Operational analysis: The 4 pillars to master

Welcome to this chapter on exploitation analysis!

In this Operational Management course, we will see the 4 pillars to master in the chapter on operating analysis.

Concretely, here are the different parts that I will cover in this article:

• The income statement
• Farm analysis and GIS
• Self-financing capacity (CAF)
• Ratios in farm analysis
• Conclusion

 

The income statement

What is an income statement?

This is a financial statement established at least once a year for the attention of the tax authorities, banks and other third parties. It brings together all of a company's expenses and income.

It shows the activity of the business unit over a defined period of 12 months, or one accounting year. It allows you to determine the result of the exercise: a profit or a loss.

In the income statement, we distinguish two main parts: expenses and income. An expense is an impoverishment for the business unit, while an income is an enrichment.

In each major part, we distinguish three subcategories: exploitation, financial and exceptional.

 

Income statement or operating statement?

The term income statement will be used more by an accountant while the term operating statement will be used more by a salesperson.

This difference was created by the practice of different sectors.

 

Operating expenses

Operating expenses are directly linked to the company's activity. We mainly distinguish:

• Purchases of goods
• Purchases of raw materials
• Purchasing supplies
• Stock variation
• Personnel costs
• Depreciation charges
• Taxes and duties
• Other charges

 

Financial charges

These are mainly interest charges on loans and discounts granted to customers when invoicing.

 

Exceptional charges

These are expenses that do not have a daily frequency and are not normally linked to the current activity of the business unit and are not repetitive in nature.

 

Operating products

Here are the main products of a business unit:

• Net turnover excluding tax
• Stored production
• Production sold
• The subsidies
• Others products

 

Financial products

Here is a non-exhaustive list of financial products in accounting:

• Share income
• Income from social shares
• The dividends
• discounts obtained during invoicing
• Interests on financial products
• The proceeds of the sale
• Investment products
• Exchange rate gains

 

Exceptional products

These are products that do not have a daily frequency and are not normally linked to the current activity of the business unit and do not have a repetitive nature.

Here is a non-exhaustive list of exceptional products:

• Penalties collected
• Received gifts
• Tax reliefs (other than IS)
• Sales products

 

3 very important remarks

Note No. 1 : it is mainly operating expenses and income which contribute to the result of the financial year.

Note No. 2 : the items “Employee participation” and “Profit taxes” are not included in the various subcategories (operating, financial, exceptional).

Note No. 3 : All amounts in the operating account are exclusive of VAT..

 

Reading an income statement

The company's expenses are on the left in the operating account and the revenues are on the right.

The amounts are shown excluding taxes. Sometimes, there are subtotals which are very useful for calculations of evolution for example.

The order of the headings, products and expenses, is conditioned by that of the subcategories seen above. In order, we have the subcategory "Operation", then the subcategory "Financial" and finally the subcategory "Exceptional".

There are several official presentations of the income statement:

• le basic system (list or table): provided by law for medium and large-sized companies.
• le abbreviated system : provided by law for small businesses.
• Le system developed : planned by the general chart of accounts (PCG), this system is optional for companies.

 

Here is an example of an income statement in the expense table:

 

Here is an example of an income statement in the product side table:

 

 

The essential items in an operating account are as follows:

• The level of turnover.
• the level of operating costs.
• The level of operating profit.

 

How to calculate profit?

The difference between income and expenses is equal to the company's result.

 

Result = Total Revenue – Total Expenses

If the difference is positive, it is a profit and is located in the left column in the expenses, before the grand total line.

If the difference is negative, it is a loss and is located in the right column in the products before the grand total line.

 

Here is an example of an income statement with a list presentation:

 

How to calculate intermediate results?

Using the operating account, the business unit can calculate interim results.

Calculation of operating result = Operating income – Operating expenses

Calculation of the financial result = Financial products – Financial charges

Calculation of exceptional result = Exceptional products – Exceptional charges

 

 

Farm analysis and GIS

The SIG or interim management balances make it possible to note the elements which enabled the formation of the result for the financial year of the commercial unit.

This involves breaking down the income statement into successive balances which allows us to see how the company's results were formed.

 

How to calculate interim management balances?

The GIS are presented in a table composed mainly of three large columns:

1. products
2. the charges
3. intermediate management balances

A balance is the difference between a "set" of income and a set of expenses. A SIG can be positive or negative.

In a set of products or charges, there may be a previously calculated SIG.

If this previously calculated balance is positive, then it is included in the set of products.

If this previously calculated balance is negative then it is included in the total charges.

Here is an example of a table of intermediate management balances:

 

If you would like to see a corrected exercise on the calculations of intermediate management balances, do not hesitate, it is right here:

 

How to interpret GIS?

The sales margin measures the commercial performance of the company.

The production of the exercise is a steering indicator for the manager. It allows to check the industrial efficiency of the company.

Added value represents the gross wealth contributed by the company in the context of its operation. It will then be distributed to the various production factors between the State, the staff, and the capital providers.

EBE which means gross operating surplus shows the possible monetary flow generated by the operation of the business unit.

Operating income measures the company's ability to generate a profit (or loss) directly related to its activity. Only operating income and operating expenses are included in the calculation. It also shows the company's commercial profitability.

The current result before tax shows the importance of the consequences of the business unit's debt in the operating result.

The exceptional result measures the profitability of the company for all its non-repetitive operations and those not linked to its daily activity.

Net income measures whether the company's activity is profitable or not during a given financial year.

 

Self-financing capacity (CAF)

It is the company's ability to generate resources that will enable it to finance the renewal of fixed assets and the remuneration of invested capital.

 

How to calculate CAF?

There are two methods for calculating self-financing capacity: the additive method and the subtractive method.

The additive method

Net profit

+ Depreciation and provisions (operating, financial, exceptional)

– Reversals of depreciation and provisions (operating, financial, exceptional)

+ Book value of assets transferred

– Proceeds from the sale of assets transferred

= CAF

 

The subtractive method

 

(Total products

– all recoveries on depreciation and provisions

– Proceeds from the sale of assets)

-

(Total charges

– all depreciation and provisions

– Book value of assets transferred)

= CAF

 

 

Ratios in farm analysis

The ratios calculated from the operating account or the interim management balances provide details in the analysis of the company's operations.

 

• Activity ratios: Generally speaking, these are the rates of variation or rates of evolution that we find in the business calculations.

Example: Evolution of turnover = [(CA N – CA (N-1)) / CA N-1] x 100

 

• Structure ratios: charge elements / total charges

 

• Profitability ratio: These are usually margin rates.

Example : Profit margin rate = Profit for the financial year / turnover

 

Conclusion

Analysis of operations necessarily requires excellent knowledge of the operating account, mastery of intermediate management balances as well as calculations of self-financing capacity.

Ratios will complement your expertise in operating analysis.

If you want to apply everything you have just learned, I strongly encourage you to read the article on corrected management exercises entitled Exploitation analysis: 16 corrected exercises.

So, now you know how to perform the analysis of the operation of a business unit. You no longer have any excuses for not achieving your goal: Get an excellent grade in the Operational Management test!