Whether you are an established business person or just a newbie thinking about starting a business, there are a number of business terms you must know and understand to succeed in the business world. No matter the level you are in your career there is always a new tool to master, there are new problems to solve, and a new vocabulary to understand. In this blog post, BESTech will be guiding you through 25 terms you must know to manage your business like a professional so as to avoid incurring losses. This will make you feel more confident when discussing your business’s financial needs.
1. Revenue
According to Investopedia, Revenue, often referred to as sales or the top line, is the money received from normal business operations. Revenue is generally created when either goods or services are sold. This is the most important business metric. Sales will solve almost any business problem.
2. Profit
Profit is a business term used to describe the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question. Also very important as it determines how much you get to keep or reinvest in your business.
3. Accounts Payable (A/P)
This term refers to obligations of a business that originate because of purchases of raw materials or finished goods made on credit. Accounts payable can be created by anyone who buys goods or services on credit and promises to pay for them later. This is what you owe your supplies so keep track of it.
4. Accounts Receivable (A/R)
In simple terms this is money which others owe your business for goods and services you have rendered to them. They are legally enforceable claims for payment held by a business for goods supplied or services rendered which customers have ordered but not paid for. Another important metric to track.
5. Assets
An asset is anything that adds money to your pocket. Assets are valuables owned by a business whether tangible or intangible. Typical items listed as business assets are cash on hand, accounts receivable, buildings, equipment, inventory, and anything else that can be turned into cash. You should focus on acquiring or building assets.
6. Balance Sheet
Also known as the statement of financial position or statement of financial condition, This document is a summary of the financial balances of an individual or organization. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. It shows how much your business is worth at any point in time.
7. Capital
Refers to the overall wealth of a business as demonstrated by its cash accounts, assets, and investments. Capital can be tangible, like durable goods, buildings, and equipment, or intangible such as intellectual property.
8. Depreciation
It is the actual decrease of the fair value of an asset. Depreciation is a decrease in the book value of fixed assets and involves loss of value of assets due to the passage of time and obsolescence. This is an important accounting concept which is used to balance financial books.
9. Gross Profit
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement and can be calculated by subtracting the cost of goods sold from revenue.
10. Income Statement
The corporate finance institute defines an income statement as a core financial statement that shows the profit and loss of a business over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.
11. Liability
A liability is anything that takes money out of your pocket. Liabilities are legally binding obligations that are payable to another person or entity. Settlement of a liability can be accomplished through the transfer of money, goods, or services. As you should acquire more assets, you should also reduce your liabilities.
12. Return on investment (ROI)
Return on Investment 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. It's quite obvious that the higher the ROI, the better the investment.
13. Liquidity
Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. It's good to have a balance of high and low liquidity assets. Always have spare cash for emergencies or when opportunities come up.
14. Statement of Cash Flow
The statement of cash flow should reflect activity in the areas of operating, investing, and financing and should be an integral part of your financial statement package. It shows how much money is coming in and going out of your business. Make it a habit to track every transaction in your business.
15. Statement of Shareholders’ Equity
If you have chosen to fund your small business with equity financing and you have established shares and shareholders as part of the controlling interests, then you have to show them this document. You are obligated to provide a financial report that shows changes in the equity section of your balance sheet. Your shareholders need to know where they stand.
16. Annual Percentage Rate (APR)
APR represents the yearly real cost of a loan including all interest and fees. The total amount of interest to be paid is based on the original amount loaned, or the principal, and is represented in percentage form. Watch out for the APR whenever you're considering taking a loan.
17. Bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. Always create a separate entity to shield your personal assets in case your business goes bankrupt
18. Collateral
Any asset that you pledge as security for a loan instrument is called collateral. Lenders often require collateral as a way to make sure they won’t lose money if your business defaults on the loan. When you pledge an asset for collateral, it becomes subject to seizure by the lender if you fail to meet the requirements of the loan documents.
19 . Business Plan
Here is your tool for demonstrating how you want to establish your small business and how you plan to grow it into good financial health. When writing a business plan, it should include financial, operational, and marketing goals as well as how you plan to get there. Your business plan is what will show investors whether your business is investible or not.
20. Accruals
A business finance term and definition referring to expenses that have been incurred but have not yet been recorded in the business books. Wages and payroll taxes are common examples. Be careful about accruing interest.
21. Line of Credit
A lender may offer you an unsecured amount of funds available for your business to draw on when capital is needed. This line of credit is considered a short-term funding option, with a maximum amount available. This pre-approved pool of money is appealing because it gives you quick access to the cash.
22. Loan-to-Value
The LTV comparison is a ratio of the fair-market value of an asset compared to the amount of the loan that will fund it. This is another important number for lenders and a term worth knowing. Lenders need to know if the value of the asset will cover the loan repayment if your business defaults and fails to pay.
23. Long-Term Debt
Any loan product with a total repayment schedule lasting longer than one year is considered a long-term debt. Long-term debts are usually captured in the balance sheet. Generally, the faster you pay-off the loan, the lower the interest you'll pay.
24. Merchant Cash Advance
A merchant cash advance is a sales agreement where the merchant sales their future revenue at a discount to the merchant cash advance company. It's often an alternative to a business loan. It's a good option for small businesses that need a large influx of cash to reconcile cash-flow shortages.
25. Principal
The principal is a business finance key term and is the original amount that is borrowed or the outstanding balance to be repaid less interest. It is used to calculate the total interest and fees charged. The principal is often paid after the interest in for most loans.
Mastering the business vocabulary is a stepping stone to becoming a successful entrepreneur. Hope you now have a better understanding of these business terms you use everyday. Thanks for reading and please remember to comment , share and SUBSCRIBE to our blog to have easy access to more educative content.