9 Business Accounting Terms Every Entrepreneur Should Know
As a small business owner, you might or might not need to do some of your own accounting work. But even if you’re not going to be personally responsible for budgets, forecasts and tax planning, you should still familiarize yourself with a handful of accounting terms.
“But why?” you ask.
Well, for one, several terms are bound to come up in conversations with potential investors, loan applications and internal conversations with other major stakeholders. Any sources of future funding especially need to know that you have some basic knowledge about your business’ financials.
Also, even if you’re not managing your own books, knowing a few accounting terms will allow you to communicate your needs and concerns more clearly with whoever is, whether you’re hired that position internally or outsourced your CFO/accounting needs.
The following are nine essential business accounting terms you need to know.
9 Essential Business Accounting Terms
Assets: Assets are virtually anything that you own that has worth, whether it’s tangible (real estate, a vehicle, machinery) or intangible (intellectual property such as patents). Assets have some tax ramifications, such as depreciation, and also can often be sold for cash.
Balance sheet: A balance sheet outlines certain aspects of your company’s financial situation, including assets, liabilities (such as debt) and equity. This document is useful in determining what your company is worth.
Cash flow: How cash moves in and out of your business. While you might technically be profitable based on what you’ve sold and what’s owed to you, you can have negative cash flow at a certain point in time if you’ve paid out cash for certain things but haven’t yet received the cash you’re expecting. (Similarly, you can be cash-flow positive but unprofitable.)
Equity: The value of your business once liabilities are accounted for. (It’s an easy calculation: Equity = Assets – Liabilities.)
Expenses: This one’s pretty straightforward: Any costs that you absorb during the day-to-day operations of keeping your business going count. That’s everything from the wages you pay employees to rent to picking up an extra ream of paper.
Liabilities: These are any debts outstanding. Typically, these are going to be loans, but they can also include accounts payable, debt on credit cards or taxes you haven’t yet paid.
Net income: Also known as profits or earnings, net income is simply what’s left over when you subtract all expenses (including things such as taxes and depreciation) from revenues.
P&L statement: Also known as an income statement, this acts like the financial story of your company, showing how much you made from doing what it is you do, then listing the various expenses your business needed to incur along the way. Thus, it will include things such as revenues, expenses and net income (or net losses).
Return on investment: This typically refers to a calculation of what kind of profit was generated from a certain amount of invested. So, if you spent $500 on an ad campaign that you could tangibly determine delivered $1,500 in net income, the return on investment for that ad campaign was 200%.
If you’re content just keeping up with a few pieces of basic terminology and prefer to hand off accounting duties to the experts, talk to McManamon & Co. We’re an accounting, tax and consulting firm that specializes in small to midsize businesses, and we can help you with a wide range of accounting needs, from creating financial statements and maintaining records to eventually training your own accounting staff.
Not to mention, we can help you memorize a few more accounting terms.
Give us a call at 440.892.9088 or contact us online today to get help from a firm that’s well-versed in your small business accounting needs.
Tags: accounting, McManamon, small business | Posted in accounting, McManamon & Co., small business