Entrepreneurs go into business with a variety of pre-existing skills. Some are natural salespeople, while others have the ability to come up with ideas that sell themselves. Even if you hire an accountant and especially if you utilize accounting software, it’s still important to have a basic understanding of the inner workings of your company’s finances. Here are 10 essential finance terms every entrepreneur needs to know.
1.) Assets - Check out my answer here8 to know more about what assets are and the types of assets.
2.) Liabilities - Check out my answer here8 to know more about liabilities and balance sheet.
3.) Expenses - Expenses are the costs the company incurs each month in order to operate, and include things like rent, utilities, legal costs, employee salaries, contractor pay, and marketing and advertising costs. To remain financially solid, businesses are often encouraged to keep expenses as low as possible.
4.) Accounts Receivable - Accounts receivable (A/R) is the amount that clients owe to a business. Usually the business notifies the client by invoice of the amount owed, and if not paid, the debt is legally enforceable. On a business’s balance sheet, accounts receivable is logged as an asset.
5.) Cash Flow - Cash flow is the overall movement of funds through the business each month, including income and expenses. For instance, cash flows into the business from clients and customers who purchase the goods or services directly, or through the collection of debts in the form of accounts receivable. On the other hand, cash flows out of the business to pay expenses like rent, utilities, taxes, and accounts payable.
6.) Cash Flow Statement - A cash flow statement shows the money that entered and exited a business during a specific period of time..
7.) Profit and Loss - Profit is the generation of more revenue from the sale of its product or service than it costs to make that product or service. Loss is the exact opposite.
8.) Income Statement - Also known as the "profit and loss statement", this document summarizes the profits and losses incurred during a specified period, which is usually a fiscal quarter or a full calendar year.
9.) Net Profit -To determine your net profit, you would subtract all your business expenses from your total sales revenue in order to determine just how much money your company has earned above and beyond the cost of producing and selling your product or service. And because it’s usually found on the last line of a company’s income statement, it’s often also called the bottom line.