Operating Cost Survey: Terms to know

October 12, 2016 -  By

is49971220green-numbersUse the following definitions to understand the data presented in this report.

Ratio: A ratio is the relationship of two quantities expressed as the quotient of one divided by the other. For example, if there are 10 people, six who have blue shirts and four who have red shirts, the ratio of blue shirts to the population would be six-tenths or 60 percent. The ratio of red shirts to the entire population would be four-tenths or 40 percent. Most of the KPIs in this report are expressed as ratios.

Median: The value of a set of data that falls at the midpoint of the data, assuming the data is ordered lowest to highest. The median does not give value to the values themselves but rather to their ordering.

Mean: The mean is the mathematical average calculated by adding up all data points and dividing by the number of data points.

This report uses medians for the majority of reported results to limit the impact of data from outliers that can skew the data.

Current assets: Current assets are all assets on a balance sheet that can be converted into cash quickly (usually one year or less). Examples include cash, accounts receivable, inventory and marketable securities.

Current liabilities: Current liabilities are the company’s debts or obligations that are due in the short term (usually one year or less). Examples include accounts payable, credit cards payable, payroll taxes payable and credit lines payable.

EBITDA: This term is short for earnings before interest, taxes, depreciation and amortization (earnings while adding back noncash charges, so the number gets closer to cash provided by operations).

Fixed asset: Also known as property, plant and equipment (PP&E). These are assets that cannot easily be turned into cash. Some examples include vehicles, equipment and real estate.
Revenue: The amount of money earned in a given period.

Cost of goods sold (COGS): Generally accepted accounting principles don’t provide a detailed description of COGS, as they can be made up of many items. In our context, think of them as all
direct costs or those costs that happen away from the office and rise and fall with the volume of business completed.

Examples include technician labor, vehicle costs, materials, etc.

Equity: The difference between assets and liabilities on a balance sheet. In this case assets are recorded at historic costs. Therefore, true equity would not be measured from the balance sheet as assets appreciate and intangibles, such as customer lists, grow. These items can be significant and are excluded, as a balance sheet is historic but should be considered in any analytic exercise.

Gross profit: The difference between a firm’s revenue and its direct costs. Gross profit is the most important KPI when running a business. Gross profit is key to finding out a firm’s breakeven point using breakeven analysis.

Operating expenses: Operating expenses are those used to run the business that are not associated directly with production of service. Some examples include office rent, utilities, marketing and sales, office staff, etc. Many refer to operating expenses as fixed costs because many of these must be paid at any volume of business and can be seen as fixed over a range of business activity.
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About the Author:

Gordon is a New Jersey-based CPA and owner of Turfbooks, an accounting firm that caters to land care professionals throughout the U.S. Reach him at dan@turfbooks.com.

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