Intro to being a CFO! Learn about Profitability and Financial Analysis.

1. 02 What you will Learn: Okay, everyone, welcome to Intro to financial analysis. We've done the video introduction, so, like, let's actually get started on the class. Now again, this is presented by Brandy Money Onda. Let's go and get started. So what's the purpose of this? The purpose of this course is to teach you how to perform detailed financial analysis of the businesses or your own companies. Financial situation. This course will show you where to focus your analysis and energy, but will require you to dig into the financial both the actual transactions and the budget to come up the reason why things are happening. So in any good company in your company or the company you work for, you need to have a budget, just like in my personal finance classes. When I talk about having a budget, you have to have a budget or you can't tell why things are going wrong. So we'll talk about how to create a budget during this class if you don't have one. But you have to understand the actual transactions, what's actually occurring, and then the budget as well. So what are you going to learn today? You're gonna understand costs and profit so there's a difference between the variable and fixed costs, and we'll cover the definitions of what a variable cost is and what a fixed cost is, and then contribution and unit margin, total margin or profit. Those are all different terms. We gotta understand those before we can move on. Then the second thing you gonna learn is understanding. Break even. You hear the term a lot. What is break? Even so, how maney units do I need to sell to make sure I'm not losing money? That's what you're trying to do. You're trying to determine how many units you need to sell to make sure that you're not losing any money. So the difference between profiting cash, why is cash King? We'll talk about that. That involves a little bit of accounting, but shouldn't be very easy to understand the difference in profiting cash, basics of budgeting and forecasting for business. So should I start a business? This will help you determine if your business is going to be profitable and then determine how hard you're gonna need to work. How Maney yoga customers. We're going to need how many hamburgers you're gonna need to sell to make sure that your business is profitable. And then when you put that number down in a spreadsheet, is that possible? Can I sell a 1,000,000 burgers a month? Maybe that's not how many you need to sell. Maybe you need to sell 50,000 burgers. So you have to determine how many burgers genius cell per day per month per week to determine if this businesses even feasible. And then finally, the basics of variance analysis. So now you've created your budget, actual transactions have occurred, and now you have to actually do some analysis. So why didn't I make a much money as I thought I would have? What's causing the variance? Is it because you know I made a sale or is it because I didn't sell enough quantity? We'll talk about the difference from rate in quantity when we talk about basics of variance analysis. So this is what you're going to learn today. With that being said, let's get started 2. 03 Definitions for Margin Analysis: So what we need to do before we jump into the Google Sheets is to understand that the few key definitions I've listed the definitions out here and we'll go over them right now. What I recommend is that you have a sheet of paper out and that you write these down by hand because it's gonna be really important that you understand these in the long term to do good. Financial analysis is the first definition. If you follow, my mouse is going to be fixed costs. So fixed costs is an expense or costs that does not change with an increase or decrease in the number of goods or services produced or sold. Fixed costs are expenses that have to be paid by company, independent of any business activity. We're about to go through an example of what would be fixed costs. But things you can think of are, for example, red. No matter what, I have to pay my rent, right? So that's the way to think about it. Fixed cost of things I have to pay no matter what. And as you can see of the image above, it stays constant no matter what. So the next one related to it are variable cost. A variable cost is a corporate expense that changes in proportion of production output. Variable costs increased or decreased depending on a company's production volume. They rises production increases in fall as production decreases. So Slate say, I'm making protein powder for a bunch of people who love to work out. The more I produced of the protein powder, the more it's gonna cost me if I stopped producing it. It doesn't cost me that much right. Or if I don't produce dating at all, it doesn't cost me today. So that's why you can see variable costs go up when I'm produce more and down. When I produce us up. When I produce more and down when I produce less, the next one is sales price. It's a price in which a certain class of goods or services typically sold. So if I'm selling that said protein, I can sell that protein for, let's say, $60 on, and that would be the sales price. So now let's talk about unit margin unit margin, also called unit contribution margin. So those air interchangeable terms unit marginal contribution