A 2015 survey by Ogilvy PR of adults in the United States revealed this interesting yet not all that surprising statistic: 30 percent of the respondents said they’d rather clean a bathroom than solve a math problem.
Researchers have long known about our aversion to math in the United States. American students consistently score in the middle in math proficiency when compared with other countries. For example, in 2015, U.S. students finished 38th out of 71 countries in math in the Programme for International Student Assessment, which measures reading ability, math and science literacy every three years.
Unfortunately, if you are going to start or run a business – and stay in business – you have to develop some base-level awareness of your finances. Fortunately, you don’t need to relearn college algebra. In Dinero, an online provider of accounting and tax services for businesses, breaks down seven accounting terms and equations you need to know to make proper business decisions:
- Bottom Line. This is probably the most straightforward thing you need to know. If you can’t calculate your bottom line, then perhaps business management isn’t for you. Bottom line = Revenue – Cost of Goods Sold and All Other Expenses. Cost of Goods Sold includes the cost of materials and the labor associated to produce the goods or services.
- Burn Rate. This is crucial. It calculates the amount you spend monthly. If your burn rate is above your forecasted income, you have a recipe for failure. Burn Rate = Monthly Spending.
- Cash Runway. This calculation shows you how long your business can survive without any revenue. Cash Runway = Cash on Hand/Burn Rate.
- Depreciation. This is a little mind-numbing, but tracking depreciation of your equipment, hardware and furniture is a serious savings tool; when you file your income taxes each year, the IRS lets you claim any value lost based on your depreciation rate. There are three you should know: Depreciable Asset Cost = Initial Cost of the Asset – Estimated Salvage Value (resale value once it’s no longer useful); Depreciation Rate = 1/(number of years the asset will be useful) x 100; and Annual Depreciation Amount = Depreciation Rate (%)/Depreciable Asset Cost ($).
- EBITDA Margin. This is your real profitability after you factor out such things as taxes and depreciation. This is what investors look at. EBITDA Margin = Total earnings + Interest – Taxes, Depreciation and Amortization.
- Inventory Turnover. Calculating this rate is especially useful for retail businesses to identify gaps in revenue generation, such as product-line deficiencies or overstocking merchandise. Inventory Turnover = Cost of Goods Sold (COGS)/Average Inventory.
- Return On Investment (ROI). In simple terms, ROI = (Gain from Investment – Cost of Investment)/Cost of Investment. You have to adjust ROI, though, based on your industry. Click here for more tips on how to calculate your ROI.
If you can get comfortable with these seven equations, you’ll have significantly increased the likelihood of your business surviving.