It’s the start of the new school year for everyone from kindergartners to graduate students. Why not you? You may have been out of school for a little while, but it’s never too late to learn — some of the most successful business owners are those who are constantly learning.
You’re an expert in your company’s field, so it’s understandable if basic business financial terms aren’t top of mind. Learning financial terminology can not only help you better understand your business’s financial health but can also help when it comes to meeting with your accountant, bank or lenders. Here are a few terms to study (but don’t worry, there won’t be a test).
An asset is anything your business owns that supports operations and has some inherent cash value. Examples of assets include cash on hand and money owed to your company (accounts receivable), land, buildings, inventory or equipment. An asset can be current (short-term) or fixed (long-term), depending on its life cycle. Accounts receivable is a current asset because it can be converted to cash within one fiscal year, but equipment is a fixed asset because it will serve the company over many years.
A liability is the opposite of an asset. It’s something your business owes or is legally bound to pay. Debt is one type of liability, and accounts payable (better known as your bills) is another. Like assets, liabilities can be short term or long term. As an example, accounts payable are short term, and a mortgage is long term.
This is the financial statement that shows the balance between what you own (your assets), what you owe (your liabilities) and what you have left over once you subtract your liabilities from your assets (known as your owner’s equity, net worth, or working capital). Although banks and other financial institutions look at your income statement, they typically pay the most attention to your balance sheet. Why? Well, the balance sheet is similar to your personal financial statement. It shows your business’s net worth, the amount and type of debt you have (short term or long term) and what assets you have to use as collateral if the loan calls for it.
Cash is the lifeblood of your business. Since you need cash to pay your bills, without it, your business could fail in no time. Cash flow is how much cash flows in and out of your business during a given time frame, such as a week or a month. “Positive” cash flow means more money came in during the week, for example, than went out. “Negative” cash flow means the exact opposite — more went out than came in that week.
How quickly your customers pay greatly impacts your cash flow, so it’s important to consider a customer’s payment history before you continue to extend them credit. It’s equally as crucial to make sure they repay you according to your stated terms, so “10 days” means they pay in 10 days. Sure, those situations can get awkward, when you’re torn between maintaining a positive relationship with your customer and nudging them to pay up but keep your eye on the prize — predictable cash flow and a smoothly run business.
Your net profit is what your business has left over after paying all of its bills. Your business generates sales revenue, then pays for all the employees, materials and supplies. After that, you must pay rent, utilities, advertising and more. Then you pay taxes. All of this is shown on your profit and loss statement, also known as a P&L statement or income statement, and whatever remains at the bottom is your net profit or net income. Net profit is sometimes referred to as “the bottom line” because it appears on the bottom line of the income statement.
There are many other basic business financial terms, but these few are a good place to start. If you’d like more financial homework, check out our resource on business loan terms, and Entrepreneur provides a glossary of tax terms as well.