margin reflects the cost incurred to produce and sell a particular unit of product. It is a prophet of cheese per unit after deducting variable costs from the product sales price. So in our protein example, let's say that a cost $30 to produce the protein and I can sell it for 60. The unit margin in that case would be $30.60 dollars to sell it $30 of variable costs. But we haven't taken in consideration any fixed cost yet, so we'll talk about that later and then total margin. It's the total amount of margin or profit has made after deducting fixed costs as well. So it's total margin is equal to subtract out your fixed costs. Subtract out your variable costs from your total sales prices, your total sales revenue. Eso these are the key definitions again, I would write them out by hand. Fix Kloss Call, say the same, no matter what variable cost. They move up and down, and five producers produce less ERM or sales price. How much I'm actually selling it for unit margin. How much I'm making after I take out just variable costs. Total margin after I take out fixed and variable cause how much is left. So it's very important to understand these definitions 3. 04 Example 1 Google Sheet: So now let's move on to the Google sheet. So toe work in the Google sheet. I get a lot of questions about this. You need to download a coffee. OK, so Goto file here and make a copy, and then you could just just name it. Whatever you want and save it in your Google driving will need a Google account to do this . The reason why we have a Google sheet is because not everyone has Microsoft excel. So to make our classes available to everyone around the world, because more than students just in the United States take this and not everyone can afford Microsoft Excel. Google Sheets is free. So you have to download a copy again. I'm gonna do that again just because I get some negative comments. Sometimes it says the sheets are locked. It is. It is locked. But you could make an edited version a version that can be edited by saying make a copy. Okay, so file, make a copy. That being said, we are going to run through an example off a food truck. Okay. Ah, food truck that sells hamburgers for all of you that don't live in the United States. Ah, food truck. You can just think as a normal store you own a store that's going to sell hamburgers. It's a small little restaurants, and all you do is sell hamburgers. So again, we're gonna run through some of these definitions going Need a hammer home. These these points fixed costs. You have to pay these costs no matter what variable costs. You only pay these costs. If you sell a hamburger sales price, how much revenue you get per hamburger unit Margin. How much to make how much profit you make. Also, each hamburger and that total margin, How much profit you make in total after accounting for fixed costs. Okay, as always, I make this very, very simple, and certain steps are listed out here and we're going to do these together. Okay, we're gonna do these together, so please download the Google sheet. If you haven't yet pause it file making copy and then let's do this together. So the first thing we need to do our understanding costs and labeling them fixed or very so full time employees. So we have one person that makes the hamburgers and sells hamburgers for ease of understanding where simplifying this example lot. Obviously, if you were actually running a food, hamburger, truck, food, truck you need people to cook it and people to sell it etcetera. But in this case, we just have one full time employee. So is this a fixed cost or is this a variable cost? Let's ask ourselves if we sell no hamburgers. Do we have to pay our employees? Yes. If we sell 100 hamburgers to get the self pay our employees, the answer is yes. So we have to pay our employees no matter what. Which means that this is a fixed cost. So we also have a monthly rent. We have to rent our food truck. Until now, the question becomes, Do we have to pay our rent if we sell zero hamburgers? Yes. If we sell 100 hamburgers, do we still pay? The same exact? The answer is yes. What happens if we sell 1000 hamburgers? Yes, you still have to pay your monthly rent and luckily it's still the same. So what that means is that it's a fixed cost now the cost of the hamburger. I think that's pretty self explanatory. If I sell a hamburger. Do I have to pay for it? Yes. If I don't produce any hamburgers, do I have to pay for them? Mansour's? No. So this is a variable cost. This goes up as I sell the number of hamburgers and down as I sell less hamburgers. So now complete except one. We've listed out our costs. Full time employees monthly, red and cost of a hamburger. And we label them fixed or variable again. We simplified this. So let's keep it at that step to determining the amounts. How much is a full time employee? I'm gonna write numbers in here because I'm gonna give them to you these air not to have to be calculated on your own when you're starting your own business. Because I think a lot of entrepreneurs they're going to take this class. You have to determine an accurate cost of these things. So if I'm putting down a full time employee for $30,000 I want to hire a U I designer or a coder, $30,000 a year is probably not gonna be in the accurate cost. So you have to understand what an accurate cost is for somebody running a food