The Manager's Pocket Calculator: A Quick Guide to Essential Business Formulas and Ratios

288 Pages·2010·3.17 MB·English

The Manager’s
Pocket Calculator
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The Manager’s
Pocket Calculator
A Quick Guide to Essential
Business Formulas and Ratios
Michael C. Thomsett
American Management Association
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Contents
INTRODUCTION:
The Basic Problem with Numbers ix
CHAPTER 1:
Compound Interest: The Power of Money 1
Time Value of Money: The Concept 2
Accumulated Value of a Series of Deposits 19
Looking Ahead 22
CHAPTER 2:
Present Value and Sinking Funds 23
Present Value of a Single Deposit 24
Sinking Fund Payments and Present Value per Period 27
Loan Amortization 31
Reading Loan Amortization Tables 38
Annual Percentage Rate 44
Looking Ahead 45
CHAPTER 3:
Rates of Return 46
Return on Revenue and Equity 46
Cash Return and Cash Flow 53
Returns on Purchases and Sales 58
Investment-Based Returns 61
Annualized Return 65
Looking Ahead 67
CHAPTER 4:
Calculating Breakeven and After-Tax Profit 68
Hidden Costs 68
The Inflation Effect 73
Taxes in the Profitability Equation 76
Breakeven Calculations: Inflation and Taxes 79
v
vi Contents
Calculating Cash Flow 83
Looking Ahead 86
CHAPTER 5:
Financial Reporting Formulas: The Balance Sheet 87
Balance Sheet Basics 87
Working Capital Ratios 91
Ratios Showing Management of Working Capital 94
Capitalization Ratios 99
Combined Ratios 105
Looking Ahead 108
CHAPTER 6:
Financial Reporting Formulas: The Income Statement 109
Income Statement Basics 111
Dollar and Percentage Reporting 115
Cost of Goods Sold Relationships 121
Revenue and Profitability Trends 125
Core Earnings 127
Looking Ahead 128
CHAPTER 7:
Depreciation Calculations 130
Basic Depreciation Rules 131
Straight-Line and Declining Balance Depreciation 132
Class Lives and Recovery Periods 136
Depreciation Calculations for Real Estate 140
Home Office Depreciation 145
Amortization 147
Looking Ahead 149
CHAPTER 8:
Bringing Reports to Life: Powerful Arguments with the
Numbers 150
Picking Your Report Format 151
Narrative Sections 153
Financial Sections 158
Combining Narrative and Financial Content 161
Graphics in Reports 164
Looking Ahead 166
Contents vii
CHAPTER 9:
Budgeting Calculations: Assumptions and Prorations 168
Documenting Your Assumptions 169
Addressing the Expense Issues 172
Prorating Expense Estimates 175
Calculating Variances 177
Revising Budgets 180
The Nature of Revenue Forecasts 182
Looking Ahead 185
CHAPTER 10:
Statistics for Effective Reporting 186
Management Application of Statistics 186
Statistical Averages 190
Dispersion, Variance, and Deviation 196
Accuracy in Statistics 202
Looking Ahead 206
CHAPTER 11:
Incredible Math Shortcuts 207
Addition Shortcuts 207
Subtraction Shortcuts 211
Logical Rules 214
Multiplication Shortcuts 216
Division Shortcuts 225
Looking Ahead 226
CHAPTER 12:
Incredible Conversion, Measurement, and Time Shortcuts 227
Conversion 227
Measurements 236
Time Shortcuts 241
APPENDIX:
Summary of Formulas 245
INDEX 269
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I N T R O D U C T I O N
The Basic Problem with
Numbers
t’s all in the numbers. Everyone has heard this statement and it is
true. Your performance is invariably judged by how much profit you
Icreate or by how much cost you incur in your segment, team, or
department. The so-called bottom line—profit or loss—is the universal
means for monitoring performance and for determining whether an ini-
tiative was worthwhile.
With the dominance of the bottom line in every aspect of how your
performance is graded, you have a distinct advantage if you are skilled
at conveying information in terms of profitability. Conversely, you are at
a distinct disadvantage if you cannot communicate the profit or loss
aspects of your work to management. On a most basic level, just asking
management for something is less effective than demonstrating how an
approval is going to create additional profits or cut costs (related directly
to revenues) and expenses (overhead, not related directly to revenues).
This is the rudimentary distinction between managers with communica-
tion skills and those who struggle every day trying to find the best way
to communicate what they know and what they have achieved.
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