20 Basic Business Terms

Regardless  of what your business entails, there is one thing that all companies  have in common, and that is money. Even a non-profit business has to  track their funds. Some business owners embrace handling their finances,  and others would rather avoid responsibility. Wherever you may fall on  this spectrum, all business owners need to understand some basic  financial terms. This knowledge is critical when talking to your  accountant or a lender.

To get you started, here are 20 basic financial terms.

Accounting – the process by which financial information about a business is recorded, classified, summarized, and interpreted.

Accounts Payable – the amounts your business owes to your creditors for goods or services received.

Accounts Receivable – the amounts owed to your business by clients or customers for provided goods or services.

Accrual Basis Accounting – this  is one method of accounting that you can use to run your business. It  recognizes revenues and expenses at the time of the sale, not when the  cash is actually received or paid out. This method requires the  double-entry method of accounting. When you enter a transaction in one  account, you also enter a matching transaction in the other account  (Accounts Payable and Accounts Receivable).

Assets – the  cash value of everything a company owns and uses to conduct business.  These are usually classified as current or fixed. Current (or  short-term) assets include cash or inventory. Fixed (or long-term  assets) include equipment or land.

B2B versus B2C – An  overall description of your business customer. If you primarily do  business with other businesses, then you are a business-to-business  (B2B) venture. If you supply a product or service to a consumer (end  user), then you are a business-to-consumer company.

Cash-basis Accounting – An accounting method that records revenue when cash is received (not when invoiced), and expenses when they are paid. Accounts receivable and accounts payable do not come into play under the cash-basis system.

Cash Flow – the  movement of money in and out of your business. You want a positive cash  flow – when the flow of income is greater than the outflow of expenses.

Depreciation – the degrading value of a fixed asset over time.

Fiscal Year – the  12-month accounting period used in your business. The fiscal year can  coincide with the calendar, but it isn’t necessary. Your fiscal year  could run July to June, or October to September. A company is  responsible for choosing their fiscal year start and end dates.

Fixed Cost – costs  that do not vary during a period, even if business volume is greater or  less than anticipated. An example of a fixed cost would be a lease or  rent payment.

Gross Profit – simply the difference between the revenue generated from sales and the cost of goods sold.

Liabilities – debts  your business owes to others. Like assets, there are two types of  liabilities: short term (current) and long term (fixed). Short term  expenses are financial obligations that are due within one year or  within a normal operating cycle, such as money owed to suppliers. Long  term debts extend beyond a year or the normal operating cycle of a  business, such as a business loan.

Net Loss – when  your total expenses exceed your overall income. The risk of a net loss  is one of many reasons to understand the financial side of your business  and to keep company costs under control.

Net Profit – also  known as your “bottom line.” Net profit represents total revenues minus  total expenses. For some businesses, this figure is especially  important at tax time because you pay self-employment taxes as a  percentage of net profit.

Operating Expenses – normal expenses incurred in the running of your business.

Profit Margin – how much profit a business keeps relative to total sales. It is  expressed as a ratio of profit divided by revenue and displayed as a  percentage.

Variable Cost – expenses  that change in proportion to the activity of a business. This can  include raw materials used in manufacturing, utilities, and commissions  paid.