truck. $30,000 Probably, you know, a reasonable cost. So what's the rent to rent my food truck? I'm gonna say it's $1000 a month to rent again. I'm coming up with this. So this is, um, for a year than making $30,000 then per month. The rent is $1000 for the food truck, the cost of a hamburger, $2 per hamburger and then the selling price. I'm gonna sell these hamburgers their little, um, fancy or hamburgers. So I'm gonna sell each hamburger for $7. Okay, so now we covered are fixed. Costs are These are fixed costs. Here's our hamburgers are variable cause and are selling price. Well, is our sales price of $7 for him? So now we completed step one, labeling our costs fixed or variable and step to determining the amounts for the costs, the expenses and our revenue, which is the selling price. And then, if you were running your own business, you have to determine what is a reasonable selling prices. $7 for a hamburger. Will people pay that? The answer is probably yes. People will pay $7 for a hamburger in the United States. So Step three finder, a unit or contribution margin. So the unit are margin is how much profit you make off of each hamburger. So I sell each hamburger for $7. So link the cells here $7 how much is it? Cost me to produce each hamburger $2. So that means my unit or contribution margin is $5. Every hamburger I sell, I make five books sounds all well and good. But the problem is, I haven't taken in account the fixed caution, so to take into account the fixed costs I have stepped for, which is a cost to break. Even so, the total fixed costs for the year include what they have my full time employees and rent. And again, I'm doing this per year. So my employees cost $30,000. This is per year, and that if my rent is $1000 per month, how much is my cost per year? Well, it's $1000 times 12 months in each year, so all right, this out for you $1000 times 12. So we don't forget. It's always important to write little comments out. So you remember how you came up with that amount? It's also in the formula itself if you look up here. So my total fixed cost per year are $42,000. So now I can pull my unit margin $5. And how Maney Units does it cost to break even? So break even means I'm not losing any money. But I'm not making any money either. So the total units toe break even. I need to sell 88,400 hamburgers per year. Toe break even. What that means is that I can cover all of my fixed costs for a year or $42,000. Okay, so how many units is that per month? I just got divide that by 12 at 700 units per month. How many units per day? Let's say I'm never closed a 365. So this assumes open every day, so I gotta sell 23 units per day or 23 hamburgers per day. And so is how many? How many per hour do I need to sell? Right? And that's a That's another question. That's a good way to think of things. And so what I'm gonna do is I'm gonna assume that I'm only open eight hours per day. Divide that by eight. So this is hamburgers her our and assumes eight hour day. Okay, so I'm only open eight hours. So can I sell three hamburgers an hour? I feel like Yeah, I can I can do that. So this seems like a pretty reasonable business if these costs are correct and that I can actually sell them for $7 in my cost for hamburgers, too. And can I sell three hamburgers a day? That means at least I'm not losing any money, which is the cost to break even. Okay. Cost a break even is a number of units I need to sell to cover all of my fixed costs. And again here my fixed cost. So, step five, we're gonna calculate our total margin. So total margin, what we're gonna do is going to say units or hamburgers sold. So let's Macon implicate. So let's like this and they call it amounts. Type that in. So we'll make this in a mountain. Let's say let's just test it out. Let's say that we have 8400. Okay, so the total revenue I'm gonna redo this formula 8400 times. How much I sell each unit for right. And that's $58,800. I sell $7 times it by 80. 400. So one of my other costs. My costs are full time employees. I'm gonna link it here. Cost of a full time employee. Rent is the $12,000 a link it here and then cost of goods sold. So possibly sold Is 8400 units times. How many? How much does it cost for hamburger? $2. So 58,800. And now you can see my total margin is here. So what I've done is redo this cost a break even, but broken it out so you can simply understand what's going on. So if I sell 8400 units, I make $58,800. I've covered all my fixed costs, and I can pay for my cost of goods sold, which is the cost of the hamburgers. And my total expenses are exactly the same. So now I've set this up for a reason. So let's say I sell 8000 under one hamburgers. It's equal exactly to my unit. Margin. $5. So for each additional hamburger I sell, I make $10 or $5.10 dollars in total. So the reason why I made this dynamic what that means I can change this is if I were really trying to start a business, I would say, Look, to make this food truck happened. I have to sell 8400 and hamburgers per year. I feel like I can sell. Let's say I'm open 365 days a year. I'm gonna do some scratch work over here 365 and Aiken sell. Let's say that I think I can sell five hamburgers per hour, eight hours per day so I can sell 14,600 hamburgers. So if I sold 14,600 hamburgers, let's change the font of I mean the way this looks here, the formatting a