Accounting Fundamentals for Managing and Sustaining Profitability

Report
Presented by: Don Thibert B. Comm.
A one year program is $12,000.
You earn $12,000/12 months or $1,000/Month.
Or $12,000/52 weeks or $230.77/Week.
Or $230.77/5 days or $46.15/Day.
 Estimating
monthly Revenue
 Budgeting
 Business
 Other
Plan
examples?
 Revenue
less expenses = Net Income
Fixed Expenses:
Variable Expenses:
Rent
Textbooks
Marketing
Student supplies
Payroll Office vs Faculty
Utilities
 What
are your conclusions about expenses?
 Most
of our costs are fixed?
 What
if variable costs are $100 per month
per student.
 Our run rate (Revenue) is $1,000 from our
previous example.
 So
variable costs are 10% of Revenue per
month.
 Contribution towards fixed expenses is
therefore 90% of monthly Revenue
 What
if fixed expenses are $30,000/Month.
 You
would need $30,000/90% in Revenue to
cover fixed expenses or $33,333.33
 Income Statement:





Revenue
Variable Expenses
Contribution
Fixed Expenses
Net Income

$33,333.33
3,333.33
$30,000.00
$30,000.00
0
Break Even = $33,333.33 or 33 students/month

Income Statement:





Revenue (38 X 1,000)
Variable Expenses
Contribution
Fixed Expenses
Net Income
$38,000.00
3,800.00
$34,200.00
$30,000.00
4,200.00
Once you have passed Break-even every new
student has 90% of revenue flow through to Net
Income...NICE!!!!
 Unfortunately every student under break even
has 90% of the missed Revenue flow through to
create Net Losses...OUCH!!!

The Profit Model
Start Up
Turning Star
Cash Cow
Shooting Star
Tution Revenue
100%
100%
100%
100%
Total Wages including benefits
60%
50%
40%
37%
Marketing Costs
15%
15%
15%
15%
Total Overhead Expenses
30%
25%
22%
20%
Net Income Contribution
-5%
10%
23%
28%
 Bad
Debt 2.5% or less of Revenue
 Attrition of 3.0% or less of monthly student
population
 Referrals 40% of started students
 Employee Turnover should be less than 10%
 Graduate Employment 80%
 Student Satisfaction of 90%
 Schools should strive for a 5% improvement
in Profit Year over year.
 Schools that achieve a 25% Profit are
generally very well run.
 What

is EBITDA?
Earnings before Interest, Taxes, Depreciation and
Amortization
 Why
is EBITDA Important?
 What
drives earnings multiples
 There
are multiple principles but I wish to
share a select few:



Continuity – keep reporting in the same manner
Conservatism – do not exaggerate
Matching (the most important principle for our
sector) – that revenue should match the period
they are earned in and expenses that are related
to those revenues should be reported in the same
period.
Trust me – this is not as simple as it seems!
 Here
are a few matching issues I have seen
over the last 10 years in our sector:





Recognizing revenue on a cash basis rather than
when it is earned
Recognizing 100% of revenue when the regulatory
rules say that it is earned
Not matching costs of fees, books, and
instructional supplies to when revenue is
recognized
Forgetting that practicum supervision costs are
higher at the end of a program
Any of these distort your results and ability to
manage your company effectively.

Types of external assurances:
Audits – positive assurance but not a guarantee
against fraud
 Reviewed – substantial diligence involved
 Notice to Reader – simply compiled


Specialized situations
Audits of OSAP in Ontario (and now we have sources
of revenue audits as well)
 Review of earnings and PCTIA payments in BC


Costs
You get what you pay for
 Huge need to pay attention to what you are actually
purchasing

 The
Notes to the F/S are long and tedious,
after the numbers, and that is why they get
ignored
 But they are the explanation of “how
everything was interpreted”
 They include explanation of the assumptions
on capitalization and amortization
 And this is where the real criminals hide key
issues like overvalued derivatives, non
productive assets, or write offs of bad
decisions
 EBITDA



is important to:
Bankers
Investors
Purchasers
 Therefore
it is important to you!
 The calculation is:





Net Revenue
Plus Interest Expenses
Plus Taxes
Plus Amortization
Plus Depreciation
 Financial
Statements should be analyzed
because it helps you understand your
business and keeps you out of trouble
 A couple of quick ratios to consider

Current Ratio


Debt to Net Equity


Current Assets / Current Liabilities (short term
liquidity test)
Total Debt / Total Equity (how much debt leverage you
have on your business – risk versus reward issue)
Gross Profit

Gross Profit / Total Revenue (biggest potential win)
 Budgets



are often avoided because:
We don’t know what will happen in the future
They are a huge amount of work (months to do
well)
They have been used by management as weapons
 But
they are really a solid business process
when used correctly:




They are a planning tool, what do we think will
happen
They demand that you look at key issues like
pricing, growth, and product mix
They provide an opportunity for what if scenarios
They allow for comparisons of “what did happen”
 Revenue
recognition
 Direct costs
 Marketing costs (more ratios)
 Lease commitments
 Matching costs to when revenue is earned
 Accurate and timely reporting with analysis
 Budgeting – get a plan in place (and review
results)
 Balance the right tools with the right staff to
get the job done
 Never forget cash














B/S – Balance Sheet
CA – Chartered Accountant
CGA- Certified General Accountant
CMA – Certified Management Accountant
EBITDA – Earnings Before Interest Taxes Depreciation
& Amortization
I/S – Income Statement
F/S – Financial Statement
GAAS –Generally Accepted Auditing Standards
GAAP – Generally Accepted Accounting Principles
Gross Margin – Gross Profit as a % of Revenue
Gross Profit – Revenue minus Direct Costs
Loss - Bad
Profit – Good
Statement of Cash Flows

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