Question 1

What are depreciation and amortisation?

Accepted Answer

Methods of spreading the cost of a **long-lived asset** across the periods it is used, rather than charging the whole cost in the year it was bought.

**Why it exists.** A van bought for £30,000 and used for six years is not a £30,000 cost of that one year — it is a resource consumed gradually. Charging it all at once would make one year look catastrophic and the following five artificially profitable, misrepresenting every one of them. Depreciation applies the **matching principle**: the cost appears in the periods that benefit.

**Depreciation** applies to **tangible** assets — vehicles, machinery, equipment, fixtures, buildings.

**Amortisation** is the same idea for **intangible** assets — software, patents, licences, purchased goodwill.

**The common methods:**

**Straight line.** Equal amounts each year over the asset's useful life, less any expected residual value. Simple and by far the most used.

**Reducing balance.** A fixed percentage of the remaining value each year, so charges are higher early and lower later — a better reflection of how vehicles and technology actually lose value.

**Units of production**, based on actual usage, used where wear relates to output.

**What it is not:**

**Not a cash flow.** No money moves when depreciation is charged. The cash left when the asset was bought. This is why depreciation is added back in cash flow statements and excluded from EBITDA.

**Not a valuation.** Book value is cost less accumulated depreciation, following a policy — it is not what the asset would sell for, and the two can diverge enormously.

**Not a savings fund.** Charging depreciation does not set money aside to replace the asset, which is a common and expensive misconception.

**Judgement is involved**, and it affects reported profit: useful life and residual value are estimates chosen by management, so two identical businesses can report different profits from identical assets.

**Tax is separate.** In the UK, accounting depreciation is **disallowed** for tax; **capital allowances** are given instead, on their own rules and rates. So the depreciation in your accounts has no direct effect on your tax bill.

General information, not tax or accounting advice.

Question 2

What is EBITDA, and why is it criticised?

Accepted Answer

Earnings before interest, tax, depreciation and amortisation. It strips four things out of profit to give a figure intended to show operating performance independent of financing and accounting

Question 3

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust. Revenue (turnover). The total value of sales in a

Question 4

What do the three financial statements actually tell you?

Accepted Answer

Each answers a different question, and reading any one alone gives a misleading picture — which is exactly why there are three. The profit and loss account (income statement). Did we make money over

Question 5

How does inventory tie up cash, and what does that cost you?

Accepted Answer

Stock is cash converted into a form you cannot spend, and the cost of holding it is consistently larger than businesses estimate — commonly a fifth to a third of the stock's value per year once every

Question 6

What are unit economics?

Accepted Answer

The revenue and costs attributable to a single unit — one customer, one order, one subscription — stripped of everything else. The question they answer is simple and brutal: does one of these make

Question 7

What is break-even analysis?

Accepted Answer

Working out how much you need to sell to cover your costs — the point at which the business stops losing money, before it makes any. The two cost types it depends on: Fixed costs do not change with

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