Entrepreneurship is a learning journey. If you’re open to learning and set yourself up with the right team including a qualified accountant, financial advisor, or bookkeeper, you’ll be off to the races.
So let’s start the learning. As a new business owner, it’s essential to familiarize yourself with various financial terms to effectively manage your company’s finances. Here are 20 key financial terms you should know:
- Revenue: The total income generated by your business from sales or services rendered.
- Expenses: The costs incurred to run your business, including rent, utilities, salaries, supplies, and marketing expenses.
- Profit: The positive difference between revenue and expenses, indicating the financial gain or net income of your business.
- Gross profit: The amount left after deducting the cost of goods sold (COGS) from the revenue. It represents the profit before accounting for other expenses.
- Net profit: The profit remaining after deducting all expenses, including COGS, operating expenses, taxes, and interest. It reflects the actual profitability of your business.
- Cash flow: The movement of money into and out of your business over a specific period. Positive cash flow means more money is coming in than going out, while negative cash flow indicates more money going out than coming in.
- Accounts receivable: The money owed to your business by customers for products sold or services provided on credit.
- Accounts payable: The money your business owes to suppliers, vendors, or creditors for goods or services received but not yet paid.
- Assets: The resources owned by your business that have monetary value, such as cash, inventory, equipment, property, or accounts receivable.
- Liabilities: The debts or financial obligations of your business, including loans, accounts payable, or any other outstanding payments.
- Equity: The ownership interest in your business, represented by the difference between assets and liabilities. It reflects the net worth of the business.
- Break-even point: The sales volume or revenue level at which your business neither makes a profit nor incurs a loss. It’s the point where total costs equal total revenue.
- Return on Investment (ROI): A measure of the profitability of an investment, expressed as a percentage. It compares the gain or loss relative to the cost of the investment.
- Cash flow statement: A financial statement that shows the inflow and outflow of cash during a specific period. It helps you understand how cash moves through your business.
- Balance sheet: A financial statement that provides a snapshot of your business’s financial position at a specific point in time, showing assets, liabilities, and equity.
- Income statement: Also known as a profit and loss statement (P&L), it summarizes your business’s revenues, expenses, and net income or loss over a specific period.
- Financial ratio: A quantitative relationship between different financial elements, used to evaluate your business’s performance, liquidity, profitability, and solvency.
- Depreciation: The systematic allocation of the cost of an asset over its useful life, reflecting the reduction in value due to wear and tear or obsolescence.
- Amortization: The gradual reduction of a liability or intangible asset over time through regular payments or expenses.
- Budget: A financial plan that outlines projected revenue and anticipated expenses over a specified period, helping you control and allocate resources effectively.
If these terms feel foreign to you, take that as a sign that hiring a professional or sourcing a good online accounting program is probably the right move. We use Quickbooks here at wild idea co., but there’s also wave, freshbooks, dubsado, and honeybook among others.
Many of these programs also offer a lot of great free educational resources to help you feel more comfortable with the financial side of running a business.