The media often use financial terms as if they assume that everyone knows what these terms mean. Sometimes readers and listeners know what these words mean but at other times they are completely in the dark. If you can grasp the explanations below you can impress your buddies at a braai by using these terms and offering to explain to them what these mean.

Gross profit versus net profit

Gross profit is calculated as follows:

Turnover (sales) minus the direct cost (or cost of sales) of producing the product/service sold

Net profit (bottomline) is what you keep after all the rest of the expenses have been taken into account. The formula for net profit is:

Gross profit minus all indirect expenses (also called overheads/non-production costs)

Profit margin

The profit margin expresses the profitability of the business as a percentage.

A gross profit margin (%) can be calculated like this:

Gross profit/Sales (also called turnover) x 100

To calculate the net profit margin (%), use the following formula:

Net profit/Sales x 100

The ideal gross and net profit margins differ between industries because the direct costs and overheads between industries are not the same.

Cash gap

A cash gap is the number of days from the date your business pays cash for stock purchased from suppliers, until the date the business receives cash from the customers who bought that same stock from your business.

The idea is to manage cash payments and cash receipts in a way that will keep the cash gap as short as you can, so that the business only need to finance the smallest amount of stock for the least number of days possible.

Niche market

A niche market is a small segment of a bigger market with the potential of being profitable if exploited.

How do you find a niche market? You don’t just find a niche market – you create it by identifying gaps in the market where consumers have a need that is not being met by someone else yet, and then offer the products or services to fill that need.

Passive income

Passive income is income you earned that you didn’t actively have to work for now. But there is a catch: a source of passive income must be created before you can start receiving any passive income from it, and that takes time, money and work.

Examples of passive income are rent received from a past investment in property and royalties earned by an author on book sales from a book written in the past. Salaries and wages are not seen as passive income because you had to work for it now to earn it.

Inflation

There are many clever definitions for inflation but the long and the short of it is this: say in 1999 you could buy a bread for six rand, then fast forward to 2009 and now the same bread costs ten rand. Inflation is what happened to your money: the same amount became worth less over time, or to put it in a different way, you will have to pay more money for the same item now than you had to pay for it in the past.

The above descriptions attempted to shed some light on the meaning of certain financial terms often used by the media. If you need further information on these or any other financial terms, please contact your financial advisor.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Reference List:

• Your Business Magazine – April/May 2015
• http://www.businessdictionary.com
• http://quickbooks.intuit.com
• http://inflationdata.com