Of all the tasks involved in running a business, bookkeeping is rarely anyone’s favorite. But there may be new opportunities — as well as potential risks — hidden within the acronyms. In this article we look at the concepts behind the acronyms and what they really mean for your business.

1. Operating expenses (OPEX)

OPEX are what it costs to run the business day to day, including “must-haves” like rent and “nice-to-haves” like refills for the coffee machine.

This number is an important baseline, since you have to cover these costs no matter how many goods or services you sell.

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Keep an up-to-date list of your operating expenses and highlight where you could cut back if you needed to. This can help you act swiftly in a crisis (like COVID-19) or make smaller adjustments in less drastic circumstances.

2. Capital expenditure (CAPEX)

CAPEX happens when you spend money on things that will benefit your company for the long term (think more than a year). The most common expenditures are equipment (from machines to computers), buildings, and cars.

It’s important to know when expenses are capital expenditures, because they are entered into your books differently and are handled differently at tax time.

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If you notice more than a few expenses that you think qualify as capital expenditure, it may be worth it to consult an accountant, banker, or tax professional to find efficiencies.

3. Cost of goods sold (COGS)

COGS refers to any costs or expenses that are directly tied to the products you’re selling or services you’re offering.

These costs should fluctuate based on your sales. If you sell more, you’ll have higher cost of goods sold that month.

Watch your COGS over time. If they increase, you want to know so you can raise prices; otherwise those increases can eat into your profit.

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Knowing the difference between fixed OPEX and COGS can help as you plan for the future. You’ll know which costs will increase if you ramp up production or sales, and which will stay fixed. COGS can also help you figure out margins and pricing (see next section).

4. Gross margin percentage

Gross margin percentage is the number you get when you subtract costs of goods sold (COGS) from your revenue (sales), then divide by your revenue. Multiply by 100 to turn it into a percent.

Essentially, your gross margin percentage tells you how efficiently and profitably you make your products. Ideally, your number is higher than your competitors’, for instance, because you’re operating more efficiently.

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Gross margin percentage tells you the most when you monitor it over time. Check for big fluctuations: If you’re more profitable one quarter than others, can you reallocate resources to create a more efficient and stable profit stream? If the number is consistently shrinking, you may need to evaluate your costs and prices and make adjustments.

5. Chart of accounts

Chart of accounts is a master list of sorts. It documents all of the accounts in your business, both on the income-producing side and the expense side. If you use accounting software, you may have a premade chart of accounts, although they can sometimes be formatted in a confusing way.

The biggest challenge with a chart of accounts is to organize it in a way that you can understand it, so that it’s helpful to you. But it also must fit within accounting norms.

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Spend some time thinking about what structure makes the most sense to you and consider consulting with an accountant if you need help.

6. Balance sheets

Balance sheets are a list of what a company owns. Think assets less liabilities and equity. Often, these assets and liabilities are thought of as fixed (like a building) and current. Current items tend to be more liquid (you could convert them to cash if needed).

Your balance sheet can help you assess the overall value of your company. It’s especially important if you’re going to sell, talking to investors, or thinking about your personal net worth.

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Keeping your balance sheet up to date can ensure your business is fairly valued. (As a business owner, this valuation may be reflected in your personal net worth, too.)

7. Profit and loss (P&L) and cash flow

P&L and cash flow are two statements most business owners are familiar with. P&L shows whether you’re making or losing money and how much. It often contains some of the other terms we’ve described so far.

Cash flow explains how you got to your P&L by looking at your transactions, how you finance things, and any investments. These two statements taken together are the biggest indicator of your business’s financial health.

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Keep them current and make sure you understand each line item at a high level.

Many business owners resist the complexities of bookkeeping or think their business model is too unique to accurately be summarized via standard accounting. But as accountant, CFO, and small-business owner Jennifer Yousem says, “You’re not that special. … Every business operates under the same fundamental principles: Money comes in (revenue) and money goes out (costs). Whatever you’ve got left over is your profit.”

Standard bookkeeping can help you figure out ways to be more profitable. It also ensures you’re speaking the same language as any potential investors or partners. Keeping good books can help you make big decisions as you grow your business. 

Download our bookkeeping worksheet (PDF) to see what these concepts can tell you about your business, specifically.

Sources: Investopedia, I Heart EBITDA, Investopedia, The Balance Small Business, Houston Chronicle, I Heart EBITDA

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