When to Pay Interns

Certain things have become the recognizable signs of spring. Budding leaves. Flowers. Chirping birds. And summer intern resumes. Especially during a slow or recovering economy, HR professionals are likely to receive many resumes from eager students or recent graduates hoping to work as interns in order to gain valuable experience and networking opportunities. Often, intern candidates offer to work for nothing in exchange for the chance to learn about a job or industry.

Of course the idea, however enticing, of free labor should raise red flags. In fact, the United States Department of Labor (“DOL”) has made it clear that, unless specific criteria are met, student “interns” working at for-profit companies are actually student “employees,” subject to the minimum wage and overtime requirements of the Fair Labor Standards Act (“FLSA”). The DOL has identified the following six criteria for determining whether an individual meets the test for an unpaid intern:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Only if an internship program meets all of these requirements can participants be considered unpaid interns. And as you can imagine, meeting all of these requirements can be challenging. For example, the internship program must be structured around classroom or academic experience rather than around the employer’s business operations. For this reason, compliant programs are often developed and overseen by colleges or universities, which then give academic credit for participation. Moreover, the more the interns perform productive work for the employer (as opposed to job shadowing or similar activities), the more likely they will be deemed employees, entitled to minimum wage and overtime under the FLSA. You can find the DOL’s fact sheet on internship programs here.

At the end of the day, private employers seeking to benefit directly from eager students or graduates willing to work for the experience will find it difficult to meet DOL requirements. On the other hand, a company willing to provide work experience in order to be a good corporate citizen or to build relationships with schools or students, can structure an unpaid student intern program to meet those goals and comply with the law.

Advertisements

Medical Tech in Germany

Industry Overview

The medical technology (medtech) sector is a market which is growing dynamically worldwide. An aging population combined with the need for new and innovative medical technology sustain the sector’s strength and constant growth, despite the current economic situation. Today, Germany is Europe’s leading location for medical technology and 3rd biggest medical technology producer and medical services provider worldwide. In terms of new patent registrations German manufacturers rank second behind teh USA, making Germany Europe’s strongest location for innovation in this industry.

The broad spectrum of technologies available in this area ranges from electrical engineering/electronics to precision mechanics and optics. Furthermore, technologies from the textile industry, the plastics processing, pharmaceutical and, most recently, from the biotechnology industries are also utilized in German medical products.

Industry in Numbers

  • Total industry turnover of EUR 18.3 billion in 2009
  • Around 9% of the total turnover was reinvested in R&D
  • In 2010 exports increased by 6% in the EU member states, 19% in rest of Europe, almost 13% in North America, more than 26% in Asia and over 28% in Middle and South America
  • With 87,000 employees the number of workers remained constant; 15% of all employees in this industry work in R&D
  • The industry is characterized by small and medium-sized enterprises. 95% of all companies employ less than 500 people.

Market Potential

Germany is the largest market for medical devices in Europe and the third-largest in the world. Nowadays, the medtech industry is considered to have the highest growth potential. According to a recent survey from the Medical Technology Association, (BVMed), 46 percent of the surveyed medtech companies expect a rise in revenues in 2010. In comparison to last year, businesses in the field are being more careful about their expectations, but have confidence in the sector’s stability.

Market Access

Foreign exporters must be aware that, in order to place medical devices on the market for the first time, the products must be registered with the appropriate competent authorities. In general, the manufacturer or authorized representative is responsible for the introduction of new medical devices on the market. The medical device’s importer is responsible in cases where the manufacturer’s location is outside the European Union and an authorized representative in the EU has not been designated. The Federal Institute for Drugs and Medical Devices (BfArM) offers detailed information on the EU directives on medical devices as well as guidance in accessing the German medical device market and the prerequisites to be fulfilled. Furthermore, a list of notified bodies can be found on the German Institute of Medical Documentation and Information’s website (DIMDI). This site offers access to about 60 databases with approximately 100 million documents.

Manufacturers and importers of medical products must also make sure that their products comply with the REACH regulations (Registration, Evaluation and Authorization of Chemicals). According to REACH, companies are required to prepare information on the chemical substances used in their products and register the data with the European Chemicals Agency (ECHA). Registration is required for most hazardous substances above 1 ton per year, for substances toxic to the aquatic environment above 100 tons per year, or substances manufactured or imported above 1.000 tons per year. For many medical products compliance with REACH is a prerequisite for affixing the CE marking.

