McKinsey

Problem Solving Test

Business Terms:
Absolute Values, Ratios, Exhibits

© 2016-2017 Flessibilità, Victor Rogulenko. All Rights Reserved

Table of Contents
1. ABSOLUTE VALUES ............................................................................................................................... 4

REVENUE .................................................................................................................................................... 4
SALES VOLUME VS SALES REVENUE ...................................................................................................................... 4
FORMULAE: ...................................................................................................................................................... 4
COSTS ........................................................................................................................................................ 5
VARIABLE VS FIXED COSTS.................................................................................................................................. 5
COST OF GOODS SOLD VS OVERHEAD .................................................................................................................. 5
FORMULAE: ...................................................................................................................................................... 6
PROFIT ....................................................................................................................................................... 6
AVERAGE PROFIT .............................................................................................................................................. 7
GROSS VS OPERATING PROFIT ............................................................................................................................ 7
EBIT / EBITDA ............................................................................................................................................... 7
BREAKING EVEN ................................................................................................................................................ 7
PAYING BACK ................................................................................................................................................... 7
FORMULAE ....................................................................................................................................................... 8

2. RATIOS / SHARES ................................................................................................................................ 9

MARKET SHARE ............................................................................................................................................ 9

FORMULAE ....................................................................................................................................................... 9
PROFIT MARGIN ........................................................................................................................................... 9
FORMULAE ..................................................................................................................................................... 10
MARKUP ................................................................................................................................................... 10
FORMULAE ..................................................................................................................................................... 10
CONTRIBUTION MARGIN ............................................................................................................................. 10
FORMULAE ..................................................................................................................................................... 11
EFFICIENCY ............................................................................................................................................... 11
AVERAGE EFFICIENCY OF X SUBJECTS ................................................................................................................ 11
PRODUCTIVITY AND RETURN ON INVESTMENT ..................................................................................................... 11
FORMULAE ..................................................................................................................................................... 12
GROWTH RATE .......................................................................................................................................... 12
COMPOUND GROWTH ...................................................................................................................................... 12
CHURN .......................................................................................................................................................... 12
FORMULAE ..................................................................................................................................................... 13

3. EXHIBITS ............................................................................................................................................ 14

ABSOLUTE VALUES ..................................................................................................................................... 14

WATERFALL ............................................................................................................................................... 15
SHARES – PIE CHARTS ................................................................................................................................ 16
SHARES – TWO-DIMENSIONAL ...................................................................................................................... 16

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CHANGE.................................................................................................................................................... 17
CUMULATIVE VALUES .................................................................................................................................. 17
INDEX ....................................................................................................................................................... 18
DEVIATION FROM AVERAGE ......................................................................................................................... 19
MIXED (PERCENT AND ABSOLUTE VALUES) .................................................................................................... 20
PERCENTILE / DECILE / QUINTILE / QUARTILE .............................................................................................. 20
VALUE CHANNEL / FUNNEL ......................................................................................................................... 21

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1. Absolute Values

Revenue
(выручка)

= total money paid by customers to the company for products or services in a given
period (e.g. day, week, month, year, etc.).
Synonyms:

• Sales (продажи),
• Sales revenue (выручка от продажи)

Sales Volume vs Sales Revenue

(Продажи в физических единицах и продажи в деньгах)

• Sales Revenue = Revenue (in money terms – dollars, euros, pounds, etc.)
• Sales Volume = Quantity of goods sold (in physical units, kg/lbs, gigabytes,
etc.) (количество проданных товаров)

Formulae:
(1) Revenue = Price x Quantity of goods sold,
if the company sells one product or service
(выручка = цена x количество)

(2) Revenue = Revenue1 + Revenue2 + … + RevenueN

= Price1 x Quantity1 + Price2 x Quantity2 + … + PriceN x QuantityN,
if the company sells N products or services

(3) Revenue = MarketSize x MarketShare,

if the company is present in one market
(выручка = размер рынка x доля рынка)

(4) Revenue = Revenue1 + Revenue2 + … + RevenueM

= MarketSize1 x MarketShare1 + MarketSize2 x MarketShare2 + … +

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 MarketSizeM x MarketShareM,
if the company is present in M markets

Costs
(издержки)

= total money paid by the company to produce goods / services in a given period (e.g.
day, week, month, year, etc.). Includes payment to employees, suppliers and vendors,
taxes, etc.
Synonym: expenses (затраты)

Variable vs Fixed Costs

(Переменные и постоянные издержки)

• Fixed Costs = Costs that are "fixed" and do not increase even as sales increase
moderately (example: salaries of top management, rent)
• Variable Costs = Costs that "vary" proportionally with the number of items sold
by the company (example: raw materials, manufacturing labor costs).

