Financial Terminologies that a product manager can be familiar with

Whilst a lot of product managers are familiar with gathering requirements, working with management, user experience, development and testing teams, and other aspects of product development, not many of us are familiar with the financial aspects of running a business or development of a product.

Some product managers are responsible for P&L of their products’ business, and I thought I’ll jot down some basic financial terminologies that we can be familiar with to understand financial statements.

Revenue

• It is the total sales of a company after deductions for returned goods and discounts. It is calculated by simply multiplying quantity of sales by the number of units sold.
• Revenue = Net units sold * selling price
• AKA Top Line

COGS

• It is the sum of all direct costs that go into the production of goods sold by a company — cost of raw materials and direct costs relating to manufacturing/production.
• Indirect costs such as those for transportation and distribution are not part of COGS, but will be part of Operating Expenses.

Operating Expenses

• Operating Expenses (OPEX) are expenses incurred by a company for running its business operations.
• Expenses towards R&D, licenses, employee salaries, sales, marketing & advertisement, IT, utilities, and G&A can be considered OpEx.

Operating Income

• It is the profit before taxes.
• Operating Income = Revenue – COGS – OPEX – Depreciation
• AKA Operating Profit

Net Profit

• It is the net amount that’s realized as profits that companies can use for various purposes such as investment in same/new businesses and paying dividends.
• Calculated as Net Profit = Operating Income – Taxes
• AKA Bottom Line

Here’s a simple financial statement that’s prepared for a tea shop called ‘Chennai Tea Shop’. I have kept it simple and avoided comparative figures w.r.t. previous periods.

Chennai Tea Shop – Financial Statement for April 2014
Currency: Indian Rupees (INR)