Business Tools Blog

In Less is More How Great Companies Improve Productivity Without Layoffs,  Jason Jennings writes:

Productive companies are open with their numbers, and they score everything that’s important.

In most businesses, numbers are still provided to people on a need-to-know basis. The sales manager knows the sales target, the production manager knows the costs of all components that go into creating whatever they do and the office manager knows the cost of overhead. Then all the various departmental numbers are entered, digested and split forth from the desktop of the CFO, who following some top secret mumbo jumbo, nervously clutches the bottom line number to his chest and hesitating delivers it to the top dog who sits in his office and always growls, “Nope, not good enough.”

… Conventional wisdom says the worker bees can’t know how much money the business really makes because if they did, they’d all want a raise. “And besides,” choke the practitioners of medieval management, “the other reason people can’t have the numbers is they won’t understand them anyway.”

“That thinking is stupid,” retorts Jack Stack of SRC, “You can only build a productive enterprise when everyone thinks like an owner. How can you ask people to think like owners if they don’t know the numbers?”

Dan Caruso prophesizes about  Empowerment and Accountability at Zayo.

Accountability, specifically around P&L, will be vastly improved. We will have three groups maintaining their own financials all the way to down to the balance sheet and cash flow level. This might sound fairly basic, but for reasons I will explain in the next blog entry, this is a big deal in the telecom industry.

My guess is that people at all levels of our organization will experience something they haven’t had in a long time in their career, if ever. They will feel empowered. They will be energized. They will feel invigorated.

On a daily basis, employees will see an increasingly direct relationship between what they are doing and how it is impacting our bottom line. Capital decisions will center more on how expenditures will really impact cash flows—and less around how to dress up a business plan to convince corporate to approve. Expenses will be scrutinized—are they really essential for us to win business and provide great service to our customers? Winning and retaining business will feel more important than ever—with a more direct relationship between revenue and cost, every dollar of revenue will matter a ton more.

Though feelings of discomfort are inevitable, I believe most people will respond well to more clearly defined financial accountability. I guess we will see.

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Financial Statements can be intimidating, especially if you weren’t a fan of accounting or math in high school and college.  The good news is that financial statements are basic addition and subtraction.  There aren’t many fancy formulas … so once you are familiar with the format and definitions, you will be ready to fulfill Dan Caruso’s prophesy and feel empowered, energized and invigorated.  I promise!

Over the next few days, I will show the the anatomy of an income statement (I/S), balance sheet (B/S) and cash flow statement (C/F).  At Zayo, we forecast the I/S, B/S, C/F showing 2 quarters of history and a 4 quarters of forecast.

The income statement in all it’s simplicity is shown below:

The following define the terms used in the income statement.   Refer to this earlier post for additional financial definitions that we use at Zayo.

Financial Statement Revenue: is Billable Run Rate at the beginning of the month +/- pro-rates, plus backbills, less credits, less revenue reserves, plus regulated revenue, plus usage revenue, plus termination revenue, plus amortized installs, plus amortized IRU’s, plus construction revenue +/- other adjustments

Network Expense: network costs directly associated with billed revenue. These include third party offnet circuit charges, IRU costs, Colocation Rents, Switch Rents, and Fiber Leases.

Gross Margin: Revenue less Network Expense

SG&A: Selling, General and Administrative Expenses. SG&A is broken into (1) Personnel and Contractor Expense, (2) Network Operations Expense (3) Other SG&A

EBITDA: Gross Margin less SG&A

Depreciation: A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence.  Because it is a non-cash expense, depreciation lowers the company’s reported earnings while increasing free cash flow

Amortization: Writing off an intangible asset investment over the projected life of the assets; or the gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time.  Because it is a non-cash expense, amortization lowers the company’s reported earnings while increasing free cash flow

EBIT: EBITDA less Depreciation and Amortization

Interest: Expense for interest on a loan

Income Tax: Expense for tax on the company’s net profit

Net Income: EBIT less Interest and Income Tax