Confused About Accounting Terms? Here’s a Primer

The following is a glossary of some commonly used accounting and bookkeeping terms:

Accruals: Charges that are incurred and increase even though an invoice has not been received. An example is interest that accrues before you receive a bank statement.

Amortization: The depreciation of an intangible asset such as a loan or mortgage over a fixed period of time.

Burn Rate: The rate at which a company spends money.

Capital: An amount of money put into a business.

Credit: A column in a journal or ledger to record the “from” side of a transaction.

Cost of Goods Sold: A formula for determining the direct cost of merchandise sold over a given period.

Days Sales Outstanding: The average number of days it takes to collect money owed.

Debit: A column in a journal or ledger to record the “to” side of a transaction.

EBIT: Earnings before interest and taxes are deducted.

EBITDA: Earnings before interest, taxes, depreciation and amortization are deducted.

Equity: The net value of a business, calculated by subtracting liabilities from assets.

FIFO: This means first in, first out. It is a method of valuing inventory.

Fiscal Year: A business’s accounting year. It can begin at any point during the calendar year.

Gross Margin: The percentage difference between the selling price of a product or service and the cost of producing that product or service.

Income Statement: A report that summarizes all income and expense accounts and is used to calculate the net income/loss reported on the balance sheet.

Liabilities: Amounts owed to others outside the business.

LIFO: This means last in, first out. It is a method of valuing inventory.

Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of figures so they are more consistent with the general trend of the business.

Profit and Loss Account (P&L): An account composed of revenue and expense accounts. The P&L shows the current profit or loss of the business.

Profit Margin: The percentage difference between the cost of a product and the amount it sells for.

ProForma Financial Statements: Financial statements that have not been officially audited.

Retained Earnings: The amount of money held in a business after the owners have taken their share of profits.

Revenue: The sales and any other taxable income from all sources including sales.

Run Rate: An annual forecast based on current year-to-date figures.

Selling, General and Administrative Expenses (SG&A): Overhead or expenses involved in running a business.

Write-off: An asset that is depreciated to zero.

Marketing Return on Investment: 7 Key Metrics to Track

By measuring and tracking key metrics, you can determine your marketing return on investment and link your efforts to bottom-line goals such as income and revenue. Following are some key marketing metrics that matter:

Leads Generated: Keeping track of the number of leads generated and the source of those leads helps you allocate marketing resources effectively.

Leads Converted: Knowing the percentage of leads that actually turn into customers enables you to home in on target prospects.

Customer Acquisition Cost: The total cost associated with persuading a consumer to buy your product or service, including research and advertising outlays, may surprise you.

Average Dollars per Transaction: Brought down to the individual customer level, this hard metric helps you assess pricing and price your products/services appropriately.

Churn Rate: Churn rate refers to the number of customers who discontinue buying or using your service compared with the total.

Retention Rate: The opposite of churn, retention measures the percentage of customers who stay with you or return and make repeat purchases. Bolstering customer retention is less costly than going after new prospects.

RFM (Recency, Frequency, Monetary): RFM analysis identifies top customers by examining how recently, how often and how much customers spend with you. RFM analysis is based on the 80/20 rule. For example, 80% of your business is derived from 20% of your customers.