Financial Jargon Unjumbled

ScotiaAccounting  |  25th August

Know Your Figures!

We’ve all cringed at the entrepreneurs on Dragons’ Den who have got flustered over their financials forecasts and fluffed the finer details of their past profit margins.

It’s all too easy to think you’d cope better when you’re the one sitting at home in your slippers – but what if you were in the spotlight?

Here’s our quick-fire guide to the basic jargon of business finance:

Book-keeping is directly linked to cash flow. It’s the records you need to keep of actual and general cash flow. That means the money that has come in and gone out of the business over a set time, and the predicted incoming and outgoing cash respectively.

Expenses, direct costs and overheads are easily confused.

Direct costs are simply the expenditure directly linked to making your product or providing your service. These are also called variable costs, and include things like labour, materials and certain expenses.

Indirect costs, on the other hand, are also known as fixed costs or overheads. These terms refer to constant outgoings such as insurance, utilities, property fees and more.

Expenses refer to the cash spent on business activity and might include travel, materials for client meetings and more.

A familiar and very important term is revenue or turnover, which is your total income from sales or a set period of time.

Knowing your turnover is essential for determining your various profits.

In its simplest form, your company’s profit is the difference between what you’ve made, and how much you have paid.

Gross profit, on the other hand, is your total income or revenue minus all of your direct costs – even for unsold or unused units/services. This figure is helpful for judging if your product or service is at the right price point.

Gross margins differ from gross profit in that they refer to only the difference between sales and the costs of goods sold.

Finally (and most importantly!) your net profit is how much money your company has made once all costs and income is accounted for – to make this figure, you subtract your total costs including direct, overhead and expenses from your total income.

It might seem obvious, but without a firm grasp on all of these terms and  – most importantly – your numbers for each category, it’s impossible to sustain and develop a successful business!

If we can be of any assistance in calculating your profit and margins email Mark here.