Knowing the numbers in your business can put you in the top tier of small business owners. There are so many numbers involved in our business. Three key concepts you need to know are profit margin, working capital, and breakeven.
profit margin
Do you know your profit margin? Do you know how to calculate it? Can you provide the definition of profit margin? If you answered no to these three questions, you are not alone. Don’t let that group membership stop you from breaking out into the world, though. Instead of dealing with luck, start running your business. Today is the day to know your business numbers and what they mean.
Profit margin is defined in Accounting by Warren, Reeve and Fess as "A component of return on investment calculated as the ratio of operating income to sales." So what does this mean for the average person? It is the amount of profit from each dollar of sale. If you sell an item for $10 and it costs you $6, then your profit is $4 and your profit margin would be $4/$10, or 40%.
working capital
Working capital is the difference between your current assets (items of value you own) and your current liabilities (amounts you owe to creditors). Current assets and liabilities can be found on your balance sheet. Current assets include cash, accounts receivable and inventories. Current liabilities are amounts that you owe to your creditors within a year and include accounts payable and short-term bills payable. Working capital is the amount of money you need to run your business with in the current period. Insufficient working capital is one of the most common causes of business failure. If your current assets are $50 and your current liabilities are $30, your working capital is $20. This is the amount of money you have to run your business after paying the creditors.
break even
Do you know how much it costs you to produce your product(s)? Do you know how much material, labor and overhead you use in the manufacture of your products? You probably have an idea but not a clear idea of all the costs involved. It is easy to determine the material that goes into the product and the labor that goes into making the product. What about all the other costs involved? How do you allocate your overheads? What is overhead you ask? Overheads are any indirect costs of running your business, such as: B. Accounting, marketing, sales people, utilities, etc. Overheads include any costs required to run your business that are not a direct cost of the product. If you know all of these expenses, do you know how to calculate the point where your total income equals your total expenses? Do you know how to calculate how many items to sell and at what price? How can you cover your expenses and get the expected profit?
There is so much to learn about running our business. Stay tuned for more accounting concepts! You don’t build an empire in a day – you build it block by block!
margin account vs cash account
