thing I noticed is that there was an apparent cash flow surge from “Other Current Assets.” A couple of drilldowns solved the mystery: there was an overpayment of Income Taxes from last year. This was put into an Asset account that I had mapped into “Other Current Assets.” In August, the last of this pre-payment was used up, and the balance was put into Income Taxes Payable.
Receivables look good – a steady 42 days of sales. There were no large inflows of cash due to accelerated collections. Payables were actually down to 4.6 days from 17.6. They ballooned last month due to a one time expense that was paid in August.
The company looks to be in good shape – assuming Sales continue to do well. Total time spent thinking about it: 45 minutes. Time spent loading or manually crunching numbers: less than 2 minutes.
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