Entrepreneurs go into business with a variety of built-in skills. Some are natural salespeople, while others have the ability to come up with ideas that sell themselves. But while there may be a handful of entrepreneurs who are truly financially savvy, the majority cringe at the thought of preparing financial statements and managing their books.
Business owners who struggle with finances should definitely hire an accountant or utilize accounting software to make things easier, but there are some basic financial terms every entrepreneur should know as their business grows. These terms may come up in meetings with potential investors, partners and clients, so it’s important to be aware of them and to understand how they might affect your business.
Here are 15 essential finance terms every entrepreneur needs to know.
1. Assets
These are the economic resources a business has, including the products it has in inventory, the office furniture and supplies purchased for use, and any trademarks or copyrights it owns. These assets count toward the value of a business, since they could be sold if the business experienced difficult times.
2. Liabilities
This includes any debt accrued by a business in the course of starting, growing and maintaining its operations, including bank loans, credit card debts, tax debt, and monies owed to vendors and product manufacturers. Liabilities can be divided into two major types: current, which refers to immediate debts (e.g. money owed to suppliers), and long-term debt, which refers to liabilities (e.g. loans and accounts payable).
3. Expenses
Business expenses are the costs the company incurs each month in order to operate, including rent, utilities, legal costs, employee salaries, contractor pay, and marketing and advertising costs. To remain financially solid, businesses are often encouraged to keep expenses as low as possible.
4. Cash Flow
Your cash flow is the overall movement of funds through your business each month, including income and expenses. Businesses track general cash flow to determine long-term solvency. A business’ cash flow can be determined by comparing its available cash balance at the beginning and end of a specified period.
5. Bottom Line
This is the total amount a business has earned or lost at the end of the month. The bottom line is the last financial figure on a ledger. The term can also be used in the context of a business’ earnings either increasing or decreasing.
6. Financial Report
A financial report is a comprehensive account of a business’ transactions and expenses, created to give a business oversight of its financial matters. A financial report may be prepared for internal use or external sources, such as potential investors.
7. Financial Statement
Similar to a financial report, a financial statement lists all of a business’s financial activities. However, a financial statement is generally a more formal document, often issued by a lending institution.
8. Cash Flow Statement
A cash flow statement shows the money that entered and exited a business during a specific period of time. It generally covers four main categories: operating activities, investing activities, financing activities and supplemental information.
9. Income Statement
Also known as a “profit and loss statement,” an income statement shows the profitability of a business during a period of time. The income statement looks at a business’ revenues and expenses through all of its activities.
10. Balance Sheet
A business’ balance sheet gives a snapshot of the company’s financial situation at a given moment. This includes the cash it has on hand, the notes payable it has outstanding and owner(s) equity in the business.
11. Profit and Loss
To remain financially healthy, a business must have a regular profit that exceeds its losses. Profits and losses are usually itemized on a profit and loss statement, also known as the income statement defined above.
12. Capital
In business finance terms, the money a business has in its accounts, assets and investments is known as capital. In business, there are two major types of capital: debt and equity.
13. Accounts Receivable
Accounts receivable (A/R) is the amount a business is owed by its clients. Usually the client is notified by invoice of the amount owed, and if not paid, the debt is legally enforceable. On a business’ balance sheet, accounts receivable is often logged as an asset.
14. Depreciation
Over time, a business’ assets decrease in value due to the time that has passed since it was purchased. For tax purposes, a business can recover the cost of that depreciation through a deduction.
15. Valuation
When a business seeks funding from investors, those investors want to know the overall worth of that business. This is accomplished through a valuation, which is an estimate of the overall worth of the business.
A business owner doesn’t have to be a financial expert to be successful. However, it is important to know the basic financial terms that will come up in conversations with colleagues, potential clients and investors. By maintaining oversight of operations through financial reports and budget maintenance, a business can increase its chances of success.
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