You might be a rock star at unplugging the kitchen sink or crafting a killer bridal updo. You might love to transform the backyard into a wonderland. Maybe you’re that guy who can fix anything.
Whatever your skill, kudos for following your passion and turning it into a business you can call your own. What you might not be prepared for is all the business stuff that comes with chasing your dream and becoming a small business owner.
But for your business to grow, you have to be as good at running a business as you are at the things your business does. As a small business owner, you need to understand the ins and outs of running a business.
Learn about these finance terms related to running a small business.
Accounts payable is the term used to identify the money you owe to others. It might be another vendor or supplier. They are your business obligations owed to others.
Think of accounts receivable as the opposite of accounts payable. The receivable part is the money owed to your business for your services. If you provide the service and invoice a client, it becomes your accounts receivable.
This is the term that explains the income you get over a period of time. The revenue goes into your accounts receivables.
Assets are valuables owned by your company. Assets can be tangible, such as real estate, equipment, and furniture, or intangible, such as trademarks and patents.
A business plan is the foundation of your business. This document fleshes out your mission and vision, ownership details, organizational structure, capital requirements, income projections, and your sales and marketing strategy.
Cash Flow/Cash Flow Statement
Cash flow is the amount of money that comes into and goes out of your business over a period of time.
Each month your business has accounts receivables. This is the cash flowing into your business. Also, each month your business has cash leaving it through your accounts payable.
The cash flow statement records these transactions within a specified period.
Small businesses often need to obtain a line of credit to help them get started and cover their expenses. Your credit limit tells the maximum amount of money an investor or a lender can give you.
Gross Profit and Net Profit
As a business owner, profit is important to you. Understanding the difference between gross and net profit is critical.
Gross profits are the profits you have coming into your business once you subtract the cost of the items you sold.
Net profits are not just the cost of the item minus the cost of the product. It is the profits minus all expenses related to the business. Net profits commonly referred to as the bottom line, explain how much money is left in the business after all the costs and expenses are subtracted.
An income statement, also known as profit and loss statement, shows a business’ revenues and expenses.
By studying an income statement, a business owner can easily know their profits or losses. They can also tell if their expenses are too high, and establish whether the business is on course to meet its financial objectives.
Understand these finance terms!
Being a small business owner means being business-savvy and keeping an eye on the money. With this guide on basic finance terms, you now have a stronger understanding of your business’ finances.
Keep learning and feel free to learn more about how we can help your business.