little nicer. So 14,600. I'd actually making $30,000 a year, and this is what we're. This is a very simplified version of what we call scenario analysis, which will be doing an example, 300 variance analysis. But this way you can change the numbers. Let's say it's out 13,000 year. I'm gonna make $23,000 profit or margin here. So this is the way they think about it. When you're thinking about opening your own business or starting your own business, it's to say, Look, under these scenarios, I need to sell at least 8400 anything above, I'm gonna make money. But let's say if I make less than that is still less than that. I'm gonna start losing money if I sell 7000 hamburgers. So that's the end of this example. Now you know how to label fixed or variable cloths. Determine the amounts. Find your contribution margin, determine how much it costs a break, even how many units you need to have break even and then create your own dynamic analysis so you can do scenario analysis for when you're starting a business. What would happen if Isil 87,000 hamburgers, 8400 or 9000 hamburgers? Right, and you can see them. The margin increase or decrease with those that being said, That's the end of this section 4. 05 Example 2 PPT: So now let's talk about budgeting and forecasting for a business. Okay, let's go through a different example. You are considering starting a small boutique Jim called Surfers Jim. This gem sells a monthly membership for $229 a month and also provide certain add ons, which include in body measurements for $20 for each measurement like body fat analysis and stuff like that and then protein supplements $60 for each been of protein. The expenses include monthly rent of $10,000 a month coaches three of them for $3000 a month. Each of them cost $3000 a month so annually. Each coach makes $36,000 a year. Utilities $2000 a month in body machine rentals, $150 a month, and the protein cost is $30 per month. These are all the expenses that I have included. I want you to calculate your total margin or income, which everyone you want to call it if you have 200 members throughout the year and each member purchases one protein per month in one body measurement permanent. So that's all the information. We're now going to move to the Google sheet to perform the announces on example to 5. 06 Example 2 Google Sheet: So we're moving back into the Google sheet and we should be on tab example to budget and forecast. So we're following the same steps. Step one. Listen, label your claws step to determine the amounts. Step three, Finder unit contribution margin. Step forward. Costs of break even and set five total margin forecast. Okay, so I made a copy of the slide here so we could have the information in the Google sheets, so we'll have to go back and forth. So first, let's Leibler clause we have a full time impolite. We have monthly rent. We have utilities, we have the in body machine rental, and then we have costs of the protein. Okay, so are these fixed or variable costs full time employees gonna be fixed monthly, rent fixed, utilities fixed. We have to pay them, no matter what. In body machine is fixed with some monthly rent, no matter what and cost. A protein is very. As we sell more protein, the cost go up. And then as we sell less protein, that costs go down. So that's a variable costs. So step one. I'm not gonna go into each reason why each is fixed or variable. Really? Just ask yourself if I served the gym. Do I have to pay these no matter what? If I have to? Members or 200 members answers. You have to pay the coaches no matter what the rent, no matter what utilities, no matter what, the machine's gonna be there no matter what. And if I sell more protein, that's another source of revenue. Then the costs go up. If I sell less than I would sell, the costs would go down. So now let's determine the amount. I'm gonna the answer. The amounts are here, but let's write them out into the spreadsheet can use them full time employees. Total clauses. $9000. The frequency is monthly, right? I have 33 coaches on. They all make $3000 a month. My monthly rent is listed here as $10,000. That's monthly utilities $2000 in love. Again, I'm taking them from my examples of This is just a lot of problem that you would get in university in body machine $150 a month and then cost the protein, which is $30 for each protein that I sell So Step two are determined. The amount that's pretty easy cause they're all listed here. So Step three, let's find our contribution margin and what is contribution margin again? It's my revenue. Subtract out my variable costs. I'm not in consideration any fixed costs here, so membership monthly price listed here is to 29 per month. I also have my embody measurements, and that's $20. And how am I getting $20? Each member only purchases one body measurement per month, $20 of revenue and then protein, and each one buys one protein per month. So that's $60. So these are just labelling here. Revenue revenue All right, like capitalization. A little bit better. This is a revenue, and then this is my cost. My only cost is variable cost of protein, and this is $30. So what's my unit contribution margin? It's equal to some of my revenues and subtract out my variable costs. Okay, so $279 is the unit contribution mark, but I haven't taken into consideration my fixed costs yet, which is almost all