When you’re new to the business world, learning the jargon is an important step.
Below you’ll find commonly used phrases along with the definitions of each.
Accounting
Accounting involves the systematic recording and reporting of business financial transactions. It’s important to have at least a basic understanding of how accounting works to help you make better decisions about your business finances. If you’re not sure where to start, hire a professional to help you out. They can advise you on what you need to do to keep your books in order. Having a good grasp of accounting will help you run your business more effectively and make more informed decisions about your finances.
Accounts receivable
Accounts receivable is an important metric for any business. It represents the amount of money that your customers or clients owe you for goods or services you have supplied. This total value can give you a snapshot of the amount owed to your business at any given time. Accounts receivable can also be used to assess the creditworthiness of your customers or clients. If you have a high accounts receivable balance, it may be an indication that your customers or clients are not paying their bills in a timely manner. High accounts receivable can also put a strain on your business’s cash flow. Therefore, it is important to monitor your accounts receivable carefully and take steps to collect outstanding payments in a timely manner.
Accounts payable
Accounts payable is an important financial metric that measures how much you owe your creditors for goods or services supplied to you. This figure can be used to assess your financial health and give insight into your ability to pay your debts. Accounts payable is typically reported on a company’s balance sheet, and it is important to note that it is different from accruals, which are expenses that have been incurred but not yet paid. Accounts payable is also different from accounts receivable, which measures how much money is owed to you by customers. As a result, accounts payable is a key metric that should be closely monitored by business owners and financial managers.
Assets
When most people think of assets, they think of physical belongings like houses or cars. However, in the business world, assets refer to anything of value that a company owns. This can include cash, inventory, equipment, and land. Assets are important because they can be used to generate income or grow in value over time.
Liabilities
One of the most important aspects of running a successful business is maintaining a strong financial foundation by carefully managing both your assets and your liabilities. While assets are the things that your business owns, such as cash, inventory, and equipment, liabilities are the debts that your business owes to another person or entity. Like assets, you’ll have to define liabilities as either current or long-term. Current, or short-term, liabilities might include an expense payable to a supplier. Many business loans are long-term debts. Carefully managing both your assets and your liabilities is essential to keeping your business financially secure.
Revenue
Revenue refers to the income you get from a business activity in a given time. You can calculate earnings by multiplying the per-unit cost of goods or services by the number of units sold.
Expenses
Does your business incur expenditures for equipment, utilities or inventory? These are all examples of expenses, money you spend to operate your business. For the self-employed, legitimate business expenses are tax-deductible.
Owner’s equity
Usually represented as a percentage, Owner’s Equity refers to the owner’s part of business assets.
Balance sheet
This key financial document provides a snapshot of business assets, liabilities and owner’s equity.
Net profit
Also known as your “bottom line.” Net profit represents total revenues less total expenses. This figure is especially important at tax time. This is because you pay self-employment taxes as a percentage of net profit.
Net loss
If your total expenses exceed your overall revenues, you have a net loss. The risk of a net loss is one of many strong reasons to keep company costs under control.
Profit margin
This essential business term measures how much profit you keep relative to total sales. There are three types of profit margins: gross, operating and net. Calculate these by dividing the profit (revenue minus costs) by the revenue.
Cash flow
Cash flow is the movement of money in and out of your business. You want there to be a higher flow of income into the business than there is an outflow of expenses from the business. This is called positive cash flow.
Return on investment
Your Return on Investment, or ROI, shows how much you gained or lost on a business investment relative to how much you spent on it. Calculate ROI by dividing net profit by the cost of the investment.
B2B/B2C
Is the purpose of your business to supply goods or services to other businesses? If so, you operate a B2B, or business-to-business, venture. On the flip side of B2B businesses are B2C businesses. These businesses supply goods or services directly to an end user or consumer.