Successful entrepreneurship isn’t just about having a brilliant idea or being a strong salesperson. At its core, business success often hinges on one’s grasp of financial literacy. It’s the silent engine that powers informed decisions, helping business owners steer clear of pitfalls and capitalize on opportunities. However, many budding entrepreneurs feel swamped when terms like “ROI” or “Working Capital” come into play. Fear not! We’re here to break these down for you.
1. Cost of Sales: When people talk about Cost of Goods Sold (COGS) or Cost of Sales, they’re referring to the total cost you’ve incurred to produce a service or good you’re selling. Essentially, it’s about understanding what it costs to make what you sell.
2. Labor Margin: Think of this as a lens into your profitability. It’s the gap between what you charge customers for labor and what you end up paying your employees.
3. Working Capital: This is a snapshot of your company’s financial heartbeat. By subtracting current liabilities (like what you owe) from current assets (like cash or inventory), you get a clear picture of your company’s short-term financial health.
4. Cash Flow: Ever heard the saying “cash is king?” This term underscores that. Cash Flow looks at the net cash coming in and going out of your business. When positive, it means you have more liquid assets, helping you reinvest, cover expenses, or even handle unforeseen challenges.
5. Return on Investment (ROI): When you pour money into a project or tool, how do you know it’s worth it? ROI gives you that answer. It evaluates the profitability or efficiency of your investment.
6. Overhead Costs: Beyond labor or materials, running a business has its own set of costs. Overhead refers to those ongoing expenses that don’t directly tie into producing goods or services. Think rent, utilities, or insurance.
Do these terms seem confusing? If so, you’re not alone. At SBK, we believe that a good accountant does more than just crunch numbers—they empower their clients with knowledge. If you need help understanding these financial concepts or anything else related to your business finances, don’t hesitate to reach out to us. Let’s work together to demystify your financials and set your business on a path to success.