Pies you can’t bite

Once or twice a year, each engineer is invited by the consulting firm management for the periodic company results report share.

Each of us listen to speeches containing business plan, budget, process improvement, revenues, gross margin, overheads, operating income and several other key words. The cash flow of company operating activitites could be presented.  Sales perfomances of each business unit could be illustrated as well. If you are “important” enough, you could even be informed about the “average dayrates” factor. In fact, clients have been making huge pressure to consulting firms in order to stop/decrease such pricing, especially in such uncertain economic environment.

After a short presentation of any significant activity and event occured since the last meeting, the company plenary meeting may probably consist of some “thanks guys but we urgently need to improve” and a 15 minutes slides presentation with pies, numbers and terms.

These numbers are important, and it’s working trying to join the meeting with at least basic minimal knowledge.

 

Company’s  important numbers are, i.e., the  updated headcount, just to inform about numeric changes in staff.

The staff turnover rate is generally not presented, even if it’s an important indicator (this number affects several costs and expenses in the operating income or EBIT calculation as we’ll see this later).

Generally, the very first number presented is a euro number corresponding to the company total revenue within a certain period.

Revenues are normally compared with a previous reference period, so a percentage change is presented too.

Revenues are simply incomes. It would be very interesting to know the reasons of changes, like i.e. acquisitions etc… Sometimes info on that are given too.

The revenues are often shown in a breakdown set of figures (i.e. by country, by business unit, by customers etc…). The distribution by customer is very important in order to understand the effective relevance of each working unit.

Another important number is called the operating income. This is a final income results (expressed in euros).

The Operating income, is the total pre-tax profit generated by the business.
How do you calculate it?
You start from Revenues.
Removing the cost for generating that revenue (as a consulting firm is a service company the cost is what you spend for consultants in terms of material, PCs, any other good for them, hotel, travelling allowances,  etc…) you get the Gross Profit.
Gross Profit is very important because it determines how much money you have for salaries, dividends to shareholders, investiments…
If Gross profit must be big enough, infact, in order to obtain the Operating Income you need to subtract the operating expenses ( salary to pay, income taxes, office supplies, research and development costs, legal fees, accountant fees, bank charges, electricity, water, rents, cars, etc…)
Now you have the Operating Income. It is not yet money in company pocket, as there are still others to pay (yes, taxes, and not just them unfortunately).
Operating Income is important because if you divide it by Total Sales, you get a percentage named Operating margin, which is important as it tells how good you are performing.
The Operating Income is often named as EBIT, acronym for Earnings before interest and tax. It is a financial indicator as measure of the success of a company from period to period. (sometimes companies calculate EBITDA, which is EBIT added of depreciation and amortization charges:  EBITDA = operating income (EBIT) + depreciation + Amortization)

We are close to the end, please resist guys! (I intentionally removed form the discussion amortisation of goodwill and adjusments coefficient).

From EBIT we need to remove taxes and we get finally the net income, which corresponds to effective Earnings.

Sometimes changes on net income are presented too. Net income is important as it measures how profitable the company is over a period of time. The measure is also used to calculate earnings per share, in case you want to buy stocks of the company you work for.

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