While new entrepreneurs may not be aware of the different financial terms involved in running a business, they do understand one thing – the bottom line. If your business is not making a profit, you realize you must consider the reasons behind it.
It may be hard to define the situation of your company if you don’t know some basic financial terms. Of course, it is essential to have a dedicated accountant such as Howlader & co. to help you with a business plan, annual accounts, bookkeeping, etc.
However, it is still good to understand some essential vocabulary when talking about your business money. It’s important to know what they mean in order to have proper discussions with your accountant and make smart decisions for your business. Here are some of the most important financial terms every entrepreneur should know.
1. Revenue
This term defines the total amount of money that your company brings in through sales or services provided. It’s important to keep track of revenue so you know how much profit your business generates and where it’s coming from. Your accountant will have a better look at what the next steps should be and this will help you make informed decisions about where to allocate your resources.
For example, if your revenue is coming from online sales, you may want to invest in a better e-commerce platform or digital marketing strategy. On the other hand, if you’re generating most of your revenue through in-person sales, you may want to focus on opening more brick-and-mortar locations.
2. Expenses
Every business has expenses, which are the costs associated with running the company. These can include everything from rent and utilities to salaries and inventory. Keeping track of your expenses is important so you can see where your money is going and identify areas where you may be able to cut back.
If you find that you’re spending a lot on inventory, you may want to reconsider your supplier or find ways to reduce waste. Also, if you’re spending a lot on marketing, you may want to reevaluate your strategy to see if there are more cost-effective ways to reach your target market.
3. Profit
Profit is the difference between your revenue and expenses. This is the money that you have left over after you’ve paid all of your bills and costs associated with running your business. Of course, you want your business to be profitable so you can reinvest in the company and continue growing.
4. Cash Flow
This term refers to the movement of money in and out of your business. It’s important to track your cash flow with a professional accountant so you always have enough money on hand to cover your expenses.
For example, if you know that you have a big inventory purchase coming up, you’ll need to make sure you have enough cash on hand to cover the cost. You can do this by either taking out a loan or boosting sales in the meantime.
5. Accounts Receivable
Accounts receivable is the money that your customers owe you for goods or services provided. This is important to track because it’s money that you are expecting to receive, and you’ll need to account for it when making financial decisions.
If you’re expecting a large payment from a customer, you may want to wait to make a big purchase until the money comes in. Or, if you’re short on cash, you may want to offer discounts for early payment to encourage customers to pay sooner.
6. Accounts Payable
Accounts payable is the money that your business owes to suppliers, creditors, or others. This is important to track because it’s money that you need to pay back, and you’ll need to account for it when making financial decisions.
For example, if you’re short on cash, you may want to negotiate longer payment terms with your suppliers. Or, if you have extra money on hand, you may want to prepay some of your bills to save on interest.
7. Equity
Equity is the ownership stake that each shareholder has in a company. This is important to know because it determines how much control each shareholder has over the business.
Provided a company has two shareholders with equal equity, they will each have 50% control over the business. However, if one shareholder has 60% equity and the other has 40%, the first shareholder will have more control.
8. Debt
Debt is the money that your business owes to creditors. This is important to track because it’s money that you need to pay back, and you’ll need to account for it when making financial decisions.
For example, if you’re trying to grow your business, you may want to take out a loan to finance expansion. Or, if you’re trying to improve your cash flow, you may want to negotiate longer payment terms with your creditors.
9. Income Statement
An income statement is a financial document that shows your business’s revenue, expenses, and profit for a specific period of time. This is important to track so you can see how your business is performing and identify areas where you may need to make changes.
If you notice that your expenses are increasing but your revenue is staying the same, you may need to find ways to cut costs. Or, if you see that your profit is declining, you may need to boost sales or find ways to reduce expenses.
10. Balance Sheet
A balance sheet is a financial document that shows your business’s assets, liabilities, and equity. This is important to track so you can see the overall financial health of your business.
For example, if your liabilities are increasing but your assets are staying the same, it may be time to take action to improve your financial situation. Or, if you see that your equity is increasing, it may be a sign that your business is doing well.
11. Cash Flow Statement
A cash flow statement is a financial document that shows the movement of money in and out of your business. This is important to track so you can see where your cash is coming from and going to, and identify areas where you may need to make changes.
If you’re spending more money than you’re bringing in, you may need to find ways to cut costs. Or, if you see that most of your cash is coming from loans, you may want to focus on boosting sales to improve your cash flow.
12. Profit and Loss Statement
A profit and loss statement is a financial document that shows your business’s revenue, expenses, and profit for a specific period of time. This is important to track so you can see how your business is performing and identify areas where you may need to make changes.
For example, if you see that your expenses are increasing but your revenue is staying the same, you may need to find ways to cut costs. Or, if you see that your profit is declining, you may need to boost sales or find ways to reduce expenses.
In Conclusion
So there you have it, 12 financial terms every entrepreneur should know. This is by no means an exhaustive list, but it’s a great place to start if you want to better understand your business finances. In order to be successful as an entrepreneur, it’s important that you have at least a basic understanding of these concepts. This way, you can make informed decisions about your business.
