Profit and Loss Statement (P&L) basics for Contact Center Leaders (PART 2)

This blog is a continuation of the 1st blog published in the past,   Access to part-1   link 

In our previous discussion, we defined the first 3 elements in our profit and loss statement analysis (Revenue, Cost, and Gross Margin) and its calculation.

The next line item in our P&L once we have calculated our GM and GM% is Operating Expenses and SG&A.

OPEX and SG&A expenses are generally defined as one or the same. They both consist of costs that are not included in the COGS (cost of goods sold) where the majority of BPO companies account for their Agents Salaries.

We can define SG&A (Selling, General & Administrative expenses) as the operating expenses of running our contact center that is not included in the delivery of your Contact Center services on a month over month basis and most of the time are considered a fixed costs.

If we take a deeper dive into SG&A we can find some of the following examples but not limited to:

  • Rent or Facilities
  • Technology,
  • ISP, Telco TSP, SIP Trunks, Datacenter Hosting, IVR, CRM services
  • Office Supply
  • Legal expenses.
  • Social media/ Marketing/ Advertising expenses
  • Payroll Taxes ( Social Security, Mandatory Government Medical Insurance, sometimes reflected on the Total operating expenses line item)
  • Software Licensing
  • Travel
  • Insurances
  • Maintenance
  • Security
  • Other Expenses
  • *** Administrative staff Salary (Finance, HR, Recruitment, etc.)

***Note some BPOs might include their Account direct Support staff (Supervisors, SMEs, Floorwalkers, Trainers, QAs, Managers, etc.) on the SG&A line as other companies might include them directly on their COGS (cost) line-item, the decision where to allocate these expenses depend on your company financial guidelines. In some other cases, Admin Salary might also be allocated as a distribution percentage of your total revenue perceived.

So how do we calculate our SG&A expenses?

We can simply add up all the expenses not directly related to the generation of the company’s Revenue.  Once we have calculated our Operating expenses/ SG&A we can proceed to our next line-item EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) can be defined as a way to measure the company’s financial performance, nevertheless, EBITDA removes the cost of capital investments like facilities and technological equipment (computers, servers, data centers, headsets, etc.)

We can calculate it using the following Formula:

EBITDA= Gross Margin-Operating Expenses.

The EBITDA formula is calculated by subtracting all expenses except interest, taxes, depreciation, and amortization from our Gross Margin line item. Often the equation is calculated inversely by starting with Gross Margin adding back the ITDA.

I would also like to provide a quick overview of these 4 concepts, we might elaborate on their calculation in a separate article.

  • Depreciation: (tangible Asset mostly applies to Equipment) it is represented as an expense that considers the asset’s useful life and the residual value for equipment over time.
  • Amortization: (Intangible asset mostly applied to Research and Development, Trademark, Patents, Copyrights, etc.) A good way to think of this is to consider amortization to be the cost of an asset as it is consumed or used while generating sales for a company. Not very common for specific business units (Sites or Accounts) however It might be accounted on the overall BPO company P&L.
  • Interest: defined as a non-operating expense, it tells us the cost incurred by the company when they borrow funds like loans, convertible debt, etc. Interest expense represents interest accrued during the period covered by the financial statement.
  •  Tax: These are current liabilities normally paid directly to the government. Taxes depend on the country and Labor law you are operating.

Now if we subtract from EBITDA our Depreciation and Amortization, we obtain our EBITor Operating Profit.

EBIT/Operating profit can be defined as the total earnings from the company’s core business functions for a given period, excluding the deduction of interest and taxes. Note that operating profit reflects the residual income that remains after accounting for all the costs of doing business.

We can calculate it using the following Formula:

EBIT= Gross Margin-Operating Expenses (including SG&A)- Depreciation-Amortization.

In other words, we can say EBIT= EBITDA-Depreciation-Amortization.

Now that we have identified our EBIT if we subtract the Interest and taxes, and we obtain our Net Income or Net profit.

This can be defined as the last line item located at the bottom of the P&L statement. Net income reflects the total residual income that remains after accounting for all cash flows, both positive and negative. In other words, from revenue, which is called the top-line number, all income, expenses, and costs are deducted to arrive at net income.

Net income is the most important financial metric, reflecting a company’s ability to generate profit for owners and shareholders.

We can calculate it using the following formula:

Net Income=EBIT- Interest-Taxes

After you have obtained the Net Income expressed in a $ amount you can also convert it to a margin in order to show the percentage of revenue you retain as profits after paying all expenses.

We can calculate it using the following formula:

Net Income%= Net income/Revenue* 100

So what would it an acceptable Net income %?

A good net income margin will vary considerably by Company, industry, Geography, and size of business or account you are managing, but as a general rule we can say that a 15%-20% net profit margin is considered average, a 20%-30% net profit margin is considered high (or “good”), and a 5%-15% net profit margin is low, Yet again this will depend on your company internal guidelines.

Now let’s see a hypothetical example of XYZ BPO Company P&L statement. Note the values used for the example are not real and additional calculations are required to come to those results incorporating other accounting documents such as the Cash flow statement & the Balance Sheet, the following example can give you an idea of what a P&L will look like, the format and line-items categorization might vary from company to company.

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In Part 3, we will continue discussing how operations leaders can help to maximize P&L Performance by considering some key elements from WFM, Human Capital, Technology, RPA, Call deflection etc.

Author :
Norman Acevedo
Associate Director Vendor Management, LATAM Global Strategy at UnitedHealth Group

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