All medical devices intended for the German market must bear a CE marking before they can be sold or installed. The CE marking is a mandatory conformity mark attached to certain products intended for sale within the European Union which indicates conformity with the essential health and safety requirements set out in the applicable European directives. Depending on the type of product, conformity can be assessed either by the manufacturer himself or by an authorized office.

Distribution Channels

Foreign manufacturers of medical devices tend to enter the German market by setting up subsidiaries. It is also possible to enter the market by contracting with a specialized importer in the medical device field or by participating in the tender procedures of hospitals or clinics. Another way of finding business partners in Germany is by participating in specialized trade fairs. The Association of the German Trade Fair Industry, (AUMA), offers a search engine on its website where interested companies can find trade fairs in their business sector.

Institutions in the German medical devices industry can be of great help in finding ways of effectively introducing products to the market.  The German Medical Technology Association, (BVMed), for example, represents about 230 manufacturers and service providers of medical devices. As a trade association, BVMed promotes and represents the combined interests of the medical technology industry and trade companies. Users can download several documents, e.g. the BVMed Annual Report which expands on the medtech market in Germany.

The Trade Association Medical Technology, (SPECTARIS), represents the interests of around 400 mostly small and medium-sized companies in the medical technology goods and appliances sector. The Trade Association Medical Technology provides its members support with and information on different industry-related areas and topics.

The German Association of Biomedical Engineering, (DGBMT), works to promote the development and application of innovative medical technologies. In the DGBMT, Physicians, scientists and engineers combine their efforts to facilitate the use of advanced technologies for diagnostics and therapy. The DGBMT organizes initiatives, projects and events to support promising activities like micro- and nanotechnologies in medicine and life sciences.

Hospimed publishes information databases on manufacturers and suppliers in the German health service sector in print, on CD-ROM and online.

Eucomed is the voice of the medical technology industry in Europe. The alliance represents around 22,500 European designers, manufacturers and suppliers of medical technology used in the diagnosis, prevention, treatment and amelioration of disease and disability. Small and medium-sized companies account for more than 80% of the businesses in this sector. Eucomed is active in market data collection, research and innovation projects as well as in international trade issues.

German Food and Beverage Business

Industry Overview

Germany’s 82 million inhabitants make the food and beverage market the largest in Europe. The sector ranks fifth among the local industries and has a workforce of over 544,000 in the 5,900 predominantly small and medium sized enterprises.
Germany’s main trading partners in the food and beverage industry are other EU countries followed by Russia, the United States and Switzerland. Even though part of the local demand is satisfied with domestically produced goods, the country is a net importer in major groups of food and drink products. In the past ten years, food imports have steadily increased, thus underlying the rising demand for foreign as well as exotic foods.

Industry in Numbers

  • Second largest food producer in Europe with a total turnover of around EUR 150 billion in 2010
  • Exports amounted to EUR 51.8 billion in 2010 making up 34.5% of total sales
  • Imports of processed foods and agricultural commodities to the value of EUR 60.7 billion in 2010, making Germany a net importer of food & beverage products.
  • Largest sector sub-segments in 2009: meat (22.7%), dairy (15.4%), alcoholic beverages (8.7%), and confectionery food (9.4%)
  • Industry analysts forecast growth of 2.5% in 2011, with growing demand for convenience, health and wellness food products.

Market Potential

Given the large size of the German market, the existing opportunities in the food and beverage sector are very attractive to exporters worldwide. Especially the increasing demand for wellness, convenience food and organic products in the past years, represents a large potential for foreign companies active in these market segments.

German consumers are generally well informed. They expect high quality and low prices for their food and beverage products. The domestic food and beverage sector has profited from the fast economic recovery in Germany and the growing demand for food products made in Germany brought the export quota to an all-time high. Moderate growth was recorded in the meat and sausage products, confectionery, baked goods, and non-alcoholic beverage segments. The German food service market is also expected to grow significantly in 2011.

Market Access

The German food & beverage industry is highly fragmented and competitive. Food imports from other countries within the European Union fall under the “free movement of goods” principle. This means that products that are imported by other EU-countries may be brought into Germany even if they violate German food laws. If this is the case, importers must obtain a permit from the Federal Office for Consumer Protection and Food Safety (BVL) in order to sell the product in Germany. The duties to be paid for food brought from outside the European Union are subject to European legislation as well. The tariffs for different food products are published in TARIC, the Online Customs Tariff Database.

