In presenting the data, the following definitions are relevant and should be understood.
A ratio is the relationship of two quantities expressed as the quotient of one divided by the other. For example, if there are 10 people, 6 of whom have blue shirts and 4 of whom have red shirts the ratio of blue shirts to the population would be 6/10ths or 60%. The ratio of red shirts to the entire population would be 4/10ths or 40%. Most of the KPIs in this report will be expressed as ratios.
The value of a set of data that falls at the midpoint of the data assuming the data is ordered lowest to highest. The median does not give value to the values themselves but rather to their ordering.
The mean is the mathematical average calculated by adding up all data points and dividing by the number of data points.
Median versus Mean
This report utilizes medians for majority of reported results. The reason for using the median is that it excludes outliers that can skew the data.
A perfect example would be sitting down with multi billionaire Mark Zuckerberg and a few other average wage earners. Due to Zuckerberg’s extremely high net worth the average net worth at this table would be a billionaire. However, using the median net worth of all folks at the table instead of the mean, Zuckerberg would be excluded as an outlier, and a more realistic net worth would be used to calculate the typical wealth of the folks at the table.
Where the mean or average will be used in this report will be on the compilation of opinions asked in the survey on industry opportunities and challenges. Here each respondent’s answer will be given equal weight.
Current assets are all assets on a balance sheet that can be converted into cash quickly (usually one year or less). Examples include cash, accounts receivable, inventory, and marketable securities.
Current liabilities are debts or obligations of the company that are due in the short term (usually one year or less). Examples include accounts payable, credit cards payable, payroll taxes payable, credit lines payable.
Earnings before interest, taxes, depreciation, and amortization (earnings while adding back non-cash charges – so the number gets closer to cash provided by operations).
Also known as Property, Plant and Equipment (PP&E). These are assets that cannot easily be turned into cash. Some examples include vehicles, equipment and real estate.
Revenue is the amount of money that is earned in a given period.
Cost of Goods Sold (COGS)
Generally Accepted Accounting Principles do not provide a detailed description of COGS as they can be made up of many items. In our context, think of them as all direct costs or those costs that happen away from the office such as technician labor, vehicles costs, materials. etc.
The difference between assets and liabilities on a balance sheet. In this case, assets are recorded at historic cost. Therefore, true equity would not be measured from the balance sheet as assets appreciate and intangibles such as customer lists grow. These items can be significant and are excluded as a balance sheet is historic but should be considered in any analytic exercise.
The difference between a firm’s revenues and their direct costs. Gross profit is the most important KPI when running a business. Gross Profit is key to finding out a firm’s breakeven point using breakeven analysis (BEA).
Operating expenses are those expenses used to run the business that are not associated directly with production of service. Some examples include office rent, utilities, marketing, sales, office staff, etc. Many refer to operating expenses as fixed costs. The reason for this is that most of these must be paid at any volume of business and can be seen as fixed over a range of business activity.
Financial ratios are used widely to evaluate the performance of business and to identify possible trouble areas that could result in reduced profits or even business failure.
Industry indicators of financial performance are useful to those lending monies, or to those thinking about investment in that they allow comparison of the firm under consideration with the industry in general.
Managers/ Owners also use industry data to evaluate their own situation and performance, and to develop internal plans in which they might compare current and past performance.
For example, is cash flow getting tight? Are accounts receivable taking longer to collect? Is additional debt being incurred? People tend to improve what is being measured. Call it competition, or call it business acumen. But most people want to be part of a winning team. So, looking at the proper metrics with an eye on improvement is helpful in winning at the game of business. Ratio analysis helps to quickly analyze the business. We used ratio analysis in the following areas: