The evaluation and discussion of finances can bring on bouts of frustration in the average person as numbers, figures, terms and jargon intertwine to confuse and disorientate. If small business owners hope to have meaningful discussions with their accountants regarding their business’ financial circumstances then they must have a firm grasp on the most essential and basic accounting terms and phrases.
Below you will find a list of some of the most used words in accounting.
COGS: Cost of Goods Sold
COGS refers to the direct costs attributed to the manufacture of products by a business. COGS takes into account the initial supplier purchase costs, labour expenses, any additional hidden & extra costs accrued getting the product into inventory and readying it for sale. COGS does not include indirect expenses such as distribution, admin & financing expenses (these are recorded in the income statement at a later date).
Gross Profit Margin
With the COGS determined and a good understanding of the business’ current sales revenue, the Gross Profit Margin can be calculated. The Gross Profit Margin tells you how profitable the business is. It is the difference between the selling price of a product and/or service and the revenue received. The figure is displayed as a gross margin percentage showing the proportion of income for each sales dollar.
Operating Profit Margin
The Operating Profit Margin tells you how much it costs to operate your business. It takes into account the other “fixed” and variable expenses involved in creating sales revenue. Such operating expenses include wages, utilities and more. These operating expenses are added onto the cost of goods sold. This total is then subtracted from the sales revenue total resulting in an ‘operating income’ (profit) figure.
The operating income figure must be divided by sales revenue to discover the operating margin.
EBIT means earnings before interest and taxes. It is basically another term used to refer to operating profit. The formula is: EBIT = Revenue – COGS - Operating Expenses
Earnings before interest, taxes, depreciation and amortisation helps a business get an accurate reading on how much they make yearly. This is great for tax purposes as EBITDA establishes how much money the business gets back at end of financial year. The formula is: EBITDA = Revenue – Expenses (excluding tax, interest, depreciation and amortization).
After the accountant has scoured through the business’ financials, put together the end of financial tax particulars and done the calculations, they will tell the owner their business’ Net Profit after Tax (NPAT). This is the business’ bottom line and the single, most important number when it comes to tax time and appeasing shareholders.