of my costs in this gym example. So let's calculate, or it cost to break even first. Let's list out all of our full time. I mean, are please all of our fixed costs. So that is $9000 per month. Monthly rent. Change this into dollars to make a better look. Better monthly rent is $10,000. Utilities. It's $2000 in body machine is $150. So these are really move this down, It looks better. And then put in the line again. These are all my fixed costs. So total six. Okay, So total fixed costs in one is equal to the sum of all these things. Simple point was equal to some. I'm assuming all of you know it. So that's 21,001 or a few dollars per month in total picks cause divided by my unit margin . Okay, my unit margins $279. Gives me how maney memberships I need to sell each month. Okay, so let's take this divided by the unit. Margin that 75.81 I can't sell part of the membership someone around it put round, and then I'm not gonna give any decimal places, and I'm gonna close it, so that's gonna round up to 76. So I need to sell 76 monthly memberships to break even. So if I need to cover all my fixed costs, I need to have at least 76 members in our example, we actually have 200. So in our mind, we should be thinking from a reasonable that shack. We're gonna be making money. So let's now focus on our total margin forecast, which is the last part. Okay, so let's break it out into number off members. And then let's talk about revenue list out our revenue. So we have membership revenue. We have protein revenue. How much protein do we, Sally? Tomorrow and we have in body revenue. Okay. So if people get measured, we make money. We have our total revenue here. Then we have our expenses. This list, those things out, we have our full time in police, otherwise known as FT East. We have a rent utilities in body, machine and protein. Okay, those all our expenses. So then we have total expenses here. And then little mark. Okay, so now let's go ahead and fill these numbers in monthly. How much did we get? Sorry. We want to do 200 monthly and then everything years is gonna be multiplied by 12. Because if I have 200 per month, that means I have 2400 per year. Right? So membership 75 200 members. Membership revenues. $229 right. That's 200 times my revenue per month. 229 protein revenue. I only sell one protein to each member each month at $60 in my in body measurements, every memory gets measured each month. The meant monitor their progress, and that's $20. So my total revenue here her month is $61,800. So what about my full time in police per month? I have $9000 for my full time employees, and this is already clad, Calculated for months. I don't do that again. My rent per month is $10,000. My utilities already appear $2000. My embody machine $150 my protein is a little bit different because I am selling my protein at $30 the cost per protein and I need a multiply that by my members. Remember, this is a variable cost fixed cost, fixed cost, fixed costs and fixed. I'm labeling them here, so just so you can see so order my total expenses. My total expenses are $27,150. So how much margin in my making per month off 200 members per month. I'm making $34,000 per month. Not pretty. Not bad at all, right? So how much of my making annually? So we can answer this last question, calculate your annual income or your annual margin. Annual margin is literally everything times. Okay, so I'm just gonna copy and paste here and copy and paste here and then copy and paste here to make this better. I'm gonna do Ah, format painter. There we go and sell this when it comes out to total revenues. $741,000 for a year. All I'm doing is multiplying by 12 everyone total expenses multiplying that by 12 and then total margin multiplying that by 12. So based off this example for surfers, Jim, if I have 200 monthly members and they pay $229 per month, they buy some protein, right, and they get measured each month that I'm making $61,800 per month. I have to pay my coaches because I have three coaches for these members, so they have some personal training aspect to it. I have to pay my rent. My utilities. I have to pay for my embody machine and have to pay for my protein cause I'm selling protein each month so that I get $27,000 of expenses and my total margin 34,650. To make sure this works. Let's put in our total monthly memberships. I need 76 to break even. So if I put in 76 year should come close to zero, I type in 76. Yes, it says $54 but it's because it's rounded, remember? And so if I actually just linked the cells, that's still 76. But anyway, so you can see that this is going around a 0 $54 rounds to zero in six and $48 around 20 No one really cares if they made $648 of profit when they're running a business that cost him hundreds of thousands of dollars. That is what we call in material. It's just gonna be $0. So our formula works that we put in 76. So that means that we put in 200. And if we have served any less than 76 I said we serve 75 members. We started losing money, guys. And here's the key there, too. He's here. That I want to talk about one is how cash is key. Okay, so even if I have 76 members, if I'm not actually collecting on this revenue, I'm gonna go bankrupt pretty darn quickly, okay? Because revenue is not equal to cash. In this case, if I'm running a gym, most likely it is because I'm gonna say, Look, pay me in