Securit as ’ financial model REL A TIONSHIP BE T WEEN INC O ME , CASH FL O W AND B AL ANCE SHEE T St atement of income The s t atement of income is brok en do wn accor din g to function, makin g responsibilit y for each proft le v el clear . M ana g er s with oper ational responsibilit y can easily see what is e xpected of them and concentr ate on the factor s the y can afect . Gross mar g in and oper atin g mar g in are k e y indicator s, and used in re viewin g oper ations at both divisional and Group le v el. Amortization of acquisition-related int an g ible assets, acquisi- tion-related cos ts, fnancial items and t ax es are monitored separ ately . St atement of cash fo w In principle , oper atin g income should g ener ate the same amount of cash fo w from oper atin g activities. The cash fo w is afected b y in v es t - ments in, and depreciation of , non-current t an g i- ble and int an g ible assets used in oper ations and b y chan g es in w orkin g capit al. Cash fo w from oper atin g activities is an import ant indicator at oper ational le v el. It is defned as oper atin g income less in v es tments in non-current t an g ible and int an g ible assets plus re v er sal of deprecia- tion, chan g e in accounts receiv able and chan g e in other oper atin g capit al emplo y ed. F ree cash fo w is cash fo w from oper atin g activities less net fnancial items paid and cur - rent t ax es paid. Cash fo w for the y ear is arriv ed at when cash fo w relatin g to acquisitions and share-holder s ’ equit y is deducted from free cash fo w . The consolidation of net debt in foreign currencies usually g ener ates a tr anslation difer - ence that is reported separ ately . In addition, accountin g s t andar ds require that cert ain elements of the net debt are re v alued to mark et v alue after the initial recognition and this re v alu- ation is also reported separ ately . The chan g e in net debt corresponds to cash fo w for the y ear plus the chan g e in loans, tr anslation diferences and also the re v aluation of fnancial ins truments. B alance sheet Securit as uses the terms “ capit al emplo y ed” and “fnancin g of capit al emplo y ed” to describe the balance sheet and fnancial position. Capit al emplo y ed consis ts of oper atin g capit al emplo y ed plus g oodwill, acquisition-related int an g ible assets and shares in associated com- panies. Oper atin g capit al emplo y ed, which consis ts of oper atin g non-current t an g ible and int an g ible assets and w orkin g capit al, is continuously moni tored at the oper atin g le v el to a v oid un - necessar y tied-up capit al. Capit al emplo y ed is fnanced b y net debt and shareholder s ’ equit y . This picture sho ws the connection bet w een the s t atement of income , the s t atement of cash fo w and the balance sheet . Diferent color s are used for the sak e of clarit y . ¦ Oper atin g items ¦ Net -debt -related items ¦ G oodwill, t ax es and non-oper atin g Items ¦ Items related to shareholder s ’ equit y T ot al sales Oper atin g income before amortization Oper atin g non-current t an g ible and int an g ible assets Organic sale s gro w th, % In v es tments in non-current t an g ible and int an g ible assets Accounts receiv able Production e xpenses R e v er sal of depreciation Other oper atin g capit al emplo y ed Gross income Net in v es tments in non-current t an g ible and int an g ible assets Oper atin g capit al emplo y ed Gro s s margin, % Chan g e in accounts receiv able Br anch ofce e xpenses Chan g e in other oper atin g capit al emplo y ed Other sellin g and adminis tr ativ e e xpenses Cash fo w from oper atin g activities Oper atin g income before amortization Net fnancial items paid Operating margin, % Current t ax es paid F ree cash fo w Acquisitions Shareholder s Amortization of net debt FINANCIAL K E Y FIGURE S AND HO W WE U SE THEM Securit as ’ model focuses on the factor s that impact proft , and are clearly link ed to oper a - tions. F actor s are grouped into cate g ories: v ol - ume-related factor s, efcienc y -related factor s and capit al-usa g e-related factor s. These factor s are then assigned k e y fgures that are measured continuously , allo win g mana g er s to mak e deci- sions based on facts, enablin g them to mak e quick adjus tments if needed. The model is also used when analy zin g acquisition t ar g ets. The factor s and k e y fgures are used throug h - out our oper ations from br anch le v el up to Group le v el. Six k e y fgures represent the back - bone of the model (hig hlig hted in the te xt and t able), but there are complement ar y k e y fgures used b y all divisions, such as or ganic sales gro wth and oper atin g mar g in. There are also complement ar y k e y fgures t ailored to the mea - surement needs of a particular business se g - ment . In Securit y Ser vices North America, Secu - rit y Ser vices Europe and Securit y Ser vices Ibero- America, which ofer specializ ed securit y ser vices to lar g e and medium-siz ed cus tomer s, gross mar g in on new sales and on terminations as w ell as the w a g e cos t increase are particularly import ant k e y fgures. F or oper ations within M obile and M onitorin g, new / cancelled connec - tions, prospects visited, cos t per sale / or der , a v er a g e contr act siz e and pa yback / dur ation are the k e y fgures that are monitored closely . 50 Securit as Annual R eport 2012 G o v ernance and mana g ement M ana g ement and fnancial control