Glossary of Financial Terms: 37 Finance Vocabulary Terms Every Business Owner Should Know

A financial dictionary to simplify complex words.

Understanding financial terminology is essential for budding small business entrepreneurs and finance enthusiasts alike. From basic vocabulary to intricate investment concepts, these terms serve as the foundation for comprehending the intricacies of business finance.

Being well-versed in financial terms plays a crucial role, and this is due to the pervasive influence of finance and accounting on all aspects of their operations. Whether you’re an in-house accountant or a finance team, a solid understanding of key financial terms will prove invaluable in the long run. This knowledge empowers entrepreneurs to make informed business decisions, grasp the implications of those decisions, and maintain an efficient accounting system.  

By familiarizing themselves with financial terminology, small business owners can effectively communicate with financial professionals, monitor their business’s economic health, and identify areas for improvement. Additionally, understanding financial terms facilitates strategic planning, budgeting, predictive analysis, forecasting, and essential business growth and sustainability components. Ultimately, a comprehensive understanding of economic terms equips small business owners with the tools they need to navigate the complexities of finance and catapult their businesses toward success.

Best practices for studying a glossary of financial terms:

A glossary of financial terms plays a crucial role in this process, as it provides clear and concise definitions that serve as keys to unlocking insights into business strategies, performance tracking, and investment opportunities.

Our glossary is an invaluable resource for newcomers to the financial world, offering accessible explanations of terms that may initially seem daunting. Before we dive right in, here are some things we recommend:

1. Reading through each of the financial term’s definitions carefully.
2. Find an example of each finance vocabulary word in your business or through a quick online search.
3. Talk to a trained financial professional if you still have questions about business finance terms and definitions.
4. Let’s get started. 

Accounts Payable (AP):

The amount of money an organization owes its creditors in return for goods and/or services it has delivered.

Accounts Receivable (AR):

The amount of money owed to a business by its customers after the goods or services have been delivered.

Accounting:

An organized way of recording and reporting financial transactions for a business.

Amortization:

The process of offsetting intangible assets like intellectual property or goodwill over time.

Assets:

Anything tangible or intangible that has value and is owned by a company is an asset. There are two types of assets: fixed and current. Fixed assets are physical, long-term assets likely to benefit an organization for more than one year. Examples include real estate, furniture, computer equipment, and so on. Current assets can typically be converted into cash within 12 months. These could consist of cash, inventory, or accounts receivables.

Audit:

A review by a tax official or an auditor to check that the business has accounted for everything correctly.

Balance Sheet:

A financial report provides a snapshot of a company’s assets, liabilities, and owner/shareholder equity at a given time.

Bond:

A type of debt investment is considered a fixed-income security; an investor makes a loan to an organization with the intent of receiving the loan amount back plus interest.

Bookkeeping:

A system of accounting involves the timely recording of all company financial transactions.

Bootstrapping:

This is when a startup funds its growth purely through personal finances and revenue from the business.

Capital:

The money that companies use to fund their operations.

Cash Flow:

The amount of actual operating cash flowing in and out of a business affects the business’s liquidity.

Cost of Goods Sold (COGS):

The total direct expenses of producing a good or delivering a service.

Credit (CR):

Credit is when a customer buys a good or service with an agreement to pay later. In the double-entry bookkeeping system, a credit entry represents a liability on the right-hand side of a journal or ledger.

Crowdfunding:

A business idea financing method is raising money from the general public. This usually happens online through a crowdfunding website.

Debit (DR):

In the double-entry bookkeeping system, a debit is an accounting entry on the left-hand side of a journal or ledger, representing an expense or asset.

Enrolled Agent:

A tax professional representing businesses (taxpayers) in matters involving the Internal Revenue Service (IRS).

Encumbered Asset:

An asset that is used as security or collateral for a loan.

Expenses:

A business may incur fixed, variable, accrued, and operational costs. 

• Fixed expenses are regular payments, such as rent. Variable expenses, such as labor costs, may change over time. 
• Accrued expenses are costs that have yet to be paid. 
• Operational expenses are day-to-day business expenditures not directly associated with producing goods or services, such as advertising and insurance.

Equity:

The value of ownership interest in the business is calculated by subtracting liabilities from assets.

FICO Score:

A type of credit score used by potential lenders to evaluate the risk of entering into a contract with a company.

Fundraising:

The organized activity of raising funds.

Initial Public Offering (IPO):

When a business first offers shares on the stock market to sell them to the general public.

Insolvency:

A state where a company cannot meet its financial obligations to its lender(s) when their debts come due.

General Ledger:

A complete record of the financial transactions over the life of a business.

Liabilities:

An organization’s financial obligations or debts incurred during business operations. These are of two types: current and long-term. Current liabilities are debts that are payable within a year. Long-term liabilities are those that are typically payable over more than one year.

Line of Credit:

An agreement that allows a borrower to withdraw money from an account up to an approved limit.

Net Assets:

A company’s total assets minus total liabilities — also called net worth, owner’s equity, or shareholder’s equity.

Net Income:

A company’s total earnings after tax and other deductions.

Net Profit:

Total gross profit minus all business expenses.

Net Worth:

The difference between the value of your assets and your liabilities.

Payroll:

Payroll is the process of paying your employees for the work they do for your organization. Federal, state, and local laws govern how you handle your payroll.

Profit and Loss (P&L) Statement:

A financial statement that summarizes a company’s performance and financial position by reviewing revenues, costs, and expenses incurred during a specific period, such as quarterly or annually.

Return on Investment (ROI):

ROI evaluates financial performance corresponding to the money invested. Usually expressed as a percentage, ROI is calculated by dividing net profit by the investment cost.

Venture Capital:

An investment made in a startup with a long-term growth perspective.

Working Capital:

The cash available to an organization for its day-to-day expenses.

We hope this comprehensive list helps!

Today’s dynamic business environment demands that small business owners know the latest financial terminology and fundamental finance concepts, which is crucial for informed decision-making. To ensure you get a head start, bookmark this comprehensive financial terms dictionary, which offers easy access to essential information for your daily business activities.  

Equipped with this invaluable resource, you should be able to easily navigate the intricacies of business, banking, accounting, and finance, transforming uncertainties into opportunities and inquiries into competitive advantages. Whether decoding financial reports or discussing investment strategies, having a reliable reference at your fingertips empowers you to stay informed and make sound financial decisions that propel your business forward in an ever-evolving marketplace.

Want to know more? In addition to HR, benefits, recruiting, and payroll through its PeopleOps, Escalon’s Essential Business Services include FinOps (CFO services, taxes, bookkeeping, and accounting) and Risk (business insurance). Talk to an expert today.

Authors

Devayani Bapat

With 6 years of experience in copywriting and social media management across genres, Devayani's heart lies with weaving words into stories and visuals into carefully crafted narratives that’ll keep you wanting more. She carries with her, her pocket notebook, a trusted confidante that goes with her wherever she goes, and scribbles down into it anecdotes on the go. Her secret weapon for keeping all things copy interesting! Apart from writing, Devayani is huge on travelling. You'll find her booking her next adventure while she's on her current one. And while on those adventures, you'll find her devouring true crime books one after the other. Whether it's a low down on a recent case or one that occurred 70 years ago, she can cook up a story narration you'll never forget.