cash. But what happens if I say you know what? You don't have to pay me. Except for one time of year. And for the 1st 12 months, you can come free. Well, im earning revenue because they're coming in and take my US Gap financial accounting class . If you don't what that means. But unless they pay me, I'm not able to collect on that cat. So if I get credit cards. If I accept credit cards, I won't be paid immediately. So that's why cash is king, because revenue is not equal to catch. Sometimes it is with a food truck, it is, and most likely what the gym membership it is. But if you're running a large scale business, there's a thing called accounts receivable. And that's why cash is king. You need the cash to have into your business to make sure that it can keep going. And that's what we call working capital. And the second thing is, is, let's say that I think that I only can average 70 members per month, and I wanted to reproduce this this gym. I have a surfer, Jim and I went five more surfers. Jim, should I produce this? If I have actually, let's just say it. I have 74 members a month, 5 74 members a month. I'm losing $6000 a year if I reproduce this, and I think we all know a negative numbers mean negative numbers Times any number is gonna be more is gonna be more negative. So let's say I open 10 of them across the city of Houston. I'm gonna lose $60,000. A really important point is when you're starting a business and you want to make multiple locations, each location has to be sustainable on its own, or you should not open it. So unless every location can have at least 76 members, which would be zero. But at least at least you're not losing any money. Then you can keep reproducing them. You can keep replicating these thes franchises that are these these gyms. Okay, so it's really important when you're doing financial analysis to understand when you're dealing with a big company that you look at each individual, a store, Jim, food truck, whatever it is, you have to look at it on an individual sustainability measure. So is this by itself, sustainable? It is not sustainable. You should not replicate it, because if you do, it's gonna put you in a really bad negative profit margin area. So it doesn't matter if you produce 100 gyms that have 74 members, we do 100 Jim's. It just makes you multiplies your loss, and then you could be losing $604,000 a year on, and you're like, well, look, I own 10 Jim's. Well, you're losing a ton of money and be way better to operate one Jim with profitability. So one Jim making having 80 members and making $14,000 a year is much better than having 10 gyms that are losing $6000 a year apiece. So that's the end of this example. We covered a lot here, So watch it again. Watch it multiple times if you need to, because this is really important. When it comes to financial analysis as being a CFO, a lot of people do not understand the difference from very variable costs, fixed costs, breaking down the types of revenue and then looking at sustainability on a unit level, meaning like at one school, 11 Jim What? 11? Whatever one food truck that one. Before you replicate, it must be profit 6. 07 Definitions for Variance Analysis: So before we move on to the last and final example, we need to cover a few more key definitions. The 1st 1 is Therapist Purvis. It's a term when we do variant analysis the phrase meaning all things equal. Everything else equal in the reason why we bring that up is that we we cannot do analysis of 18 different moving parts are happening So we gotta focus on one moving part which will go over an example. Three. What is what people mean when they say unfavorable? Various. Okay, What that means is amount by which actual cost 60. They standard costs are budgeted costs. Okay, so also the amount by which actual revenues are less than budgeted revenues and we'll show you an unfavorable variance. In example, three favorite variance is a good thing, a difference between an actual costing and budgeting or standard costs, and the actual causes the lesser amount. Okay, so things are cheaper than we expected them to be from A cost perspective in the case of revenues at favorite variance occurs when the actual revenues are greater than the budget or standard revenue. So I thought I could sell my hamburgers for $7 for for hamburger. But for some reason I can sell them for $9 right? Maybe there's a hamburger shortage and everybody wants to buy my hamburgers. That would be a favorable variance to revenue. You have to understand how things are correlated to check your work. So positive correlation in which will cover an example three as well is when relationships between two variables and which both variables move in tandem that is in the same direction . A positive correlation exists when one variable decreases as the other variable decreases or one variable increases. Why the other variable increases okay, and then inverse correlation. Ah, contrary relationship between two variables such that they move in opposite directions, for example, with air variables and be as a increases be decreases and as a decreases be increases. Also known as negative correlation when we're gonna cover that example. Three. So I write these down by hand, just like I recommended every class. When you ride him down my hand, you'll have a better job understanding what's going on. So the