FOOD SAFETY – The legal framework on food safety was established by the European Union. The European Food Safety Authority plays a key role in the risk assessment of food. Many developments of the previous years were aimed to increase transparency and consumer confidence, by providing better information on food ingredients. Traceability of food products is also of utmost importance. For example, the country of origin must always be listed on food labels and all intermediaries (suppliers, distributors, etc.) that joined the food chain must be included as well. Companies trading food of animal origin from one country of the European Union to another need a special permit that is issued by the Federal Agency for Agriculture and Food (BLE).

NOVEL FOODS – Novel food imports in Germany must undergo a safety assessment before being brought into circulation. Importers of novel foods must apply for a license to sell these products at the Federal Office for Consumer Protection and Food Safety (BVL). As the responsible federal authority, the BVL will perform the necessary testing and send the results to the European Commission and the Member States for final approval. Detailed guidelines for the import of novel foods can be found at the Federal Institute for Risk Assessment (BfR).

PRODUCT PACKAGING – Exporting companies should be aware that product packaging is very important to German consumers since they are highly environmentally conscious. Manufacturers, importers, distributors and retailers must make sure that their packaging materials for their food products comply with the EU’s and Germany’s domestic regulations in terms of recycling and disposal. There are several dual system companies licensed in Germany offering various waste disposal schemes. Foreign exporters are free to choose which dual system they join. It is not mandatory to display any dual system membership seal on sales packaging.

Distribution Channels

Few German retailers import products directly from other countries. Most food retailers rather buy from central buyers/distributors specialized in the import of food & beverages. In general, these wholesalers have specialized in products or product groups; some are even experts in food products from a specific country of origin. These specialized importers have in-depth knowledge of all importing requirements such as the necessary product certificates, labeling and packaging and also take care of the shipping, customs clearance, warehousing and distribution of the products within the country. It is advisable that foreign exporters find a local representation in order to place and promote their products successfully within Germany.

The German retail food sector is dominated by five large retailers that claim more than 74 percent of the market. In 2010, the overall market share of discounters offering a limited selection of mainly private label goods at low prices remained stable at 41.6 percent. As mentioned above, all these retailers rely on specialized distributors/wholesalers for their products. However, some supermarkets will sometimes contract directly with a foreign supplier and appoint an importing company of their choice to bring the products into Germany accordingly.

Especially for foreign food and beverages companies, another useful way of finding the right distribution for their products is to participate in the various food trade fairs taking place in Germany. Trade shows like ANUGA, the Green Week or BioFach in Germany enjoy an exceptional reputation among industry experts worldwide. Participating in any of these events facilitates the direct contact with German food brokers, importers and wholesalers.

Supporting Institutions

Foreign companies looking for German food importers, wholesalers or distributors can find further information at the Federation of German Food and Drink Industries (BVE), theFederal Association of the German Retail Grocery Trade (BVL) as well as at the different food market segments industry associations.

The BVE represents the interests of 21 branch associations and 49 food and beverage companies in Germany. It is one of the first stops for foreign companies looking for information and contacts in the German food and drink industry. The BVE’s main responsibility is to represent the interests of its members at both national and international levels. The BVL serves as the federal organization for the food retail trade in Germany and represents all sales channels and companies in the field. The association’s role is to safeguard the sector’s interests with regard to legislation, the public authorities and the general public in Germany and Europe.

Information about the different industry-related trade fairs being held in Germany can be found in the database of the Association of the German Trade Fair Industry (AUMA).

Protect Your IP

Are you taking right steps to protect your Intellectual Property?

Given the ever-growing risk of IP infringement, there are several steps all businesses should take to reduce their risk. Below are just a few examples:

Ensure you have the proper protections in place. Protecting your IP does take time and money, but it is almost always well worth the effort. Federally registered patents, trademarks, and copyrights provide important protection and the ability to prosecute potential infringers in court. With respect to trade secrets, nondisclosure agreements are an important tool used to make sure employees as well as consultants, vendors, and business partners know what should be kept confidential and the consequences of breaching that duty.

