As a small business owner, accounting and bookkeeping might not be your areas of expertise.
The jargon and terminology often associated with managing your books can sometimes be confusing, especially if you’re just getting started. As providers of expert financial advice and growth consulting services, this language is our livelihood, and we’re happy to provide basic definitions to get you started.
Below, we’ll define some of the most important financial terminology you can expect to encounter, and what it means to you and your business.
Terms to Know
Accounting – The function of interpreting, classifying, analyzing and reporting on financial data.
Accrual Accounting – A method of accounting where you record your income and expenses in the period in which they occur, rather than when cash is exchanged.
Balance Sheet – A report which displays everything that is owned (assets) and owed (liabilities) by a company that has a measurable financial value, plus the owners’ equity. This is one of the three primary financial statements prepared by a business and shows how a company is utilizing its assets. It can be used to evaluate the overall health of your business at a certain point in time.
Break-Even Point – The point at which revenue equals expenses.
Bookkeeping – The function of recording your financial transactions on a daily, weekly, or monthly basis.
Capital – The assets held within a company that provide value. This can include fixed assets, such as products and machinery, human capital, such as employees, and intellectual capital, such as institutional knowledge, within a company.Under-utilization of capital can sometimes hold back a business. Learn more about the resources that commonly hold back a small business from growing profitably.
Cash Flow – The inflows and outflows of cash within a company.
Cash Flow Statement – A report stating the changes in financial position, showing increases and decreases in cash during a given timeframe. This is one of the three primary financial statements.It is important to monitor and forecast your cash flow in order to anticipate positive and negative cash flow, and to sustainably grow your business.
Cash Flow Projections – A breakdown of the money expected to come into and flow out of your business in a given timeframe. Cash Flow Projections can help business owners determine when a company is running profitably and prepare for scaling.
Cost of Goods Sold – (COGS) refers to the costs associated with producing the goods sold by a company. This includes things like the cost of materials and labor but excludes things like distribution and sales costs.
Financial Statements – These include the three primary financial statements prepared by a business: (1) balance sheet, (2) income statement, and (3) cash flow statement. These written records convey the business activities and financial performance of a company and can be used to make future predictions about the company, as well as for tax, financing, or investing purposes.
Fixed Assets – Tangible assets that are purchased for long-term use and remain “fixed” because they are not likely to be converted quickly into cash. These include things like land, buildings, equipment, furniture, and vehicles.
Free Cash Flow – Free cash flow (FCF) is your operating cash flow less your capital expenditures and operating expenses, which includes fixed assets.
Gross Income – Measures total pre-tax income and revenue from all sources.
Gross Margin – A company’s net sales revenue (total sales revenue minus production costs), minus the cost of goods sold. The gross margin represents what portion of each dollar of revenue the company actually retains as a profit.
Income Statement – This report focuses primarily on the revenues earned and expenses incurred during a set period of time. This is one of the three primary financial statements and is also known as a profit and loss statement.
Liquidity – Describes how easily and/or quickly an asset can be turned into cash. Cash itself is considered to be the most liquid asset, but other assets, like stocks and bonds, are also considered liquid since they can be converted into cash quickly. Larger assets like property and equipment, however, are not considered liquid as it can take an extended period of time to convert those into cash.
Net Income – Total sales minus the cost of goods sold and all other expenses. These can include general and administrative expenses, operating expenses, depreciation, interest, taxes, and any other expenses your business incurs. Net Income is a number calculated on the income statement and indicates a company’s profitability. Also called Net Earnings.
Net Loss – The amount of money a company has lost during a set period of time. This occurs when a company’s total expenses exceed their total revenues.
Operating Cash Flow – Operating cash flow (OCF) is essentially how much cash is generated by an organization’s normal business operations.
Periodic Inventory – Inventory that is measured by an occasional physical count to check inventory levels and the cost of goods sold. Purchases are recorded in the purchases account, and the inventory account and cost of goods sold account are both updated at the end of a set period of time. This period could be anywhere from once a month to once a year.
Perpetual Inventory – Inventory that is measured using digital technology which keeps track of inventory balances continuously, and updates them automatically whenever a product is received, returned, or sold. The cost of goods sold is also updated continuously with each sale.
Profit and Loss Statement – A financial statement that summarizes the revenues, costs, and expenses incurred during a set period of time — typically a fiscal quarter or a full year. The Profit and Loss Statement (P&L) is also referred to as the Income Statement.
Revenue – The total income that a business receives from normal business activities.
Taxable Income – The amount of income (including wages, salaries, bonuses, tips, investment income, and any unearned income) used to calculate how much tax an individual or company owes to the government in a given tax year.
Total Debt Ratio – A financial ratio that measures the ratio of total debt to total assets. This signifies the extent of a company’s leverage and can be used to show what portion of a company’s assets are being financed by debt. You always want to maintain a healthy debt to total asset ratio which is specific to each industry and company.