Getting lost in financial language
A whole new language is introduced too; Turnover, Sales, Gross Revenue, Gross Profit or Net Revenue, Overheads, Staff Costs + Operating Costs, Operating Profit & Net Profit….
Is this any different to moving to a new country, where you’re unable to speak a word of the native language, in fairness probably yes, it is, but it isn’t a million miles away in how out of your depth you may feel.
In an attempt to de-mystify this new lexicon, here is a brief glossary of key terms and their meaning, explained as plainly as possible.
· Turnover, Sales and Gross Revenue: These are all the same thing, it’s the total of net amounts (excluding VAT) shown on every invoice the company issues to its clients. The total amount you have quoted to the client it will cost them to do the work. Be it fees, supplier costs or out of pocket items, they all add up to make the agency’s turnover.
· Gross Profit or Net Revenue: Again, they’re the same thing, this is simply the number we arrive at above but excluding all direct and job specific costs incurred delivering the work, for example, the print element of a job or the venue hire of an events project, also known as cost of sales.
· Overheads - Staff Costs + Operating Costs: These are different, and solely about the agency, as these are specific to your company not any one client. Overheads are the line items of costs an agency incurs running day in day out. People costs, property costs, communication costs, travel and subsistence to broadly name them. The biggest cost in any business is it’s people, anywhere between 50-75% of agencies overheads could be people! Then there is operating costs, never likely to be a concern of an account handler but never the less an unavoidable cost as an agency, your office, deck, laptop, mobile, internet etc. etc.
· Operating Profit & Net Profit: This is very confusing for non-finance guys and is something you should take time to understand each business definition of it, as this does vary in the calculation from job level result to a company total result. At a job level the net profit is a position arrived at after all the costs, direct to the job, people time and 3rd party are deducted from the jobs gross revenue. At business level, the net profit is arrived at after the total of all staff costs, overheads and direct cost or cost of sales are deducted from turnover. Operating profit is a different calculation and the purpose is to remove costs in the profit and loss that are not ‘operating costs’ of the business to determine how much of your revenue actually turns into profit. (Non-operating costs are items like interest charges and taxes).