As an entrepreneur, you’re doing it all. You may be spread so thin across all aspects of your business that learning all the financial stuff seems impossible. Don’t worry! You don’t need to become an accountant to be familiar with the important terms and documents for your business. Having a strong understanding of the basics will allow you to do the more minor financial tasks, like budgeting your day-to-day, and will give you a good background when working with an adviser. Keep these important financial terms and concepts in your back pocket to study up!
Important terms to know:
The total amount of sales before taking out any deductions or expenses (ex: rent, cost of goods, taxes, etc.).
Anything that keeps your gross revenue from going to you. This can be things like rent, payroll, taxes, interest, utilities, and other operating expenses.
What is left over after you deduct expenses from your gross revenue. Your business is profitable when this number is positive, meaning the revenue is greater than your expenses!
The amount of available cash you have in your bank account to pay bills. Sometimes, even if your business is profitable, you can have issues with not having enough cash in your bank account to pay for important expenses.
If you’re a brand new entrepreneur, you may already be privy to the break-even point. For the first several months, or even years, businesses may operate at a loss. The break-even point is the point where total revenues equal total expenses.
Costs of Goods and Sales are direct costs associated with a sale (cost of materials required for the product, cost of delivery, etc.).
A cost you pay that changes depending on another factor. COGS is a type of variable cost. For example, the more pizzas you sell, the more dough you’ll have to buy.
A cost that remains the same over time and generally does not directly contribute to a sale. These costs include bills and many of the other costs of running a business.
These are things your business owns that have been paid for. Generally, if something has value and is owned by the business and could be sold to pay a debt, it is considered an asset.
Something that a business is liable to pay. This could be an outstanding debt or other financial responsibility. Loans are considered a liability.
The value of a business’s assets minus the business’s liabilities. The equity you have in your business is how much is actually yours, as opposed to banks and shareholders if you were to sell the business.
Important documents to know:
A snapshot of your business’s financial standing at that particular time. This sheet will list your assets, liabilities, and equity your business holds and is used to calculate the net worth of your business.
Also known as a profit and loss statement or income and expenditure statement, this statement summarizes your business revenues and expenses over a year and allows you to calculate your net profit or loss for that year.
Cash flow statement
This statement shows the cash flowing in and out of your business. Cash will be put into different categories, such as cash received from sales, loans, sale of equity or assets, and cash spent on COGS items. Seeing exactly where cash is changing hands is important for your business’s financial health.
An educated prediction for the upcoming year about how much money your company will bring in. This forecast is essential for knowing how much you can afford to spend, whether you want to hire a new employee or take on a business loan. The more researched and realistic your forecasting is the easier it is to stay on budget for the rest of the year.
These are just the bare basics of finance, but once you understand these terms, you can start digging into more complex concepts! Need more help with financial literacy for entrepreneurs? Check out our financial resources and tools here.