last, the last thing you need to cover before we go to example three is rate versus quantity when you're actually performing the analysis. So this is what you can break down every analysis into. There's a rate difference, and there's a quantity difference. During any analysis, you should be able to break down the amounts, including variances into two components. Rate in quantity. Think about rate as a dollar per unit. Examples for our food truck, the sales price for Gamper hamburger is a rate, so the cost of each group hamburger is greater than the budget. This is due to the rate this was also being unfavorable variants another one. The other one is quantity, which is the number of units I've sold. So for our food truck, the number of hamburgers we sell is considered quantity. Abbreviated Q t y. The more hamburgers we sell, the higher the quantity. So we sold more hamburgers than our budget. That would be a favorable variance. See how our time everything together. That's what I love about this class. So now we're looking at rate in quantity and let's go into example three, which we actually do variance analysis and determine what what they're all what The variances are favorable and unfavorable and the difference between rate in quantity. So that being said, let's move to the Google sheep 7. 08 Example 3 Variance Analysis Google Sheets: so if you're starting your own business, you need to create a budget for your business. So for the budget for the business, let's go ahead and do that for our hamburger food truck is the one we're gonna do. We're gonna have a full time employee unless use the same cost from example one so that employees cost $30,000. This is on a per year basis. Rent is $1000 for months. Cost of a hamburger, $2 for hamburger. And again, we're just pulling this from the example. One we're building on it and the selling price is $7 for hamburger. Okay, and then the number of hamburgers. Seoul per year. In our budget, you want to sell at least 9000 hamper. OK, so that's our budget. We think we can sell 9000 so let's write down our budget. Your budget for a revenue is $9000 times of $7 per hamburger. Weaken cells that $63,000 let's ride our expenses. Full time employees. We pay $30,000 for a year, no matter what. Remember, this is a fixed costs on the labeling here just in case rent is $1000 per month. So 12,000 Not gonna be the math here. That's a fixed cost. No matter how many hamburgers we sell, that call stays the same and the cost of the hamburgers. This is our variable cost, which we should know by now. It's $2 per hamburger result. And I make the formula dynamic by feeding off the number of handlers result. So it's $18,000. So total expenses here, um, are 60,000 doors so that some of these so total expenses $60,000. What's my margin? That little margin for the year would be obviously, revenues minus expenses $3000. And again, if you need a refresher on accounting for revenues and expenses, take my accounting course is going to be really important. So my total margin is $3000. Now, let's go through an actual scenario. So now some stuff happened. Let's go through what actually happened for the year. Okay? And this is what we call in financial analysis scenario analysis. So you gotta understand scenario analysis. Okay, so now I'm gonna copy these over just to make it quick. And I'm just doing control C control via as a short cut. Um, and I'm going Teoh, copy all of this over as well. So right now, all of the numbers are exactly the same. But let's say that my cost of my hamburger instead of $2 is $2.39. Okay, I'm gonna drag out the decimal places. $2.39 is the cost of the hamburger now. Okay, um, and instead off, actually, let's put it 18 here. Just cause for some math. I wanted to work. 2.389 is the cost for a hamburger. So the same number of hamburgers were sold about the year. My revenue still the same, right? Cause everything that the hamburger selling prices and I was able to sell him at $7 I was able to sell 9000. But look you, my total expenses went up right? Because of my cost of my hamburgers, my variable costs went up, which means I lost $500. I've lost $500 this year, even though I made Mike my sales goal or 7 9000 hamburgers. So what would be my action item? my action here would I would look for a new supplier slash cheaper cause because I know by looking at this that hey, you know what? The reason why this is happening is because the cost of the hamburger is higher. So what is this when we look at a woman looking unfavorable variance? This is an unfavorable variance for the rate for cost of hamburgers, right? The cost of my hamburgers. I budgeted for $2. It came in at $2.39 roughly so. That's an unfavorable variance. My cost was higher than my budget. And then when it comes to correlation, there is an inverse correlation. The cost of goods went up, cost of goods go up and my profits go down. And that's the inverse correlation. It's important to understand that is my cost go up, my profits going to go down. So let's recap this my costs. My hamburgers were more than I thought they were going to be. Maybe beef prices increased throughout the year, and so my total expenses were higher, but my revenues were the same. My margin was negative $500 which led to me, requiring me to look for a newer supplier or cheaper cost. I have an unfavorable variance for that