As a firm providing an outsourced CFO service, we may be biased, but we definitely believe that accounting and finance is the “language of business.” Here is a summary of a useful guide published a prominent news site of some important financial terms and concepts that every business owner and CEO should understand.
1. Gross margin:
“The difference between your revenue (or sales) and the costs to sell them.”
Actually, this isn’t quite correct. Gross Profit is the difference between your Sales and the direct costs (e.g., manufacturing, etc.) it took to produce those sales. Gross Margin is the Gross Profit divided by Sales.
Gross Profit doesn’t include traditional overhead costs like Sales & Marketing.
2. Fixed versus variable costs:
“As the names suggest, fixed costs don’t change, while variable costs can, regardless of a company’s sales or output. Fixed costs include rent or building leases, machinery and equipment, and depreciation if these items are owned. Variable costs include wages, utilities and the price of raw materials.”
3. Capital expenditures (also known as capex):
"In accounting terms, these costs need to be capitalized, or spread over the life of the asset. In other words, you don’t deduct them in one year."
This will cause a significant difference between the profit (or loss) on the Income Statement versus what shows up on the Balance Sheet and the Statement of Cash Flows.
4. Operating expenses:
“These are different from capital expenditures because they are shorter-term costs required to run a business. Unlike capital expenditures, operating expenses can be fully deducted in the same tax year. Examples include insurance costs, legal fees and office supplies.”
5. Intangible Assets:
“These include trademarks, brand names, patents and copyrights.”
6. Goodwill:
“An intangible asset that determines the value of a company’s brand name, customer base and relations.”
This is usually more important when a company has acquired another business.
7. EBITDA
This acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
This concept is often dangerously misused as a proxy for Cash Flow.
8. Return on investment (ROI):
“ROI measures the amount of return on an investment relative to its cost.”
This is a very important measure in order to make the right kind of growth decisions and investments for any business.
IRR (Internal Rate of Return) is also another important investment concept to utilize.