Financial Terms for Small Business: Important Terms You Need to Know

What do you know about financial terms for small business?  No matter what industry you are in, being at the forefront of your own business means knowing a little about everything that makes your company tick.  That knowledge is especially important when it comes to your finances.

Regardless of whether your company is just getting started up or has been running for years, knowing and having control of every aspect of business finance is key to your growth. So just what are some of the important terms that you need to know about and how do they affect your company’s development?  Keep reading this post to find out.

We’ll take a look at some financial terms for small business so that you can be as informed as possible moving forward.

The Most Essential Terms

    • Income – We’ll start with the most basic term. You may think of income as the money you generate through the sales of your products and services, and you’d be right. It’s important to note, however, that in the context of business finance, the term income can specifically apply to what you have left after you pay your expenses.
  • Assets – These are tangible and intangible items that help your business drive revenue and increase its value. An asset is a broad term that can apply to things like your company’s cash, accounts receivable, inventory, land, supplies, and software licenses. Assets are important to keep track of because having assets that generate sales allow you to continue operating without interruption. For example, a piece of equipment that you no longer use in your business is an asset that is not helping you to generate revenue. Get the picture? Your company’s assets can also make it easier for you to secure loans through banks and other lending institutions should you need them.
  • Liabilities – This term is used to describe the money that you owe. A liability is the exact opposite of an asset. This term can range from your monthly bills, to your payroll, to your taxes and accounts payable. Liabilities are important financial items for small business because they help paint a portrait of the company’s financial health; good or bad. It can get complicated because a liability can also be an asset for your company!  A simple example is that you purchase a machine with debt and that machine generates enough revenue to pay for the debt and provide income to your business. By having a clear picture of your liabilities, you will know exactly what your money is going toward and what your obligations are. This knowledge makes it much easier to lead your business in the direction that you want it to follow.
  • Profit – In simple terms, when all financial obligations are taken care of and there’s money left over, that cash represents your profit.  The path towards profitability is one that can take a while and many businesses might not see their first dollar of profit for several years. Profit represents the main goal that every entrepreneur works toward; regardless of industry.  Profit is important because, if not for any other reason, it is the main indicator of your company’s ability to sustain itself over time. If your company proves to be profitable enough, you can expand your offerings, hire better talent, and work your way into new markets that will help perpetuate the cycle of profitability. In other words, it takes profit in order for your business to be successful and to grow.
  • Margins – Margins are a type of financial metric that are an indicator of profitability and can be applied to areas like profit, operations, products, and other such areas. As far as financial metrics for small business are concerned, you want to make sure that you know all about your margins because they speak volumes about how efficiently your company is running. By knowing just how wide or narrow your margins are, you can easily find areas where your company is thriving as well as areas where it could use improvement. Running a business is all about constant improvement and few financial metrics for small business make that improvement easier than reviewing your margins.
  • Cash Flow – In simplest terms, cash flow is the term used to describe what cash goes in and what cash comes out of your business.  As the old adage goes, “you have to spend money to make money.”  Your company’s cash flow illustrates that point well.  Bringing money into a business is obviously important, but so is spending that money.  In the context of financial terms for small business, cash flow will show you where your cash came from and how much you have to spend on things like equipment, development, hiring, and other practices that help you grow.  This information can help you with your long-term business planning as things change and you need to change right along with them.

These are a few of the essential financial terms that you need to familiarize yourself with while you run your business. Understanding these financial terms will give you a strong insight on some of the behind the scenes developments that affect your company and assist you in making sound decisions to ensure your company’s continued prosperity.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

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