Financial terms made simple

Many business owners often find themselves stumped when it comes to knowing the definition between different financial terms and how they apply to their business. We’ve broken down some key financial terms to reference next time you’re asked to recall something many of us were taught years ago or trust Google to know the answer when you’re put on the spot.

Break-even analysis

The formula used to determine at what point which your business will start making a profit. By applying a break-even point analysis in your financial plan, you will be able to clearly define sales goals and manage your stock. The formula will tell you the total amount of sales you need to make in order to break-even.

Margin and mark up

These terms are often confused with one another so it’s important to know where each term should be applied. Should you confuse your margin and mark up figures, you may undervalue your services or products and risk not meeting your running costs. An easy way to identify your margin and mark up is to put both figures side by side – the mark up percentage will always be higher than the margin.

Gross profit and net profit ratios

The gross profit margin ratio compares your profit against each sales dollar before your expenses have been paid. Generally speaking, the higher the margin the better but this can differ between each industry. The net profit margin ratio shows your profit for each sales dollar made after expenses have been paid. The difference between each can be seen on your profit and loss statement. It’s worth noting that net profit can be a better representation of your profit, as it includes both the cost of goods sold and your operating expenses.

Working capital ratio

This ratio is a key indicator of the financial strength of your business. It shows your business’ liquidity – how quickly your business converts goods or services into profit for the purpose of paying your operating expenses. Your lenders and brokers will be particularly interested in your working capital ratio as it shows how quickly you can repay a loan.

If you’re still unsure about what these terms mean in order to understand more about the financial health of your business, you can use our free Financial Health Check Tool. To learn more about how SWAG can help to diagnose your financial health and get your business on track, please contact us.