Train employees to safeguard IP. Companies should have policies and procedures in place to prevent employees from intentionally or inadvertently disclosing trade secrets and other proprietary information. In addition, training your staff about what intellectual property is and how best to protect that IP against inappropriate disclosure is an important method of protecting a company’s most valuable IP against being disclosed to competitors.

Monitor for signs of infringement. Companies also need to actively monitor their IP for signs of infringement. While there are services and software that can assist in this process, small businesses can often search for trademarked or copyrighted materials on their own using online tools that detect the use of specified keywords, such as your brand name or tag line. Of course, should you detect signs of IP infringement, theft or misappropriation, it is also imperative to take action immediately in consultation with an experienced attorney.

New Employment CA Laws

The California legislature has done plenty this year.

Here are the highlights.

“Anti-Wage Theft” Law (AB 469). The Wage Theft Prevention Act of 2011 requires employers to provide non-exempt employees, at the time of hiring, a notice specifying the employee’s rate or rates of pay and the basis on which the employee’s wages are to be calculated (such as hourly, daily, piece, salary, commission, etc.). The notice must also include applicable overtime rates, allowances (if any) claimed as part of the minimum wage, the employer’s designated regular payday, the name of the employer (including any “doing business as” names), the employer’s physical and mailing addresses, and contact information for the employer’s workers’ compensation carrier. The Act also requires the employer to notify employees in writing of any changes made to any of this information within seven days of the implementation of such changes, unless the changes are reflected on a timely wage statement or other writing required by law. The Act adds an element of criminal liability by providing that any employer who willfully fails to pay wage-related Labor Commissioner orders or court judgments is guilty of a misdemeanor.

Independent Contractors (SB 459). This new law cracks down on employers who misclassify their employees as independent contractors by imposing a fine of between $5,000 and $25,000 for “willfully” misclassifying a worker as an independent contractor. “Willful misclassification” means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. The law also imposes joint and several liability for a non-attorney consultant to advise an employer to willfully misclassify someone as an independent contractor.

Background Checks (AB 22). This law prohibits most employers from obtaining or relying on consumer credit reports regarding employees or job applicants, except in certain specified limited circumstances. The law does not apply to financial institutions or entities required by law to perform credit checks. Under the new law, employers may still obtain and rely upon credit reports for managerial employees covered by the executive exemption.

Pregnancy Disability Leave (AB 592 and SB 299). This law expressly prohibits “interference” with the exercise of any right provided under the California Family Rights Act, or due to disability by pregnancy, childbirth or related medical conditions. In a provision that may prove to be preempted by ERISA, the law also requires employers to maintain and pay for health coverage under a group health plan for any eligible female employee who takes up to four months of leave due to pregnancy, childbirth or a related medical condition in a twelve month period.

Gender Identity and Expression (AB 887). Existing law prohibits discrimination and harassment based on gender. This law expands the definition of “gender” to include both gender identity (how the person sees him or herself) and gender expression (how other people view the person). Under the new law, an employee must be permitted to dress consistent with the employee’s gender identity and expression.

Genetic Information Discrimination (SB 559). Discrimination in hiring or employment based on genetic information is now unlawful under the Fair Employment and Housing Act. Genetic information is defined to include the individual employee’s genetic tests, the genetic tests of the employee’s family members, and the manifestation of a disease or disorder in the employee’s family members.

Commission Agreements (AB 1396). This law requires all contracts for employment involving commissions as a method of payment to be in writing and to set forth a method by which the commissions are required to be computed and paid. The employee must be given a signed copy, and the employer must obtain a signed receipt from each employee. This law does not take effect until January 1, 2013, so employers have a year to prepare for compliance.

Agricultural Labor Relations (SB 126). This law authorizes the California Agricultural Labor Relations Board to certify union elections when employer misconduct affects the outcomes.

California Transparency in Supply Chains Act (SB 657), beginning January 1, 2012, large retailers and manufacturers that do business in California must disclose information on their websites about what they do to eradicate slavery and human trafficking from their supply chains. The new law applies to companies with worldwide gross receipts of over $100 million.

The law provides that if a covered company has a website, it must disclose certain information via a “conspicuous and easily understood link” on the homepage. The company must disclose to what extent, if any, it does each of the following:

  1. Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery, specifying if the verification was not conducted by a third party.
  2. Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains.
  3. Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking.
  4. Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
  5. Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chain of products.

