As an entrepreneur, you should always be learning, irrespective of where you are in your career. And in order to feel confident when discussing your business’ finances, it’s imperative that you learn the language of business finance.
Following are some basic financial terms every business owner should know. These terms may come up in meetings with customers, partners and potential investors, so it’s important to understand how they might affect your business.
Accounts Payable (AP)
:The amount of money an organization owes its creditors in return for goods and/or services that 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: A methodical way of recording and reporting financial transactions for a business.
Amortization: The process of offsetting such assets as intellectual property or goodwill over a period of time.
Assets: Anything tangible or intangible that has value and is owned by a company. Assets are of two types: fixed and current. Fixed assets are physical, long-term assets that are likely to provide benefits to an organization for more than one year. Examples include real estate, furniture, computer equipment and so on. Current assets are those that can typically be converted into cash within 12 months. These could include cash, inventory or accounts receivable.
Audit: A review by a tax official or an auditor on a company's financial records to check that the business has accounted for everything correctly.
Balance Sheet: A financial report that provides a snapshot of a company's assets, its liabilities and owner/shareholder equity at a given time.
Bond: A type of debt investment that is considered a fixed income security. An investor loans money to an organization with the intent of receiving their money back plus interest.
Bookkeeping: A system of accounting that involves the timely recording of all financial transactions for a company.
Bootstrapping: When a startup funds its growth purely through personal finances and revenue from the business.
Capital: The money that businesses use to fund their operations.
Cash Flow: The amount of operating actual cash flowing in and out of a business, which affects the business’s liquidity.
Cost of Goods Sold (COGS): The total direct expenses of producing a good or delivering a service.
Credit (CR): A term used when a customer buys a good or service with an agreement to pay at a later date. Also, in the double-entry bookkeeping system, a credit entry is made on the right-hand side of a journal or ledger, representing a liability.
Crowdfunding: A method of financing a business idea through 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 made on the left-hand side of a journal or ledger, representing an expense or asset.
Enrolled Agent: A tax professional who represents businesses (taxpayers) in matters where they are dealing with the Internal Revenue Service (IRS).
Encumbered Asset: An asset that is used as security or collateral for a loan.
Expenses: The fixed, variable, accrued and operational costs that a business may incur through its operations. Fixed expenses are such payments as rent that occur regularly. Variable expenses are those that may change in a given time period, such as labor costs. Accrued expenses are incurred costs that haven’t been paid yet. Operational expenses are day-to-day business expenditures that are not directly associated with the production of goods or services; for example, advertising costs and insurance expenditures.
Equity: The value of ownership interest in the business, calculated by subtracting liabilities from assets.
FICO Score: A type of credit score used by potential lenders for evaluating 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 can’t meet its financial obligations with 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 a period of 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: The process of paying your employees for the work they did for your organization. There are many federal, state and local laws that 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 of time, such as quarterly or annually.
Return on Investment (ROI): A measure used to evaluate financial performance corresponding to the amount of money that was invested. Usually expressed as a percentage, ROI is calculated by dividing the net profit by the cost of investment.
Venture Capital: An investment made in a startup with a long-term growth perspective.
Working Capital: Cash available to an organization for its day-to-day expenses.