At some point in their career, some event planners find themselves serving on professional association boards. When this happens, an important responsibility is ensuring the financial health of the organization. To do this effectively, a basic understanding of financial statements is essential. (This will also be helpful for event planners who eventually set up their own businesses.)
Today's quick financial primer will cover the basics and only the basics.
Here are 4 main types of financial statements:
- Income Statement: Revenue (money collected by an organization - incoming) and Expenses (what an organization pays out)
- Balance Sheet: Assets (what a company owns) and Liabilities (what a company owes).
- Statement of Changes in Financial Position:
Reflects increase or decrease in cash.
Sources of cash - Uses of cash
- Statement of Retained Earnings:
Opening Retained Earnings + Net income - Dividends = Closing Retained Earnings
Today I'll look at the first 2. I'll review the basics and then look at some simple ratios that will help you get a handle on how the organization is performing based on an analysis of the financial data.
The income statement reflects the financial transactions that have taken place during a specific time period (e.g. annual, quarter, month). Think of it as a motion picture showing what revenue has been generated and how it has been spent.
Best viewed in Full Screen View
- Cost of Goods Sold Cost of Products that have been sold to generate revenue.
- Profit Margin = Net income (What organization keeps after expenses)
- Gross Margin: Gross Profit + Net Sales
- EBIT = Earnings Before Income and Taxes
- Earnings Per Share (EPS):
Significance: Basis for comparing value of stocks from 2 or more companies
Calculation: Net Income After Tax ÷ Outstanding Shares
- Return on Investment (ROI): Most important profitability ratio
Significance: Measures health of an organization
Calculation: Net Profit ÷ Cost of Investment or Net Profit ÷ Total Assets
The balance sheet is a snapshot of a company's assets and liabilities on a specific day.
Assets and Liabilities must balance. If assets are higher than liabilities, Owner's Equity (also known as shareholder's equity) represents net worth, the stake or claim that the owners/shareholders have on the company.
Assets = Liabilities + Owner's Equity
- Accounts Receivable Represents services or products for which an invoice has been issued but for which organization has not been paid yet.
- Inventory: Value of products on hand awaiting sale.
- Working Capital: Capital available for organization to operate day-to-day
Significance: Indicates if organization can meet its current financial obligations
Calculation: Current Assets - Current Liabilities
- Current Ratio: Relationship between Current Assets and Current Liabilities
Significance:The higher the figure the better. 1:1 ratio means there is no working capital
Calculation: Current Assets + Current Liabilities
- Inventory Turnover: (How fast the inventory is sold)
Significance: If an organization is stock piling inventory (i.e. buying too much) this could place pressure on cash flow.
Calculation: Cost of Goods Sold ÷ Average Inventory for Period
- Average Days to Sell: Average number of days it takes to sell inventory
Significance: The lower this number the better. It is important for inventory to move quickly
Calculation: 365 ÷ Inventory Turnover
Future posts will address statement of changes in financial position and retained earnings, and understanding budgets.
Additional Resources: Accounting and Bookkeeping for Event Planners
Photo Credits: Simon Cunningham