Cost of Goods Sold vs Overhead

(себестоимость реализованной продукции и накладные расходы)

• Cost of Goods Sold = Materials and labor costs directly attributed to the goods
produced for sale.
(себестоимость реализованной продукции)
Synonym: direct costs (прямые расходы).
Often (but not always) it’s the same thing as Variable Costs.
- Examples: the cost of products or raw materials, including freight or shipping
charges; the cost of storing products the business sells; direct labor costs for
workers who produce the products; and depreciation
• Overhead Costs= Costs NOT directly attributed to the goods produced for sale.
(накладные расходы)
Synonym: indirect costs (косвенные расходы).
Often (but not always) it’s the same thing as Fixed Costs.

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 - Examples: accounting fees, advertising, insurance, interest, legal fees, labor
burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures,
and utilities
• Operating Expenses = Overhead costs excluding taxes and interest expenses
(операционные расходы = накладные расходы без учета налогов и
процентов по кредитам)

Formulae:
(5) Costs = Fixed Costs + Variable Costs
= Fixed Costs + (Variable Costs per Unit) x Quantity
(затраты = постоянные затраты + переменные затраты на единицу х
количество единиц)

(6) Costs = Cost of Goods Sold + Overhead Costs

= Cost of Goods Sold + Operating Expenses + Taxes + Interest Expenses
(затраты = себестоимость + накладные расходы = себестоимость +
операционные расходы + налоги + выплата процентов по кредитам)

Profit
(прибыль)

= total money earned by business LESS its expenses in a given period (e.g. day, week,
month, year, etc.)
= Revenue – Costs
(выручка за вычетом издержек)
Synonyms:

• income (здесь: прибыль),

• net income (чистая прибыль),
• earnings (чистая прибыль),
• profit earnings (чистая прибыль).

A negative profit is called a Loss.

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(отрицательная прибыль называется убытком)

Warning: Revenue is not the same thing as Profit. The former is what customers pay
the company, the latter is what remains after customers pay the company AND all the
company's bills are paid.

Average Profit
= Total Profit / Quantity (number of units)

(средняя прибыль на единицу продукции = общая прибыль / количество

единиц)

Gross vs Operating Profit

(валовая и операционная прибыль)

• Gross Profit = Revenue – Cost of Goods Sold

• Operating Profit = Gross Profit – Operating Expenses

EBIT / EBITDA
(EBIT = чистая прибыль до налогов и процентов, EBITDA = чистая прибыль до
налогов, выплаты процентов, и учета амортизации)

• EBIT = Earnings before Interest and Taxes = Operating Profit

• EBITDA = Earnings before Interest, Taxes, Depreciation, and Amortization =
EBIT + Depreciation and Amortization

Breaking Even
(выход на безубыточность, точка безубыточности)

Break-even Point = Point at which cost or expenses and revenue are equal: there is
no net loss or gain, and one has “broken even”
= value of a parameter (most often, quantity of goods sold) at which Revenue equals
Costs, or, equivalently, Profit = 0.

Paying Back
(окупаемость)

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Paying back requirement: grow profits so that
Incremental Profits ≥ Incremental Costs (Investment)

Formulae
(7) Profit = Revenue – Costs
or, equivalently, Revenue = Costs + Profit

(8) Gross Profit = Revenue – Cost of Goods Sold

(9) Operating Profit = EBIT = Gross Profit – Operating Expenses

(10) Net Profit = Operating Profit – Taxes – Interest

(11) Net Profit = Revenue – Cost of Goods Sold – Operating Expense – Taxes –
Interest

(12) Breaking even: Revenue = Costs,

or, equivalently, Profit = 0

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2. Ratios / Shares
(соотношения / доли)

Market share
(доля рынка)

= the percentage of a market (defined in terms of either units or revenue) accounted

for by a specific company
= Revenue / Market Size (in value terms)
or Sales Volume / Market Size (in volume terms)

(Выручка / Размер рынка (в денежном выражении) или Физический объем

продаж / Размер рынка (в физических объемах))

Warning: Revenue / Market Size (in value terms) ¹ Sales Volume / Market Size (in
volume terms). These are different things!

Market size = total value (or volume) of goods / services sold in a given market in a
given period (usually one year)

Formulae
(13) Market Share (by default – in value terms) = Revenue / Market Size (in
value terms)

(14) Market Share (in volume terms) = Sales Volume / Market Size (in volume
terms)

Profit margin
(норма прибыли, маржинальность)

= share of profits in revenues of a given company, product, or business unit in a given

period (day, week, month, year, etc.)
= Profit / Revenue
= (Revenue – Costs) / Revenue

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Synonyms:

• profitability,
• profit per dollar of sales,
• profit per customer dollar spent

Warning: Profit and Revenue must be calculated for the same company, product, or
business unit and the same period (e.g. not Profit for 90 days vs Revenue for the entire
year)

Formulae
(15) Profit margin = Profit / Revenue = (Revenue – Costs) / Revenue

(16) Gross Margin = Gross Profit / Revenue

(17) Operating Margin = Operating Profit / Revenue

(18) EBIT Margin = EBIT / Revenue

Markup
(наценка)

= difference between the price we sell at (e.g. retail price) and the cost of the item
(e.g. wholesale price), as a percentage of the cost of the item.

