Whether you’re talking to your accountant, a business advisor in another profession or chatting at a networking breakfast, there are a few common accounting terms that will often pop up in a conversation about your business. You may already know quite a few of these, but if not, the following explanations might help you – particularly if you are a retailer.
COGS: Cost of Goods Sold (COGS) is the main expense for retail operators, and includes all the costs directly associated with selling your inventory (not including things like administrative expenses and the cost of actually selling the stock). In order to accurately determine your COGS, you will need to keep detailed and accurate records, particularly if you have a high volume and turnover of stock. Your COGS is then deducted from your sales revenue to determine your gross profit margin.
Gross Profit Margin: As mentioned above, your gross profit margin is the difference between your net sales revenue (the money you get from your customers) and your cost of goods sold. While it doesn’t include many other costs associated with running your business (things such as rent, electricity, insurance and depreciation) your gross profit margin is a vital indicator for the ongoing success of your retail business.
FIFO: First in first out (FIFO) is the recognised costing method in Australia when you sell quantities of identical items. With this method, the cost of an item you sell is matched against the purchase costs associated with the oldest (first) unit of that item that you have in stock.
Operating Expenses: Your operating expenses are the expenses that aren’t attributed to your COGS. Things like marketing and supplies, wages, rent and electricity will come under operating expenses, although in some cases, if they can be directly attributed to the cost of selling your inventory, they will be classified under COGS. For example office stationary would be an operating expense, but plastic wrap used in packaging your inventory would be more likely classified as a cost of goods sold.
EBIT: Your Earnings before interest and tax (EBIT) is your net revenue after you deduct your cost of goods sold and operating costs. Unless you are a larger business that has significant interest revenue or expense, EBIT is basically the amount of money your business is making before tax.
Net Profit After Tax: This is the amount of many your business is making after the ATO takes its portion. As a business owner, this figure is your equivalent of an employee’s salary in the hand.
By Jennifer Lowe