Whether you’re an established entrepreneur or someone who’s just now beginning to create your own company, knowing the financial terms behind business ownership is imperative if you want to be viewed as a credible professional by your peers and customers. As with anything, financial security cannot be achieved unless you do some upfront work. This involves educating yourself on a daily basis to ensure you’re not falling behind. According to The Business Enterprise Institute, 75 percent of business owners would leave their companies today if financial security was assured.1
As many of us know, the business landscape is a competitive one, so the more knowledgeable you are, the greater your chances are of creating — and maintaining — a successful company. Just last year, the National Association of Plan Advisors discovered that approximately 60 percent of business owners expect better sales this year.2 If you want to be a part of that statistic, it's important to first have a basic understanding of some of the must-know terms that serve as the foundation for business-related financial discussions.
1. Accounts Receivable
While this term sounds complicated, it’s actually rather simple. Accounts receivable is the amount of money people owe your business. It’s important to keep this number in mind as you plan ahead for future business expenses.
2. Accounts Payable
The opposite of accounts receivable, accounts payable is the amount of money you owe creditors, suppliers and others. In some ways, this number is more important than your accounts receivable as you are the one who is in charge of paying off the debt.
Assets can include both cash and inventory, which are categorized as current (or short-term) assets. Equipment and land, on the other hand, are fixed (or long-term) assets.
Tying in with accounts payable, liabilities are your company’s cumulative debts. A loan is a long-term debt, while money owed to a supplier is a short-term debt.
From utilities to inventory, business expenses are incredibly important to track as you grow and expand your company. If you’re self-employed, some of your expenses may be tax-deductible.
Quite possibly a business owner’s favorite term, revenue is your company’s total income. Keep in mind, this number does not include your expenses.
7. Net profit
You may have heard the term “bottom line,” and that’s exactly what your net profit is. This number is your total revenue, minus any expenses you have incurred over time.
8. Net loss
The opposite of net profit is net loss. This happens when your total expenses are more than your company’s revenue, resulting in zero profit.
9. Profit margin
There are three categories of profit margin: gross, operating and net. In short, your profit margin is how much money you keep in your pocket when compared to your total amount of sales.
10. Cash flow
Cash flow can be negative or positive. If you have more expenses than income, you have negative cash flow. In contrast, if your income outweighs your expenses, you have positive cash flow.
In simple terms, depreciation is when an asset’s value is reduced over time. This can be caused by everyday wear and tear. As a basic example, as soon as you drive a new car out of a dealer’s lot, it depreciates.
Can you turn an asset into cash? If so, that asset is liquid. With liquidity comes more financial flexibility, so it’s always a good idea to have at least a few liquid assets on hand in case you unexpectedly need a large amount of cash.
13. Annual Percentage Rate
As a business owner, you will most likely need to get a loan at some point to cover startup costs associated with owning your own firm. That’s why it’s important to know the term APR — or annual percentage rate — which is the total loan cost, including any interest and fees.
If you have ever bought a house, you may be familiar with the term appraisal. The three types of appraisals include real estate, equipment and business value. All three involve the evaluation of an asset’s true market value.
Collateral is what you use as security when applying for a loan. Many lenders will require you to have collateral in case you stop making loan payments.
At Sorensen Wealth Management we have access to a great business app that helps with estimating taxes due. It's a must for the self employed.
As you become more familiar with the above terms, don't forget that part of cash flow is about paying your taxes as well.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.