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Key financial terms
The following is a condensed version of a recent Globe and Mail article by Brenda Bouw on business terms owners should know.
Gross margin
This is the difference between revenue [sales] and costs to sell. The difference is the company’s profit. Revenues alone do not tell the whole story.
Fixed versus variable costs:
Fixed costs are those that remain the same month over month. These may include rent or lease on equipment. Variable costs may include salaries, price of products purchased.
Capital Expenditures
These are fixed costs that add value to the business, such as computers and machinery. These costs need to be ‘capitalized’ or spread over the life of the asset. In other word, you don’t deduct them in one year.
Operating Expenses
These can be fully deducted in the same tax year; examples include legal fees, office supplies, consulting fee.
Intangible Assets
These include trademarks, brand names, patents, and copyrights. The worth of these intangibles are only the worth of their costs.
Goodwill
An intangible asset that determines the value of a company’s brand name, customer base and relations. This then is included into the sale factor of the business, along with tangible assets.
EBITDA
The acronym stands for earnings before interest, tax, depreciation and amortization. It is important for an investor or purchaser to understand where a company stands in terms of profitability.
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