Notably, the law does not require companies to do anything to combat slavery and human trafficking. The law simply requires disclosure of the above information.

People Matter

The Most Successful workplaces of the Future…

•    Do away with archaic command-and-control models. Winning workplaces are horizontal, not hierarchical.Everyone who works there feels they’re part of something, and moreover, that it’s the next big thing. They want to be on the cutting-edge of all the people, places and things that technology is going to propel next.

•    Instead of knives-out competition, these workplaces put a premium on collaboration and teamwork, and on building a successful community with shared values.

•    Oh, and I’m not saying workplaces should become democracies – that would never work – simply thatpeople are empowered and encouraged to express themselves.

•    Winning contemporary workplaces stress innovation. They believe that employees need to be given an opportunity to make a difference – to give input into key decisions and to communicate their findings and learnings to one another.

Corporate Culture matters more than you think

•    The best teams are hired with collaboration in mind. People who remain in the culture are those who are dedicated to the ideal that that the whole is more than the sum of the parts.

•    In the most winning corporate cultures, everyone has something to contribute. Leadership is fluid and bend-able. Integrity and character matter a lot. Everyone knows about the culture. Everyone feels the culture. Everyone subscribes to the culture. Everyone recognizes both its passion and its nuance.

•    In winning corporate cultures, roles, identities and responsibilities mutate weekly, daily, sometimes even hourly. There’s a focus on social, global and environmental responsibility. No, these initiatives aren’t just good ideas, they really matter.

Today’s Most Successful Organizations…

•    …look less like an advancing army and more like a symphony orchestra. They are divided up into sections rather than functions. Each section has a leader and every player is a member of a team that works in synchrony. The orchestra conductor may direct what the orchestra does, but he knows he’s not completely in charge. His sole mission: To impel the other orchestra members to play to the very best of their ability, while integrating those efforts into a concerted group effort.

•    In life as in business, most people are not generals, they’re lieutenants. Nor do they necessarily want to be generals – they want to be impact players. Frankly, most of us are happy to have the opportunity to accomplish what we’re good at, and what we enjoy, so long as we receive adequate recognition and reward.

•    The most successful contemporary cultures convey the message that it’s okay to be yourself, and to do your best. You don’t always have to move up; you can also move across. More important is that you are happy, fulfilled, contributing to the community and feeling productive and rewarded.

The Leaders of Today have to be self-aware –  and top-down mandates no longer work

•    There will always be the need for decisive leadership, particularly in crisis times (and there’s a touch of the autocrat and control freak inside every successful entrepreneur). But today’s world is all about collaboration –and launching and maintaining that “long conversation” that Stevenson talked about.

•    The leaders of tomorrow need to practice ego management. They should be aware of their own biases, and focus as much on the present as on the future. They need to manage the egos of employees by rewarding collaborative behavior and teamwork.

•    Leaders should strive to become what Michael Maccoby dubbed “Productive Narcissists,” tempering high self-esteem and confidence with empathy and compassion. Mindfulness, of self and others, by boards,executives and employees, may very well be the single most important trait of a successful company. Companies have to define the culture; the culture can’t define them. So pre-define it!

•    Finally, companies need to understand that every individual in the organization is a contributor; and the closer everyone in the organization comes to achieving his or her singular potential, the more successful the business will be. Successful cultures encourage their employees to keep refreshing their toolkits, keep flexible, keep their stakes in the stream.

 
Rethink Recruiting
•    Diversity is key – and by diversity I mean of thought, style, approach and background. You’re building a team, not filling a position. Cherry-picking candidates from name-brand universities will do nothing to further an organization and may even work against it.

•    Don’t buy resume or credentials. Buy competence, track record, character and culture fit.

•    Avoid hiring only superstars. It’s about company teams, not just the individual. Sure, it’s totally tempting to create an All-Star team, but in case you hadn’t noticed, those people don’t pass the ball, they just shoot it.

•    Hire competencies but remember: hire with your heart. Make sure new workers fit into the preexisting culture, while also importing their expertise. Become their sponsor – onboarding is essential. Spend time listening. Give them what they need to succeed.

•    Sometimes you need to hire aliens – folks outside of the culture who bring new ideas and best practices from other places. These people become culture-influencer and agents of change.

•    New hires are more than just the college or university they attended. In short, don’t hire credentials, hire people.