rate, which we talked about already. And there's an inverse correlation between the prop. The cost of its old and profits. Cost of goods sold went up and my profits went down. So that's the end of scenario one. Let's move on to scenario, too. So I'm gonna copy all this stuff over. I'm not gonna copy the notes down their control, see, and then controlled the just to save some time. Now let's say I want to make it back to normal. $2 for hamburger. Well, let's say instead of selling 9000 hamburgers, I have some sort of problem selling the number handlers I wanted. I could only sell 8300 hamburgers that further year. Okay, so now you can see my revenue went down, but my expenses all state pretty similar. My fixed costs are all the same, but my cost of my hamburgers went down right because I sold less and that's a variable cough. So my total expenses are 58,600. My total margin is negative. 51 So what's my action? Here is I need more customers. I have an unfavorable variance. Quantity. And do you see why? Because I wanted to sell. My budget was 9000 but I actually only sold 8300. So I had unfavorable variance for that and a positive correlation related to my quantity. So my quantity goes down, my profits go down so you can see a positive correlation here. Positive correlation. They move in the same direction. If I sell less hamburgers, of course, I'm gonna make less money. So what I want you to see here, Let's take a step back. Pause the video 1000 lei, quick. But look, the reason why variance announces is so important is one I need to set a budget. Justin, like personal finance, you need to set a budget. Then when actual things occur. So they say this actually happened and this actually happened. Look what happens on my margins. Negative $500. But you see the importance of variance analysis because look, in this case, I need to look for a new supplier action for a new supplier. Cheaper costs in this case, I need more customers. There's a reason why this one's a rate variance, and this is a quantity variants, okay, And that's what we've been talking about is the difference between rate in quantity. So that's why you see, it's important to build your budget and then look at the actual and then determine your variance analysis here because you may be doing something completely wrong. So what variance analysis allows you to do is determine the true culprit for what happened ? Was it because my costs were too high? Or is it because I needed more customers even though the margin was roughly the same? Which is why around this number here, But this tells you why things happen. That's why variance announces so important. And as a CFO, I look for analysts. I couldn't do this for your own business. You're gonna want to do this as well to determine why things happened. Why did I lose $500 was because the cost they hamburgers because I sold less hamburgers and I expected 8. 09 Conclusion: So what's the importance of variance analysis? We kind of talked about it when we did. Example. Three. The key points are it's important that a business owner, an entrepreneur, knows why they're fair bore unfavorable to budget because it helps them determine how they will solve for this issue. As much as we try to find all the heirs, there will likely be a small error or two. So focus on making sure that the announces is correct. Various announces allows us create action steps on what to do next again, if we're running a food truck, should we find a supplier with lower hamburger costs? It's a rape problem. Or should we find a way to get the word out and sell more hamburgers? It being a quantity problem. So keep in mind your own blind spots. I see this a lot. Having done 10 years of financial analysis is one a thing called confirmation bias. When you're performing your analysis, ensure that you're truly doing a deep dive and dig into the numbers, people have a tendency to make their announces fit. What they think they know. The answer should be. As you perform any detailed analysis you must be aware of this entity that can get in the way you need to perform a deep diamond. Finding actual cause of the issue confirmation bias can cause is a short cut up our effort and draw incorrect conclusion. And the way to avoid this is the question yourself. A large part of analyzing data is the ability question herself and ask yourself, How could I be wrong on this by asking yourself? This question allows you to find evidence that does not confirm your biased but actually is negating evidence. This will either prove that you're right approved that you were actually made a mistake somewhere in your explanation for any important analysis. Always actually ask yourself, How could you be role with that being said, That is the end of this class. I've really enjoyed teaching this class. I love finance. I love personal fans. This case would be business finance, but if you're an entrepreneur, it kind of is personal in that respect for brainy money. I've done this variance analysis. I built my budget for brainy money, and this is why I run a profitable company. So I think it's important that you do this as well. That being said, if you haven't take my other classes, I would highly recommend them. They all tie together. You gotta understand accounting, understand? Finance and understanding. Personal finances also really important as well.