20 Confusing Finance Terms, Simplified
In this story, we'll break down 20 tricky finance terms in simple language.
What are Fixed Costs?
Costs that stay the same every month, no matter what.
Example:
Rent, Salaries.
What are Variable Costs?
Costs that change based on how much you produce or sell.
Example:
Raw materials, Electricity for production.
What is Revenue?
The total amount of money a business earns from sales.
Example:
before
any expenses are deducted.
What is Profit?
What's left after you subtract all expenses from your revenue.
Formula:
Revenue - Costs = Profit
Cash Accounting
Transactions are recorded only when cash is actually received or paid.
Note:
Simple, but can be less accurate.
Accrual Accounting
Transactions are recorded when they
happen
, even if no money has changed hands.
Note:
(e.g., Recording a sale on credit)
What are Assets?
Anything a company owns that has value.
Example:
Cash, Property, Equipment.
What are Liabilities?
Anything a company
owes
to others.
Example:
Loans, Bills, Debt.
ROI (Return on Investment)
Measures the profit you make from a specific investment.
ROI =
Net Income / Cost of Investment
ROE (Return on Equity)
Measures how well a company uses shareholder money to make a profit.
ROE =
Net Income / Shareholders’ Equity
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation, and Amortization.
Note:
Used to check a company's core operational performance.
What is Net Income?
The final profit after
all
costs, taxes, and expenses are deducted.
Net Income =
Total Revenue - Total Expenses
Operating Expenses
The ongoing, daily costs required to run the business.
Example:
Rent, Salaries, Utilities.
Capital Expenses
Money spent on buying or upgrading long-term assets.
Example:
New building, New machines.