= (Sale price – Cost of item) / Cost of item

Compare: for 1 item,

Profit margin = (Sale price – Cost of item) / Sale price

Formulae
(19) Markup = (Sale price – Cost of item) / Cost of item

Contribution Margin
(вклад в формирование прибыли)

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= product's revenue minus all associated variable costs divided by revenue.
Represents the share of revenue not “consumed” by variable costs and left to pay for
fixed costs and to generate a profit
= (Price – Variable Costs per Unit) / Price

Formulae
(20) Contribution Margin = (Price – Variable Costs per Unit) / Price
= (Revenue – Variable Costs) / Revenue

(21) Extra Revenue Required to Make up for a Loss = Loss / Contribution

Margin

Efficiency
(эффективность, производительность, коэффициент полезного действия (КПД))

= ability to avoid wasting materials, energy, efforts, money, and time in doing
something or in producing a desired result
= Useful Output / Total Input

Efficiency is always a ratio, not an absolute value.

Average Efficiency of X Subjects

= (Total Useful Output of All X Subjects) / (Total Input for All X Subjects)

Warning: you should not calculate X efficiencies separately and then take their
average. Rather, calculate two numbers: Total Useful Output (for all subjects) and
Total Useful Input (for all subjects)

Productivity and Return on Investment

• Productivity = Quantity (or value) of Products Produced / Hours Worked (or
People Employed)
• Return on Investment = Profit / Investment
(возврат инвестиций, прибыль от инвецитий = прибыль / сумма
инвестиций)

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Formulae
(22) Efficiency = Useful Output / Total Input
(23) Average Efficiency = Total Useful Output / Total Input (for All Subjects)

Growth Rate
(темп прироста)

= New value of a variable / Old value of a variable – 1

Synonym:

• simple growth,
• percentage increase,
• growth by X%

Warning: If X is larger (smaller) than Y by Z%, than Z% = (X – Y) / Y x 100%. The

denominator is what follows after “than” (in this case Y rather than X).

Compound Growth
(сложный процент)

= growth over several periods by the same fixed growth rate each period
= geometric mean of all growth rates in a given period
= [ (Final Value / Starting Value) ^ (1 / Number of Years) ] – 1

Synonym: CAGR (compound annual growth rate)

(среднегодовой прирост в сложных процентах)

Note that CAGR can be used not only for years but for smaller compounding periods,
too. E.g. months, quarters, etc.

Churn
(текучка, отток клиентов)

= the annual percentage rate at which customers stop subscribing to a service or

employees leave a job = negative growth rate of customer base

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Formulae
(24) Simple growth Z% = (X – Y) / Y x 100%.
(25) Compound growth = CAGR
= [ (Final Value / Starting Value) ^ (1 / Number of Years) ] – 1
(26) If CAGR = Z%, then
Final Value = Starting Value x (1 + Z%) ^ [Number of Years]
= Starting Value x (1 + Z%) x (1 + Z%) x … x (1 + Z%)
(multiplication as many times as the number of years)

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3. Exhibits

Absolute Values
All values are absolute (units / dollars etc. rather than %). Values given for each
particular object and each period individually

Notice that units of measurement are not necessarily present on the graphs. You need
to check them in the text

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Waterfall
Absolute value increase over base value.

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Shares – Pie Charts
Pie charts showing split of total into separate segments. Total (in absolute value) may
or may not be shown

Shares – Two-dimensional
Each point corresponds to two values – one on the horizontal axis and one on the
vertical axis.

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Change
Difference (in absolute values or in percent) between beginning and end of a specific
period for a specific product group

Cumulative Values
Each bar shows the share of total of all items up to the current one. E.g. the first bar
shows the share of total sales of the largest market, the second bar shows the share of

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the largest two markets, the third bar – of the largest three and so on. Hence the share
of the second largest market is 28% - 18% = 10% (not 29%)

Index
All values shown as % of base value (Base = 100). Base value is unknown (it’s not 100
dollars or 100 units). Only relationship between base value and other values if known.

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Deviation from Average
All values shown as % deviation from average for the three groups (A, B, and C) each
year.

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Mixed (Percent and Absolute Values)
Total value is given at the top. The split is given within each bar.

Notice that units of measurement are not necessarily present on the graphs. You need
to check them in the text

Percentile / Decile / Quintile / Quartile

Objects (companies, population, etc.) are split into separate groups:

• Percentile = 1/100 = 1%
• Decile = 1/10 = 10%
• Quintile = 1/5 = 20%
• Quartile = ¼ = 25%

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The groups are sorted by corresponding values of interest from smallest to largest.
E.g., the first quintile has the 20% group with the lowest value of a variable, the
second quintile has the following 20% group with the next to lowest value, etc. up to
the fifth quintile with the largest value of a variable.

Value Channel / Funnel

Each next steps indicates a smaller portion of the total (or, alternatively, a portion of
the previous step).

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