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Accounting Terms & Equations for Business Owners

Bottom Line
This term may come up a lot in conversations about decision making, but have you ever actually tried calculating your own bottom line? Turns out it is pretty straightforward:

Revenue- Cost of Goods Sold (COGS-All other expenses= Bottom Line

… As long as you’re familiar with these two terms:

Revenue is the income your company generates from sales and other business activities (such as investments it makes).
Cost of Goods Sold (COGS) includes the costs of your materials and the cost of labor associated with producing the goods.

Burn Rate
Your burn rate is the amount you spend on a monthly basis:

Once you know your burn rate you can compare it with forecasted income. If you see that your burn rate exceeds this expectation you know you’ll need to adjust your monthly spending.

You will also use your burn rate to calculate cash runway...

Cash Runway

Cash on hand / burn rate= cash runaway

Example: If burn rate is 10,000 each month and you have $100,000 cash on hand then you’d divide 100,000 by 10,000 and determine that you have a cash runway of 10 months. This means your business could survive for 10 months without generating any income.

EBITDA Margin

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization.

This is a great accounting term to have in your arsenal before you start fundraising. Investors look to this report for an authentic peek into your business’s profitability after factoring out all the expenses associated with actually running it.

But who knows? Having a kick-ass EBITDA margin could very well land you a visit to an investor’s Mediterranean beach house.

Inventory Turnover

Your inventory is the assets that you plan to sell. By measuring your inventory turnover rate, you can see how often inventory is sold or used in any given time period (day, month, year, etc.).

Cost of Goods Sold/ Average Inventory= Inventory Turnover

This is especially useful for retail business that sell tangible goods and can be used to identify gaps in revenue generation and their causes, such as overstocking merchandise, product line deficiencies, or missed marketing opportunities.

ROI
Like your bottom line, your ROI is probably a term you’re very comfortable using (or asking for).

Gain from Investment- Cost of investment/ Cost of Investment= ROI

While this equation is the standard way of thinking about it, calculating the returns on costs when neither are exactly tangible or trackable can be more difficult. Take the ROI from each of your company’s departments for example. Calculating the ROI of your sales department may be very straightforward. Subtract your salesperson’s hourly rate and time spent closing each lead on the income generated by the deal and divide it by their same rate and time and you have it:

Income from Closed Deals - (Hourly Rate x Time Spent)
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(Hourly Rate x Time Spent)

But calculating the ROI of human resources is much more complex. You might still use income as your gain, but the cost of your investment will require some extra effort and most likely a specific process.

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Understanding your financials on this level is an important step in becoming a smarter, more data-driven business. With these accounting terms and equations under your belt, you’re on the right track!

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Accounting Terms and Equations for Business Owners