7 Financial Terms Every Small Business Owner Should Learn

By Funding Gates

If you’re starting out in business for the first time or finding that your knowledge base isn’t what you thought it was, read further to learn more about some common financial terminology that can benefit you, your employees, and your customers.  You don’t have to be a business guru to know the basics of how to successfully run operations so that things are done efficiently, effectively, and professionally at all times.

Here are seven financial terms every small business owner should learn and know.

1. Assets and Liabilities

Assets include anything of monetary value that your business owns.  This can be anything from cash and accounts receivable to inventory, land, buildings, and furniture.  Assets are tangible and can be sold to someone else at any given time.  Liabilities, on the other hand, include what the business owes in debts, notes payable, accounts payable, and other monies needing to be paid back to someone.

2. Capital

Also known as equity, capital can be calculated using a fairly simple equation.  It’s Assets = Liabilities + Capital.  You must subtract liabilities from assets to come up with an accurate number.  Capital includes ownership, stock, investment, and retained earnings.

3. Sales

The process of exchanging goods or services for money is what is known as sales.  Although most people have a grasp on the terminology, they don’t understand the importance of timing sales.  A sale occurs the minute goods or services are delivered.  There doesn’t need to be an immediate payment.

4. Cost of Sales

The Cost of Goods Sold (COGS), Direct Costs, and Unit Costs include raw material, assembly costs, the cost of finished goods that are resold, and the delivery of the goods.  It’s everything expenditure-wise that was needed to source material for, create, assemble, price, and deliver the items being sold.

5. Expenses

Overhead costs like rent, administrative and marketing services, payroll, telephone bills, and Internet access are considered expenses.  All items must be paid in a timely manner whether the company is making profits or not.

6. Profits

Also known as income.  Profits are calculated as sales less cost of sales less expenses.  Expenses include depreciation, interest, amortization, and taxes.

7. Aging Reports

The report lets you know how long a customer invoice has been outstanding.  An aging report gives you an idea of how aggressive you need to be to collect on it.  Past due accounts are often priorities because goods and services have already been delivered because payment was promised in the initial agreement made between buyer and seller.

Once you’re well acquainted with the financial terms listed here, you’ll be able to run your business more smoothly in the future.  This will allow you to put effective systems in place, value you and your employee’s time more, keep costs down and profits increasing, and collect on past due accounts accordingly.  In the business world, knowledge is power and you certainly possess more after learning about assets and liabilities, capital, sales, cost of sales, expenses, profits, and aging reports.

 

This article was originally published on Funding Gates. Funding Gates is the world’s first CRM platform for receivables management. Serving as an online credit department for small businesses, Funding Gates is set on making managing receivables the easiest part of running a business. 

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Funding Gates
Funding Gates, the world's first CRM for receivables management, operates as an online credit department for small businesses, allowing them to finally track, organize and manage their receivable with simple clicks. Set on helping small businesses get paid, their online community creates conversations around financial management for small businesses.
  1. I’d like to add one more to the list – Days Payable Outstanding (DPO). Where DSO calculates the average time it takes to receive cash from sales, the days payable outstanding (DPO) ratio is the average number of days it takes for a company to pay its own bills. Cash flow consists of both money coming into and going out of a business. Tracking DSO and DPS together allows you to get a better sense of your cash flow overall, not just how much is coming in.

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