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.
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.
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.
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.
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.
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.
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.
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.