We’ve officially reached our third and final part of this three-part blog series, dedicated to explaining some of the more common, yet complicated, terms used by financial experts and reports.While we’re excited to wrap up the lingo guide with this last blog post, each of the past two parts are equally packed with terms you’re likely to come across but not quite understand in your business dealings, so be sure to check out one and part two if you haven’t yet.
Operating income is the name for the amount left once operating costs has been subtracted from net sales. In this equation, only profit strictly from sales is considered, while non-operating costs are excluded from consideration.
Following the same line of thought as gross profit margin, operating margin is the percentage of operating income being made. Found through (operating income/net sales) X 100, the final percentage can tell an owner how effective their operating costs are when compared to the sales they’re making.
For a predictable bills that require advance payment, prepaid expenses comes into play. The perfect example of this in action is for a yearly insurance policy, where the final cost is credited and payment distributed evenly over the course of the 12-months. The payment is posted to prepaid expenses and 1/12th is expensed each month to account for true cost within that time period.
Revenue or Net Sales
This is the amount of money a business has flowing in from sales, after all discounts, returned products, and sales deductions have been accounted for. It’s strictly product sales profit, with no expenses yet considered, and typically listed at the top of your income statement.
Selling, General, and Administrative Expenses (SG&A)
These expenses reflect those generated through everyday business and sales – such as advertising, warehousing, office staff employee paychecks, rents, utilities, and travel – rather than those related to manufacturing the product itself.
The reverse side of prepaid expenses, unearned revenue is tracked as a successful sale of a product or service that has yet to be delivered or performed. As revenue cannot be counted until earned, if money is received prior to the actual item is provided, it must be counted as a liability until the product/service is delivered. Items falling into this category are generally deposits/retainers paid.
I hope this three-part guide has been helpful in shedding light on those strange terms shown on your financial statements or that your accountant may say now and then.
It can be complicated trying to figure out all the in’s and out’s of your business’s finances, and it’s never easy to admit what you don’t know or ask for help. But that’s why we’re here – whether to give information such as this post, or through handling all your accounting needs ourselves!
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