An entrepreneur needs to have a mindset of being open to learning. Whether you’re a small business owner or a startup founder, you should always look for opportunities to grow and level up.
If you’re new to running a business, one promising area to focus on is essential financial terms. After all, understanding the “language” of business finance is your responsibility as an owner.
In addition, being a financially literate entrepreneur will help you understand what your balance sheets, profit and loss, and cash flow statement are telling you. This will give you a clearer view of your company’s financial health, which will help you make smarter, data-driven decisions.
We’ve listed important terms that every business owner or startup founder should understand.
1. Cash Accounting – This is an accounting method where revenue and expenses are recognised when money changes hands.
2. Accrual Accounting is another accounting method that recognises revenue when it’s earned but not received or when expenses are billed but not yet paid.
3. Financial Statements – Refers to the reports prepared to present the financial performance of a company. Financial statements typically include the Profit and Loss Statement, Balance Sheet and Statement of Cash Flow.
4. Profit and Loss (P&L) – Also known as Income Statement, the P&L summarises the company’s revenues, costs, and expenses incurred in a specific period – usually a month, quarter, or financial year.
5. Balance Sheet – The Balance Sheet is a financial statement that lists each asset, liability or equity account and the corresponding balance for the close of a selected period.
6. Cash Flow – The Cash Flow Statement is a financial statement that provides information about cash generated from general operations alongside money raised or used for financing and investing activities.
7. Assets – An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
8. Fixed Assets – These are tangible items that have value but cannot be coveted into cash quickly (e.g. land, computer equipment, vehicles)
9. Current Assets – Refers to liquid assets that can be converted into cash within a fiscal year. (e.g. money in the bank, inventory, accounts receivable)
10. Liabilities – Defined as an obligation between one party and another that is not yet completed or paid for due to a past event that will result in the transfer of economic benefits.
11. Current Liabilities – Refers to the obligations of the businesses that are payable within a year (e.g. accounts payable, taxes owed)
12. Non-current Liabilities – These are the company’s financial obligations that are not expected to be settled in a year (e.g. long-term debt, long-term lease obligations, bonds payable)
13. Owner’s Equity – Owners equity or shareholders’ equity represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off in the case of liquidation
14. Accounts Payable – These are amounts payable to the company’s vendors or suppliers for goods/services that have not yet been paid.
15. Accounts Receivable – This is the amount of money that is due to the company for goods or services delivered and not yet paid for by its customers.
16. Debtors or Aged Receivables – This is a periodic report that categorises a business’s accounts receivable based on the length of time that an invoice has been outstanding.
17. Creditors or Aged Payables – This report shows the overall amount owed to the company’s suppliers based on the number of days since the invoice date.
18. Gross Profit – Refers to the profit a company makes after deducting all costs related to making and selling its products or services. The gross profit is found in a company’s income statement.
19. Operating Expenses – Often abbreviated as OPEX, this refers to an expense incurred by a company through its usual business operations. (e.g. rent, marketing, payroll, insurance)
20. Operating Profit – Measures the profits a company generates from its core business functions, excluding interest and taxes.
Knowing about these key finance terms will help you run your company more effectively as you will have a better grasp of what’s happening in your business. Please don’t feel overwhelmed as you can take it one step at a time, or you can also consult a numbers person, such as a Virtual CFO or a bookkeeper, to help you gain more clarity.
Have you got any questions? Get in touch with us and #letstalknumbers!