•    Character matters. Most people don’t succeed in teams not because they are unqualified or incompetent, but simply because they are not a good cultural fit.

•    Act now. One of the big mistakes entrepreneurs make is they don’t act quickly enough. Put aside perfectionism, don’t wait for the perfect person – he or she may not exist. Hire track record and potential.

•    If, looking back, you realize someone is not a good cultural fit, or is not getting it done, don’t wait to make the change. Sometimes it is just as simple as readjusting their position or redefining their role. If they really don’t get it done, then it’s time to make the tough call.

Be on the lookout for signs of a lack of emotional commitment from employees:

•    People complain about the hours they’re putting in;
•    Turnover is high, particularly among young top achievers;
•    Recruitment is difficult; there’s little innovation or creative thinking; and
•    There’s more politicking that there is actual dialogue.

Take note of those employees who have an emotional commitment to the organization:

•    People give extra effort voluntarily;
•    They become your best ambassadors
•    Employees make personal and professional sacrifices to stay rather than leave;
•    People feel free to think outside the box; and
•    Meetings often result in lively debates and team action.

The employees of tomorrow plays to their strengths

•    Rather than aspiring to omnipotence, and acting as though they’re the masters of all they survey, Betas focus on what I call “motivated skills,” e.g., the things they know they do exceptionally well. And instead of exploiting their peers’ weaknesses in order to attain and hold onto power, they encourage their fellow team-members to play to their own strengths so that the entire team and organization can succeed.

 

Self-Awareness is all (but don’t think for a moment it means you’re soft)

•    What is self-awareness but bringing an intellectual and emotional understanding of your strengths and their weaknesses, your goals and their motivations to a given situation?

•    Ensure that you hire self-aware people. Give them the proper tools, techniques and feedback, as well as the proper levers of success and sponsorship. Onboard people with the belief that they’ll be successful. Then make sure it happens.

•    That said, organizations cannot be whole-heartedly responsible for their employees’ development; employees have to play their roles, too. Beta leaders are skilled at assembling employees, encouraging them to think new thoughts in different ways and challenging them to do new things.
If there’s a single takeaway from years of consulting, recruiting and observing both old and new organizations it’s this: People really truly matter. They are your strategy. They need to be encouraged and coached to pursue what they do best; to keep doing what they enjoy, and to participate in the success of your company.

To survive and thrive today and into the future, business leaders need to grow and develop their own self-awareness. Self-awareness means that you are willing and able to collaborate with employees, directors, customers and yes, even your competitors. It means that you understand that every individual in your organization is a contributor with varying degrees of potential – and that the closer everyone comes to attaining a high level of self-awareness, the closer the organization comes to achieving its potential. It means that your self-awareness feeds into your employees’ own self-awareness, which in turn ignites the overall success of the venture.

Income Statement

A profit and loss statement is a report of the changes in the income and expense accounts over a set period of time. The most common periods of time are months, quarters, and years, although you can produce a P&L report for any period.

Here is a profit and loss statement for the past four years for Google. I got it from their annual report (10k). I know it is too small on this page to read, but if you click on the image, it will load much larger in a new tab.

Google p&l

The top line of profit and loss statements is revenue (that’s why you’ll often hear revenue referred to as “the top line”). Revenue is the total amount of money you’ve earned coming into your business over a set period of time. It is NOT the total amount of cash coming into your business. Cash can come into your business for a variety of reasons, like financings, advance payments for services to be rendered in the future, payments of invoices sent months ago.

There is a very important, but highly technical, concept called revenue recognition. Revenue recognition determines how much revenue you will put on your accounting statements in a specific time period. For a startup company, revenue recognition is not normally difficult. If you sell something, your revenue is the price at which you sold the item and it is recognized in the period in which the item was sold. If you sell advertising, revenue is the price at which you sold the advertising and it is recognized in the period in which the advertising actually ran on your media property. If you provide a subscription service, your revenue in any period will be the amount of the subscription that was provided in that period.

This leads to another important concept called “accrual accounting.” When many people start keeping books, they simply record cash received for services rendered as revenue. And they record the bills they pay as expenses. This is called “cash accounting” and is the way most of us keep our personal books and records. But a business is not supposed to keep books this way. It is supposed to use the concept of accrual accounting.

