27 Financial Terms All New Business Owners Should Learn
As a small business owner, you wear many hats each day. However, chances are, you didn't start your business to become an expert in business finance or a bookkeeper (unless you're Halon... we're weird that way). You likely started your company for many reasons:
- You want to change the world, or the market your business is in
- You want more flexibility in your life
- You want to work from home, or the beach, or a hotel in Costa Rica
- You want to make more money
- You want to set up a side hustle in your spare time
I'm guessing though, that you did not start your business to become a business finances whiz.
So, what's a savvy business owner to do?
You could take some courses on bookkeeping and filing business taxes. Then try and stay up-to-date on every new tax law change that happens at the federal and state levels, and figure out if and how those changes apply to your business..
You can learn the most essential and high-level parts of the bookkeeping/business finance process and leave the rest to your team (whether they be in-house, or using our squad at Halon). With the world of finance, it's important to take things one part at a time, to avoid being completely overwhelmed. With that in mind, here is a collection of 30 financial terms that every single business owner should know (whether they be brand new, or an old hat).
1. Accounts Payable
- Commonly known as AP or A/P refers to the money owed by a company to its creditor(s). These are usually for the purchase of goods or services and can be to lenders, suppliers or creditors. Liabilities like these can be short or long-term depending on the agreement with the lending business.
2. Accounts Receivable
- Otherwise known as AR or A/R, are the amounts of money a business's customers owe the business. These balances are generally marked as assets as they represent a legal obligation for the clients to pay the company.
- Accruals are records of expenses and revenue in the periods in which they are incurred. They are a key component of the accrual method of accounting.
4. Annual Percentage Rate
- Commonly referred to as APR, this rate signifies the actual yearly cost associated with a loan. The APR includes all interest and fees over a year and is represented as a percentage. When looking for the best loan for your small business, make sure to look at the APR of each option; it can be quite useful in comparing the loans in question.
5. Articles of Incorporation
- The articles of incorporation are a set of legal documents that are filed with a governmental body to formally document the creation of a company. All relevant business information is required with these documents, including name, type of business structure, street address, and type of business to name a few.
- A business asset is anything, whether intangible or tangible, that is of value and owned by a business. These can include an inventory of products, equipment, building, trademarks, etc. Anything that is of value and that the company can sell for cash if necessary.
7. Balance Sheet
- Think of the balance sheet as a snapshot of the business' net worth at any given moment. The report is a review of the company's assets and liabilities.
- Bookkeeping is a method of business accounting that involves the recording, on a regular basis, of all the financial transactions and information concerning the business. Doing your bookkeeping often ensures that the business records of all transactions are correct, thorough and up-to-date. Proper bookkeeping makes doing the business' taxes each year much easier (if you are doing your company's bookkeeping and looking for someone to take that over, our team at Halon can do that for you)
9. Bottom Line
- The bottom line isn't the diameter of your waste... It's really the total amount a company earned or lost at the end of a given period (usually a month).
- Sometimes called 'fixed capital,' capital is the wealth or money necessary to create and produce services and goods. Simply put, capital is money. Every business needs capital to maintain their operations and to purchase various assets. Typically, business capital comes in two primary forms: equity and debt.
11. Cash Flow
- Your cash flow refers to the movement of funds throughout your business during a given period, including expenses and income. Companies track cash flow over a period of time (generally one month). Keeping a close eye on cash flow is especially important for new businesses when ready cash tends to be more limited until the company grows and produces more working capital.
12. Cash Flow Statement & Projections
- The cash flow statement of a business shows the money that came and went from a company during a set period of time. Typically, these statements cover four main categories: investing activities, operating activities, supplemental information and financing activities.
- Using your cash flow statements can help you to create cash flow projections which will allow you to plan business finances ahead of time. By looking back at cash flow statements, you can see patterns of money coming and going. This information is crucial to making informed decisions and creating accurate cash flow projections.
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- Collateral is not an exclusively financial business term. Any asset that you offer as security to a borrower is called collateral. Lenders will often require collateral as insurance that they won't lose money if the business stops making the agreed payments. When you pledge an asset for collateral, it can be seized by the lender if the requirements of the loan are not met.
14. Credit Limit
- Your credit something you're likely already familiar with. Your personal line of credit has a maximum amount you can access at any given time; your business credit limit works the same way.
15. Debt Consolidation
- Debt consolidation means opening a new loan to pay off several of liabilities and consumer debts. What this means for you as the business owner, is that multiple debts can be combined into one larger piece of debt, usually with better payoff terms (lower interest rate, lower monthly payment, or both). Small businesses will use this tool to help improve their cash flow.
- Over time assets owned by a business decrease in value due to the amount of time that has passed since the asset was purchased. Wear and tear are common causes of depreciation. A business can recover the cost of depreciation on its assets through deductions on its taxes.
17. Employer Identification Number (EIN) Certificate
- The EIN of a business is an original number assigned to the company by the Internal Revenue Service (IRS), so it can be easily identified. When you set up your business, the IRS will mail you your EIN to your business address. You will most often use your EIN when you are reporting your taxes each year.
- A business' expenses are any costs the company incurs in the ordinary course of business. These generally include things like: legal costs, employee salaries, marketing costs, rent, utilities, etc. Business expenses can be deductible and are netted against the business' income.
19. Financial Report
- A business' financial report is a formal and comprehensive account of the business' financial activities. It's created to help give oversight on the business' finances and can be prepared for either internal or external sources (i.e., potential investors).
20. Fixed Asset
- Fixed assets (otherwise known as capital assets) are long-term, tangible assets used for and owned by the company. These assets are not expected to be used or converted into cash within the year. These are items such as computers, real estate, furniture, etc.
21. Gross Profit
- The gross profit of a company is the total sales (income) minus the costs associated with making and selling the product or service (expenses). These expenses can be manufacturing and labor costs, transportation, raw materials, etc.
- To calculate your business' gross profit: Revenue - Cost of Sold Goods = Gross Profit
22. Income Statement
- The income statement of a business is one of the most critical reports in a company, as it looks at the viability of the small business. The income statement (you can also think of it as a profit and loss statement), shows the profitability of a company over a given time. The statement looks at the business's bottom line, reporting on how much the business has spent and earned over the allotted time.
- A business's wages, bank loans, credit card debt, taxes, accounts payable and accrued expenses are all liabilities of the business. A liability includes any debt that the company has taken on over the course of it growing and maintaining its operations. Generally, there are two types of liabilities: current, debts to be paid within one year or less and long-term debt, payable after one year.
- A lien is a legal claim to a possession of property belonging to the business by a creditor as security for a loan until the loan is discharged.
25. Personal Guarantee
- A personal guarantee is an individual's legal obligation to repay debt issued to the business at which they are a partner or executive. The personal guarantee ensures that if the business ever becomes unable to pay back the loan, the individual is personally liable and responsible.
26. Profit & Loss
- A company must have a regular profit that surpasses its losses to stay financially healthy. Most companies itemize their profits and losses on a profit and loss statement; this is also known as the income statement which is explained above.
27. Business Valuation
- When a business looks for investors for funding, those investors need to know the overall value of that business. The business valuation is the process determining that total financial value of a company.
As a small business owner, you will wear many different hats every day... from the receptionist to bookkeeper, to director of sales and marketing, to CFO. Instead of getting intimidated by all the financial nuances, you can start small by learning some of the terminologies and understanding how they apply to your small business.