Are you a small business owner who wants to maximize your profits and foster growth? There are some key financial terms and procedures that you will need to know. Increasing your accounting knowledge not only makes you more informed but also puts you in a better position to have insightful discussions with your financial team, understand your profits, protect your business, and promote growth.
Here is a list of 6 essential accounting and financial terms for all small business owners.
1. Cash Flow
Do you have more cash flowing into your business each month than you payout to cover costs and expenses? If so, your accountant will conclude that you’re “cash flow positive.” If the opposite is true, your cash flow statement will reveal that you’re “cash flow negative.”
Your business is better equipped to keep up with debt, cover unforeseen expenses, and invest in growth opportunities when you have excess cash on hand. Your accountant will generate a cash flow statement each quarter to keep tabs on this key performance indicator.
2. Profit and Loss Statement
The profit and loss statement (also known as the income statement) is one of the most important documents used by accountants to determine the profitability of your business.
This document lists revenues and gains as well as expenses and losses over a specific period of time (typically every three months for small businesses). It calculates your all-important “bottom line” so you know if you’re operating at a loss or turning a profit.
3. Gross vs Net Profit
Gross profit is what remains when you subtract the cost of goods sold (COGS) from your total revenue. Net profit, on the other hand, drills deeper. It reveals your exact dollar per profit of sales after subtracting all operating expenses, including COGS, taxes, interest paid on debt, etc.
Gross and net profit are both profitability ratios. They are key for measuring business performance against an industry benchmark and your competitors.
4. Balance Sheet
The balance sheet offers a snapshot of your overall financial position at a particular moment in time. It lists the assets (such as cash, inventory, accounts receivable, and equipment); liabilities (like accounts payable, income tax, and employee salaries); and shareholder capital.
In a nutshell, the balance sheet shows what you own, as well as what you owe.
5. Accounts Receivable & Accounts Payable
Simply put, accounts receivable is money your business is owed by customers for goods or services sold. It is considered an asset on your balance sheet. Conversely, accounts payable is money you owe suppliers and any bills you have yet to pay. As such, it’s listed as a liability on your balance sheet.
6. Bad Debt Expenses
Bad debt happens when you can’t collect payment from your customers. Long term outstanding accounts receivable could be listed on your balance sheet as “bad debts”, and if they’re never collected, may have to be written off as a loss.
And there you have it – six key financial terms to help you build your accounting vocabulary, join the conversation, and empower smarter decision-making.
If you need assistance with maintaining your books for your business, connect with Bookkeeping Confidential. We are a full-service bookkeeping company that focuses on assisting small firms and businesses to actualize their growth potential through fast, accurate, and efficient service.