The Beginner’s Guide to Small Business Finance Vocab
Small business entrepreneurship comes in all shapes and sizes. You may have branched off as an expert in your specific industry—or maybe you’re an ambitious MBA who wants to start their own business ASAP. Whatever background you come from, understanding basic finance concepts and vocabulary is fundamental to communicating with customers, clients, lenders, accountants, and bookkeepers.
Even if you’re just starting out, you need to have a basic understanding of how to talk the business talk with those in the know. And that begins with mastering all that fancy financial terminology.
Keep reading to get the lowdown on the financial vocabulary every small business owner should know.
Small business terms that are no small business (A-Z)
Accounting period: A set period of time that your accounting records refer to. This is usually 12 months, but you can always look at accounting periods of different lengths.
Accounts payable: A record of how much your business owes to your suppliers.
Accounts receivable: A record of how much your business is owed by your customers.
Accrual accounting: An accounting method that calculates expenses and income when they are earned or billed, even if no money has left or entered your accounts. For a contrasting method of accounting, see Cash accounting.
Assets: Any items of value that your business owns. These items can be tangible (equipment, tools, buildings, technology, furniture, vehicles, merchandise, etc) or intangible (branding, reputation, customer base, partnerships).
Balance sheet: A financial statement that details your business’ assets and liabilities at a given point in time. Balance sheets show you whether your business is currently operating at a net loss or a net profit.
Calendar year: The standard calendar year from January 1st through December 31st.
Cash accounting: An accounting method that calculates expenses and income based on when money actually enters or leaves your business.
Cash flow: The positive or negative description of cash entering or leaving your business. A positive cash flow means more money is entering your business than leaving it. Negative cash flow is the opposite.
Cash flow statement: A financial statement that summarizes the above for a specified period. Your CFS will summarize cash flow from operating activities, investing activities, and financing activities.
Credit control: The process of managing your customers’ credit and making sure all of their invoices are paid on time.
Creditor: A person or business that your business owes money to.
Debtor: A person or business that owes money to your business.
Depreciation: The process of writing off the purchase of a large asset in your taxes over several years rather than in one fiscal year.
Double-entry: An accounting system that records every transaction both as a debit and as a credit in order to more easily prepare statements and find errors down the line.
Equity: The total value of all of your assets minus the total cost of all of your liabilities. Your equity is reflected on your balance sheet.
Fiscal year: The 12-month period your business uses as its accounting period. Your fiscal year can be the same as a calendar year, but it doesn’t have to be.
Income: Not to be confused with revenue, income typically refers to net income. This “bottom line” number can be found at the bottom of your income statement, and is calculated by subtracting all expenses (such as loan interest, administrative costs, and taxes) from your gross income.
Income statement: A financial statement that calculates your business performance over a specified period of time. As opposed to a balance sheet, the income statement shows you the net earnings or losses from a specified period so you can see bottom-line profitability during that time.
Inventory: Any products or materials your business purchases to create sellable goods. Also refers to the sellable goods themselves.
Liability: Any costs or debts your business owes to other people or businesses that are still unpaid. Liabilities owed for less than a year are considered “short-term” while longer than a year are considered “long-term.”
Markup: The difference in the sales price of your product vs. the amount it cost to produce. In other words, your markup is the amount of profit you make on a single item.
Overheads: Also called fixed costs, these are your day-to-day running costs required for your business to function. Some of the most common costs include rent and electricity.
Petty cash: A small amount of cash set aside for small, casual purchases—normally made by staff or assistants. Most petty cash is used for food and drink items like coffee, milk, and granola bars for employees.
Revenue: Sometimes used interchangeably with income, in a financial setting the two are different. Revenue refers to the total amount of income (gross income) you make from the sale of goods, services, and/or labor. Often referred to as the “top line” number, it can be found at the top of your income statement.
ROI: Return On Investment is a simple ratio that determines the profitability of a business investment. By dividing the net profit (or loss) from an investment by its cost, you can quickly see how worthwhile it was. ROI can be calculated for any number of business investments, such as marketing, technology, or business initiatives.
Working capitol: The amount of money your business needs to simply operate on a day-to-day level. This is often the sum of your overhead costs also accounting for any liabilities.
Year-end: This is the end of your business’ fiscal year or year-long accounting period. It usually refers to the last day of that year, but many businesses also use it to refer to the crunch time leading up to filing your final accounting paperwork.
Learn the ropes with an experienced accountant!
Jumping into finances for the first time as a small business owner? It doesn’t have to feel intimidating. The best way to keep your business’ accounting on track is to partner with an expert.
Know Your Numbers Accounting works with small business owners just like you to keep their books on track and their financial literacy up to snuff. Schedule a call today to dive into your finances together as a team.
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