At Cloud 360 Accounting we’ve spent the past eleven years helping clients understand their financial picture better through our suite of cloud accounting services. Turnover, net profit, margins – these are just a handful of basic accounting terms that we see confusion around daily. Time and time again we see people struggle with bookkeeping jargon. Just watch BBC’s, ‘Dragon’s Den’ to see individuals stumble when it comes to the financial probing that inevitably ensues. In this week’s blog, our CEO and founder Kieran Phelan breaks down eight phrases to get to grips with your bookkeeping…
1. Sales and Turnover
The Dragons love to ask what a company’s sales and turnover is. However, it often proves to be an issue for many, especially when pitching for investment. Sales and turnover are essentially the same thing. Some people call it your ‘top line’. It is the value of goods / products your business has sold or the value of services delivered to clients / customers. This is a key metric for any business owner. Knowing your sales / turnover is the starting point in assessing the performance of your business and in drawing up plans to grow and improve. This figure should be monitored weekly, monthly and annually to find out how your business is changing and evolving. The more often you review, the more often you will make decisions and take action to improve your ‘top line’.
2. Gross Profit and Margin
This metric must be worked out as a percentage to show how the business is performing overall. Subtract your direct costs (or cost of sales) from your sales turnover to work out gross profit. Gross profit margin is expressed as a percentage and is calculated by dividing gross profit into sales / turnover. For example:
Sell price for Product A = £ 100
Cost price for Product B = £ 60
Gross profit for Product B = £ 40
Gross margin for Product B = 40% (i.e. £40 / £100 expressed as a percentage)
3. Net Profit
The net profit of your business is worked out by taking your Gross Profit (as above) and then deducting all your overhead costs. Overheads are the costs your business would incur regardless of the level of sales / turnover being achieved – for example rent and rates.
Again, you should be checking this monthly, quarterly and annually in order to understand how the business is doing. A business without profit or suffering from lack of profit will eventually run into trouble. Your net profit should be enough to pay yourself plus any income tax (or corporation tax) your business must pay out of those profits.
4. Budget versus Actual Figures for Income and Costs
You MUST have a budget for your business and then track this against what is actually happening. Think of this like a road map, you need to have some direction to know where you are going, but when you are driving you still need to have your eyes on the road and look ahead to make sure you reach your destination!
5. Aged Receivables vs. Aged Payables
It is imperative to understand the differences in these two variables and managing this is an essential part of good credit control and policies. Customers who owe money fall into, ‘Aged Receivables.’ ‘Aged Payables’ are suppliers who are owed money.
6. Overheads as % Sales
For some businesses, it is useful to compare certain overheads against your sales / turnover. Express these figures as a percentage and then compare against industry averages.
For example, retail businesses often compare wages and salaries to sales (as a percentage). The figure for many small retail businesses falls into the range of 9% to 14%. If you’re above this, it may be an indication of over-staffing or poor rota management.
7. Average Customer Value
Understanding average customer value is hugely important to understanding the genetic make-up of your business and to help you understand how you can grow your company. Simply work out the number of clients / customers served against sales and turnover achieved.
8. MRR and ARR
These anagrams stand for, ‘Monthly Recurring Revenue’ and ‘Annual Recurring Revenue’. Essentially, it shows what repeat business you have and is a key metric for some service-based businesses with subscription models (such as SaaS companies – to learn more about this watch our recent interview with Gary Turner, MD of Xero UK and EMEA). SaaS companies are often valued based on their current and potential levels of MRR and ARR, so these figures are key when it comes to seeking angel investment during various funding rounds.
Learn How We Can Help Your Business
Bookkeeping and cloud accounting can sometimes feel like it’s stuffed with jargon, but we can make is simple and easy to understand and integrate into your business. Get in touch today to see how we can help.