During last week’s last module of the IMO Masterclass in Brazil for CEO’s, we were discussing finances, reporting issues and key performance indicators. The flipchart notes you can see here give an image of what we discussed.
First, we spoke about the main content of the profit and loss calculation. We focussed on the gross margin as a main indicator. Depending on the type of business the gross margin should be above 50% of total revenues. It shows the revenues, minus cost of goods. Then we focussed on the EBITDA. Some businesses aim this to be above 10%. We also discussed a healthy level of regular investments, in order to stay on top of systems, production tools, and facilities. Then we looked at the equity of the balance sheet and how that grows when the company is making a profit.
In Brazil, most of the smaller healthy companies have an equity of more than 70% of the total balance sheet. This makes them strong enough for the constant financial and economic crisis around here in Brazil. The equity is connected with cash flow. All agreed that the biggest concern every day of any CEO of a small or medium-sized business should be cash flow. I strongly advised for a separate calculation of the cash flow, dealing with the cash at hand at the beginning of a period (let's say in the morning), and the end of a period (evening). Of course, this can also be a week or a month.
And finally, we discussed some key performance indicators and agreed that the leadership team should maybe have 5 or 7 of those, but not much more, in order to stay focused. It was a very nice discussion.