Understand these 3 Accounting Terms To Make Better Business Decisions!

Return On Investment

An accounting term many people have heard, but don’t really understand. It’s most often heard when people think about financial investments like in stocks or bonds, but it applies just as much to your business. Put more simply, it refers to what you’ll get back for putting money into your business.

How does this help you? When you’re trying to decide on a marketing initiative, or buying a piece of equipment, it helps to think about whether the return of investment will be good or bad. Now, figuring that out is not always easy. However, this is something your accountant can help you evaluate.  Just ask.

Accrual Accounting

Most business owners study the health of their business solely by their bank account. However, this does not give a full picture of how your business is doing. That’s not to say it isn’t important, but accrual accounting has a huge effect on your bottom line. Taxes for example are owing for a period when the billing occurs, not when collection happens. If your customers take a long time to pay, this can potentially cause a big problem not just with corporate taxes but with HST as well.  Talk to your Accountant about accrual accounting.

Gross Profit Margin

Again, there is a tendency by entrepreneurs to study only the bottom line or your bank account. However, there are many revealing details about a business when the gross profit margin is looked at. The gross profit margin shows up on your income statement and it refers to the amount of income generated after only considering the direct costs required to produce that income. The important point is that the general operating costs or more indirect costs are excluded, like overheads. Knowing the difference can help you to look at how you can improve your bottom line. If you have a high gross margin, but low net income, then it may be that you need to find cost savings in all your general operating costs. Or if you have a low gross margin, then maybe you really need to re-evaluate the basics of your business model.

Understand these three terms and how to use the information so you can make better business decisions. 

These are just a fraction of the tools available allowing your accountant to help you evaluate how your business is doing and then help you make decisions on what you should do next.

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The blogs posted on our website provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

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