I’m not going to bore you with too much accounting talk (at least I’ll try not to 🙂)… but today we are going to dive into the income statement and it’s importance to profitability and EBITDA.
This discussion is a deep dive that goes alongside our previous discussion on controllable and uncontrollable costs. Year over year, one of your largest expenses on the income statement will be labor. And, let’s face it... without people you wouldn’t be in business. Even though labor is one of the largest line items on the income statement, it also can be a controllable cost… if you have the right insights at the right time.
As a leader, it is imperative to pay attention to the income statement. But, how often are you actually able to look at your income statement? After the books close each month? Weeks after real change could have been made to improve profitability and customer delivery?
We know that one of the biggest challenges businesses face is not having the insights they need at the exact time they need them. Wouldn’t it be ideal to have the data from yesterday, today? Or even the data from 15-minutes ago right now? What could you do if that were the case?
Well, you’d be able to make evidence-based decisions to impact the bottom line. Not only that, but with analytic.li, you would be able to look at your data dynamically, on the fly, not statically. You wouldn’t have to rely on gut-feeling and last month's reports.
What if your customer’s weren’t being delivered to on-time and in-full each month? What would you do? Would you even know that’s the case until they are calling and asking where their shipment is? What could you do to ensure that they got their entire order, and the right order, every time?
With analytic.li, the unknown is a thing of the past. You will always know exactly what is happening in your business when it happens, not weeks later. Now, let’s dig into how the income statement plays into these scenarios.
The Income Statement
The purpose of an income statement is to answer the question “Did I make any money?” on a weekly, monthly, quarterly, or annual basis.
There are three key financial statements that all companies have: the income statement, the balance sheet, and the statement of cash flows. The income statement is used to report the financial performance over a specific period of time. Some people might also call the income statement a profit and loss statement or a statement of revenue and expense.
Net Income = (Total Revenue + Gains) - (Total Expenses + Losses)
The income statement provides valuable insights into a company’s operations, the efficiency of its management, under-performing sectors and its performance relative to the industry.
Why is the income statement important?
At this point, you might be thinking Great, I loooove accounting (NOT!). Why should I worry about this?
Let’s look at the image of the income statement above. You’ll see two line items are highlighted in red: total frozen pizzas sold in revenue and direct labor expense in COGS. These are two areas you can directly impact on the income statement to boost EBITDA. Here are two examples to prove the importance.
Say you make 1,000 more pizzas than planned in a week and it cost the same amount to make them. This means your top line (aka revenue) goes up. You were more productive, made more money, and most likely had happy customers.
Managing Labor Expense
Labor expense is one of the most important controllable costs on the income statement. Better managing labor expense can drive down the cost of goods sold and drive down variable expense which boosts your EBITDA.
For example, let’s say we make $10,000 worth of pizzas this week and it typically takes $7,500 to produce those pizzas. But this week we decreased the number of overtime hours by sending employees at risk for overtime home and adjusted schedules accordingly. In turn, it only cost $6,000 to make the same amount of pizzas. If that were the case, your profit would increase. Imagine if you were able to adjust schedules every week to dodge avoidable overtime and boost your EBITDA.
Key Drivers of the Income Statement
There are four key areas that we monitor at analytic.li. Each of these is directly related to the income statement. As you think about hitting productivity and revenue goals and boosting EBITDA, you have to ask questions in each of these areas:
1. Productivity: Did we make enough?
2. Profitability (EBITDA): Did we sell enough?
3. Efficiency: Did we run lean and boost EBITDA and/or Revenue?
4. Customer Delivery: Are we delivering efficiently for the customer?
Efficiency + EBITDA
EBITDA which is the earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s overall financial performance. It is a more precise measure of corporate performance since it is able to show earnings before financial deductions. Simply put, EBITDA is a measure of profitability.
EBITDA and efficiency work hand in hand to determine the overall health of the business. The core of efficiency is being able to make more with less. The less time it takes to make a product, the less labor it requires which means the less money it costs to produce. The more you can make with less, the more you can boost your EBITDA. That’s why we have cost per unit as one of our core metrics to track in the analytic.li platform.
As you can see, the income statement and your EBITDA are very important to manage and track throughout the week. Most of the time, companies do not have the resources or the data to track this on an ongoing basis. That’s where analytic.li comes in. With 15-minute refresh cycles and tracking metrics like units produced per hour, cost per unit and order fulfillment, you will never be left in the dark.
That's Why We're Here
At analytic.li, we uniquely understand the need for manufacturers and distributors to closely monitor their income statement and EBITDA. After all, it is one of the foundational financial reports that indicates profitability in an organization.
With our first-ever, cross-functional labor efficiency and worker productivity platform we break down data barriers and organizational barriers to set up operations managers for success. This means businesses can arm their leaders with real-time insights to manage productivity, profitability, efficiency and customer delivery by alerting leaders of positive or negative changes throughout the day.
If you’d like to learn more about ways to proactively monitor your income statement or discuss how analytic.li will work for your organization, reach out to us. We’re eager to connect with you. If now is not the time to consider new software but you liked what you read here, subscribe to our blog below.