Crunching numbers is a critical aspect of running a business. Businesses may use an accountants to keep the books, but an accountant is another expense, so some business owners may choose to handle the business finances on their own. Whether you want to handle your business’s money matters or you use an accountant, it helps to understand some of the basic terms like operating expenses, revenue and profit.
An expense is something you pay out. Operating expenses cover the costs necessary to keep the business running on a day-to-day basis. The expenses generally include costs such as payroll and salary, rent, utilities and taxes. An operating expense is not associated with the costs incurred to produce goods or services, however. Another term for an operating expense is selling, general and administrative expenses, or SG&A Expenses.
Revenue is money coming into the business. It is all the money that the business brings in from conducting its operations — be that selling goods, services or other offerings. Revenue is materially different from operating expenses -- it is money flowing into the company as opposed to going out. Revenue is also different from profit or income.
Gross profit is the amount of money left over after subtracting the cost of goods and services from the revenue. It is money the business uses to cover operating expenses. For example, if the business brought in $15,000 in revenue, but it costs $6,000 to produce the goods or services, the gross profit is $9,000.
Your operating income is the money left over after paying the operating expenses. Figure this sum by subtracting the gross profit from the operating expenses. If you end up with a positive number, you business has made money. Negative numbers indicate that you business is losing money, or paying out more than it is brining in. For example, if you have a gross profit $9,000 and operating expenses of $3,000, the business earned $6,000.