Let’s say you hire a contract developer to build your iPhone app. And your deal with him is you’ll pay him $30,000 to deliver it to you. And let’s say it takes him three months to build it. At the end of the three months you pay him the $30,000. In cash accounting, in month three you would record an expense of $30,000. But in accrual accounting, each month you’d record an expense of $10,000 and because you aren’t actually paying the developer the cash yet, you charge the $10,000 each month to a balance sheet account called Accrued Expenses. Then when you pay the bill, you don’t touch the P&L, its simply a balance sheet entry that reduces Cash and reduces Accrued Expenses by $30,000.

The point of accrual accounting is to perfectly match the revenues and expenses to the time period in which they actually happen, not when the payments are made or received.

With that in mind, let’s look at the second part of the P&L, the expense section. In the Google P&L above, expenses are broken out into several categories; cost of revenues, R&D, sales and marketing, and general and administration. You’ll note that in 2005, there was also a contribution to the Google Foundation, but that only happened once, in 2005.

The presentation Google uses is quite common. One difference you will often see is the cost of revenues applied directly against the revenues and a calculation of a net amount of revenues minus cost of revenues, which is called gross margin. I prefer that gross margin be broken out as it is a really important number. Some businesses have very high costs of revenue and very low gross margins. And example would be a retailer, particularly a low price retailer. The gross margins of a discount retailer could be as low as 25%.

Google’s gross margin in 2009 was roughly $14.9bn (revenue of $23.7bn minus cost of revenues of $8.8bn). The way gross margin is most often shown is as a percent of revenues so in 2009 Google’s gross margin was 63% (14.9bn divided by 23.7). I prefer to invest in high gross margin businesses because they have a lot of money left after making a sale to pay for the other costs of the business, thereby providing resources to grow the business without needing more financing. It is also much easier to get a high gross margin business profitable.

The other reason to break out “cost of revenues” is that it will most likely increase with revenues whereas the other expenses may not. The non cost of revenues expenses are sometimes referred to as “overhead”. They are the costs of operating the business even if you have no revenue. They are also sometimes referred to as the “fixed costs” of the business. But in a startup, they are hardly fixed. These expenses, in Google’s categorization scheme, are R&D, sales and marketing, and general/admin. In layman’s terms, they are the costs of making the product, the costs of selling the product, and the cost of running the business.

The most interesting line in the P&L to me is the next one, “Income From Operations” also known as “Operating Income.” Income From Operations is equal to revenue minus expenses. If “Income From Operations” is a positive number, then your base business is profitable. If it is a negative number, you are losing money. This is a critical number because if you are making money, you can grow your business without needing help from anyone else. Your business is sustainable. If you are not making money, you will need to finance your business in some way to keep it going. Your business is unsustainable on its own.

The line items after “Income From Operations” are the additional expenses that aren’t directly related to your core business. They include interest income (from your cash balances), interest expense (from any debt the business has), and taxes owed (federal, state, local, and possibly international). These expenses are important because they are real costs of the business. But I don’t pay as much attention to them because interest income and expense can be changed by making changes to the balance sheet and taxes are generally only paid when a business is profitable. When you deduct the interest and taxes from Income From Operations, you get to the final number on the P&L, called Net Income.

I started this post off by saying that the P&L is “one of the most important things in business.” I am serious about that. Every business needs to look at its P&L regularly and I am a big fan of sharing the P&L with the entire company. It is a simple snapshot of the health of a business.

I like to look at a “trended P&L” most of all. The Google P&L that I showed above is a “trended P&L” in that it shows the trends in revenues, expenses, and profits over five years. For startup companies, I prefer to look at a trended P&L of monthly statements, usually over a twelve month period. That presentation shows how revenues are increasing (hopefully) and how expenses are increasing (hopefully less than revenues). The trended monthly P&L is a great way to look at a business and see what is going on financially.

I’ll end this post with a nod to everyone who commented last week that numbers don’t tell you everything about a business. That is very true. A P&L can only tell you so much about a business. It won’t tell you if the product is good and getting better. It won’t tell you how the morale of the company is. It won’t tell you if the management team is executing well. And it won’t tell you if the company has the right long term strategy. Actually it will tell you all of that but after it is too late to do anything about it. So as important as the P&L is, it is only one data point you can use in analyzing a business. It’s a good place to start. But you have to get beyond the numbers if you really want to know what is going on.