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Eight Vocabulary Words Every Small Business Owner Needs To Know May 27, 2009

Posted by Julie Duriga, CPA in accounting, Income Statement, profit, Small Business.
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Words To Grow Your Business 

Tomorrow I am speaking at the annual Mountain BizWorks Women In Business Conference.   My break out session is going to be a great review for small business owners.  I will to reconnect the business owners with their income statement and the terms needed to understand this statement.  I  realized yesterday that I needed to jot down some topics to talk about at the conference.   I  also realized that I needed to start a blog.  So, here I am a new blogger, writing my first blog and while drafting some discussion topics for the conference tomorrow.

  • Income or Profit and Loss Statement-This statement shows how much revenue you have generated and how much in expenses you have generated.  It also gives us important historical information but we can use our income statement to make decisive and informed decisions.  We can count on our numbers to tell us a story, sometimes it is a story we want to hear and sometimes the story can be uncomfortable.

 

  • Revenue-This number represents what you have earned selling your goods or services.  Revenue is the dollar amount that you have actively earned during the normal course of your business.   If you receive a loan, this is NOT revenue.  If you receive cash at the time you have completed your sale, then your cash in the bank and revenue would most likely be the same.   If you invoice your customers, then your revenue versus what you have in your bank account could be dramatically different.

 

  • Cost of Goods Sold-This number represents what the cost of the goods or services that you have sold cost you.   If I sell a dress for $20.00 (this is my revenue) and I paid $5.00 for this dress, my cost of goods sold is $5.00.   Measuring cost of goods sold for those of us in the service business is a little tricky.  If we are selling other people’s time, we should classify that person’s time as cost of goods sold.  Manufacturing cost of goods sold is complex, bigger than the scope of this blog, but certainly worth a blog entry of its own.

 

  • Gross Profit-This calculation is simply found by subtracting our cost of goods sold from our revenue.  Hopefully, we have more revenue than our cost of goods sold.   Gross profit is represented as a dollar figure.  Looking at the dress example above, our gross profit is $15.00.

 

  • Gross Profit Margin-This calculation is a percentage figure.  Again, referring to our dress example above, our gross profit margin is 75%.  We arrive at this figure as follows: Gross Profit/Revenue.  Try it yourself and see if you get the same answer.  Two calculations are necessary.  First, figure the gross profit and then you can figure out your gross profit margin.  This is one of the most important figures in your business.  Your gross profit margin might reveal that you need to raise your prices or find a new supplier or that everything is just fine.  Of course, the higher the gross profit margin, the better you are doing financially

 

  • Expenses-These are cash outlays that are required  to operate your business.   In business,  expenses are any cash outlay that contribute to the continuation of the business.  Rent, utilities and advertising are examples of expenses.  Equipment that you purchase is not considered an expense.    If you are paying back loans, the principal payment is not an expense but the interest portion is an expense. 

 

  • Net Profit or Net Income-This is also known as your bottom line.  This is simple addition and subtraction.  Your net income or net profit is found by subtracting all of our expenses from our revenue.   Our net profit is what is left over after all of our expenses have been accounted for.  If we had $100.00 in dress sales and $50.00 in expenses, we are left with $50.00 in net income.

 

  • Net Profit Margin-Like our gross profit margin figure, this is one of the most important figures of your business.  The higher the net profit margin, the better.  In our example above we have a 50% net profit ($50.00/$100.00).

These eight vocabulary words will help you understand your income statement with a new empowered approach.  I want to help you love your numbers and I want you to have a relationship with your numbers.  I want you to make all of your business decisions only after reviewing your numbers.   Your numbers need you! 

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

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