Financial Terms All Business Owners Should Understand

Owning a business can be overwhelming, and so is knowing that you have to be on top of your finances to succeed and survive. Unfortunately, not all entrepreneurs are fond of numbers. That is why accountants and bookkeepers exist to help. Still, that does not mean business owners should wholly rely on them for everything. It is still their business, and they need to know the ins and outs of their finances.

Even though this business aspect seems too much to handle, there are steps you can do to take them in slowly. You can begin by learning about the different financial terms and understanding what they are about. Here are the main terms you need to know.

Easy Definition of Financial Terms

Cash Flow: This refers to the amount of money a business has available. It is distinct from net income, which is the amount of cash a company generates. Cash flow is a better indicator of a business's health.

Depreciation: This is the tax deduction that is used to account for a tangible asset's loss of value over time due to wear and tear or obsolescence.

Income Statement: This is a financial statement that shows a company's revenues and expenses. It will also indicate how much money is leftover at the end of the period.

Owner's Equity: This is the amount of money that a business owes to its owners.

Profit/Loss: Profit/Loss = income minus expenses. A business needs to earn a profit to survive. Failure to turn a profit can lead to closure.

Net Income: This is the total revenue that a business generates after paying all of its expenses. It is important to note that this is not the same as profit/loss.

Revenue: This is the amount of money a business makes from selling its products and services.

Cash Flow Statement: This refers to a report that shows how well a business is doing. It shows the amount of cash that a company has going in and out of its cash reserves.

Working Capital: This is the amount of money a company holds in its bank account.

Capital Asset: This is an asset in a company with value and is expected to have future income.

Capital Expenditure: This refers to an asset that is expected to last more than one year.

Operating Expenses: These are expenses that a business has to pay to stay in business. They do not include capital expenditures.

Fixed Cost: This pertains to any cost that does not fluctuate with sales volume.

Accounts Receivable: This is an attribute to an asset that is owed to a company. The customer already made the purchase, but the company has not yet been paid for it.

Accounts Payable: This is an attribute to a liability that is owed to a company. The company purchased something from a supplier but did not pay for it yet.

Gross Margin: This is the amount of profit that a business makes after subtracting its cost of goods sold from its sales.

Profit Margin: This is the ratio of a company's net income divided by its revenue.

Fixed Assets: These are assets that a company owns that have an extended life. Examples are buildings and machinery.

Current Assets: These are assets that a company has that are not expected to last very long. Examples include accounts receivable, inventory, and cash.

Quick Ratio: This is the ratio of a company's current assets minus inventory divided by its current liabilities.

Long-Term Liability: This is any liability that is expected to last beyond one year.

Sinking Fund: It is a fund that a business sets aside to pay for a future expense.

Business Entity: A business entity refers to the type of organization in which a business is set up. There are three choices: sole proprietorship, partnership, and corporation.

Conclusion

These financial terms are just the tip of the iceberg when it comes to accounting. Looking them up online can give you a better understanding and help you learn more. If you find yourself unfamiliar with them, you can always reach out to your accountant. They can always help you understand the terms.

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