Plain English

The numbers, explained.

The words in the reports, in plain English. The three that catch most businesses out: gross margin is not profit, wages always include on-costs, and profit is not cash. Everything here assumes accrual accounting (explained first).

Accrual accounting (what these reports assume)

Income is counted when it's earned (the work is done and invoiced) and costs when they're incurred, whether or not the money has moved yet. Cash accounting counts income only when it's received and costs only when they're paid. Every report here uses accrual accounting, which is why profit and cash tell different stories. Many small businesses keep their books on a cash basis for tax (BAS); the numbers here won't match those, and that's expected.

Revenue

Everything you invoiced for the work you did in the period, before any costs. Not the same as cash received: you may still be waiting for your customers to pay.

Direct costs

What it cost to do the work itself: materials, subcontractors, and the time of the people doing the job, at a fully loaded hourly cost (wages plus all on-costs).

Gross margin (not profit)

Revenue less direct costs. Example: a $10,000 job with $6,500 of direct costs makes $3,500 gross margin, or 35%. It is before overheads, so it is not profit. A business can have a healthy-looking gross margin and still lose money once overheads are paid.

Gross margin is not markup

Markup is profit over cost; gross margin is profit over price. Adding 35% to a $6,500 cost gives a $8,775 price, which is only a 25.9% gross margin. Pricing with markup when you meant margin is one of the most common ways businesses undercharge.

Wages (the full cost of a person)

In these reports, wages means everything a person costs you, not just their pay: base wage or salary, overtime, penalty rates and allowances, bonuses and commissions, plus all the on-costs below. Leave them out and every job looks cheaper than it is.

On-costs

The costs on top of pay that come with employing someone: superannuation, payroll tax (above the state threshold), workers' compensation insurance, leave (annual leave, leave loading, personal leave, long service leave) and any other employment costs such as training or uniforms. A $40 an hour wage can easily cost $50 or more an hour once on-costs are added.

Overheads

Costs that don't belong to any one job: office and admin wages, rent, vehicles, marketing, insurance, IT, depreciation and interest. They are paid whether you do ten jobs or a hundred, and they come out of gross margin.

The gross margin you need

Divide your overheads (and any paid time not charged to jobs) by revenue. That is the gross margin your work needs on average just to break even. Work below it makes the business smaller in profit as it grows; work above it is what pays for everything else.

Profit

What is left after direct costs and overheads. Profit before tax is what the business earned in the period; net profit is after income tax.

Profit is not cash

Profit counts work when it's invoiced; cash counts money when it lands. Unpaid invoices, stock, loan repayments, tax and equipment purchases all make cash differ from profit, which is why a profitable business can still run short of cash.

Cash forecast

Cash at bank today, plus the money expected in (each unpaid invoice on its customer's usual payment date, and new work at its recent rate), less the money due out (pay runs, supplier bills, tax and loan repayments on their due dates), day by day. It's only as good as its assumptions, so a good one is checked against the bank as the days arrive and says why it was out.

Unpaid invoices (debtors)

Money customers owe you for work already invoiced. It is yours, but you can't spend it until it's paid.

Work in progress

Work done but not yet invoiced, valued at what you'll bill for it. It turns into an invoice, then into cash, later.

Unrestricted cash

For a not-for-profit: cash at bank less grant money received but not yet spent. The unspent grant money belongs to the funder's program, so it can't pay general bills.

Runway

How many months the organisation could keep going on its unrestricted cash at the current rate of spending, with no new money coming in.

Cost to raise a dollar

Fundraising costs (grant writing, donor campaigns, events) divided by the money they bring in, in cents. 20¢ means every dollar raised cost 20 cents to raise, on average. It is an average, not a marginal cost: the next dollar can cost more or less to raise than the last. To judge one more campaign or event, compare its own extra cost with the extra money it brings in.

Growth, year on year

This month against the same month a year earlier, so seasonal ups and downs don't look like growth or decline.

Locked, provisional, incomplete

Locked: the month is closed and won't change. Provisional: the month is over but not closed, so late invoices and adjustments can still change it. Incomplete: still happening, like today or the month so far.