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accounting terms for small business owners

Accounting Terms Every Small Business Owner Should Know

The accounting arm of your business quietly hums away in the background, taking care of all your company’s financial processes while you ideate and bring those concepts to life.

For most small business owners, that’s the goal — but it’s typically not how things start out.

Entrepreneurs, at the beginning, often have to be a Swiss army knife. A Jack-of-all-trades. A spinner of many plates. And that usually means becoming at least proficient in a few accounting terms, if not outright doing the accounting yourself at the get-go.

The thing is, even once you’re able to grow enough to justify an accounting team, or you make the decision to outsource your CFO duties, it still pays to understand some basic accounting terms for a couple reasons. For one, it’s important to properly communicate about the state of your company with whoever is running the numbers.

Not to mention, anyone who might provide you with funding in the future – be they potential lenders or investors – are likely going to feel more comfortable if they know their investment is going to someone who understands they’re own company’s bottom line.

The following are 11 business accounting terms that every small business owner should know.

11 Vital Business Accounting Terms You Should Understand

Assets

If it has worth, it’s an asset. Sometimes, those assets are “tangible” – something you can physically touch, such as real estate, a vehicle or machinery. Sometimes they’re intangible, such as patents or intellectual property. Assets are important to know because many have tax ramifications (think depreciation, which we’ll explain momentarily), and they can be sold for cash.

Balance sheet

The 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 and what your obligations to others are.

Cash flow

Cash flow – how cash moves in and out of your business – is one of the most important accounting terms to understand. Consider this: Let’s say you’re technically profitable based on what you’ve sold and what’s owed to you. It’s possible you could still be cash flow-negative if you’ve paid out cash for certain things but haven’t received the cash you’re expecting. (Similarly, you can be cash-flow positive but unprofitable.)

Depreciation

Tangible assets such as machinery and vehicles lose their value over time. (Think how your car will resell for less the longer you own it.) However, depreciation allows a business to effectively write off the cost of an asset over time, reducing profits in a way that’s beneficial for tax-reporting purposes.

Equity

The value of your business once liabilities are accounted for. (It’s an easy calculation: Equity = Assets – Liabilities.)

Expenses

Whatever it is you have to pay to keep your business running on a day-to-day basis is an expense. Wages? That’s an expense. Rent? That’s another expense. Go to the store to pick up some printer ink? That’s an expense.

Financial statement

A financial statement is like a snapshot of how your company is doing financially at any given time. It typically includes three parts: an income statement (documenting things such as revenues, expenses and profits), the balance sheet and a statement of cash flows.

Liabilities

Liabilities are any debts outstanding. Usually these will be loans, but it can include anything from accounts payable to credit card debt to taxes that are yet to be paid.

Net income

Net income is what’s left over once you subtract expenses (including things such as taxes and depreciation) from revenues. Also referred to as “earnings” or “profits.”

P&L statement

You can think of the P&L statement as the financial story of your company over a certain period. It shows you how much revenues you made in that period, how much you paid out in expenses, and what was left over (profits). This is often referred to as an income statement.

Return on investment

Return on investment (RoI) is a calculation of what profit was generated from an investment. Let’s say you spend $5,000 on a marketing effort. You determine it delivered $15,000 in net income. The RoI for that marketing campaign was 200%.

Your Source for Accounting Knowhow

Some small business owners truly relish getting into their accounting duties. Some don’t. But eventually, most small business owners have to give up the CFO duties to be the CEO.

When that time comes for you, consider handing the baton 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.

And we’re happy to teach you a few more accounting terms, if you’d like.

Just call us at 440.892.9088 or contact us online today.

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