Running a successful business that has the potential to grow starts with understanding basic terms when it comes to your revenue and costs.
Are you struggling to understand the numbers in your business? Not sure what decisions to make because “profit and loss” and “balance sheet” sound like another language?
Often, small business owners hire an external bookkeeper and/or accountant to offload the headache of dealing numbers, but it’s still important to have a sound understanding of what your numbers actually mean. Doing so will put you in the driving seat to make great business decisions off real, meaningful data. Our approach is to work closely with our clients throughout the year to so that they better understand their financial position, so that they become confident in making smart plans for future growth.
Want to increase your financial knowledge so you can have more informed, insightful discussions this quarter?
Start right now, with this list of five essential financial terms for small business owners.
1. Cash flow
Do you have more cash flowing into your business each month than you pay out to cover costs and expenses? If so, you’ll be thrilled to know that you're "cash flow positive." If the opposite is true, your cash flow statement will reveal that you're "cash flow negative."
Having excess cash on hand means you're better equipped to keep up with debt, cover unforeseen expenses, and invest in growth opportunities. It’s important to regularly reach out to your accountant or bookkeeper to look over your cash flow statement and keep tabs on your business’ performance, so that you can identify any potential issues before it’s too late.
2. Profit and loss statement
Also referred to as the P&L statement, the profit and loss statement is one of the most important documents used by accountants to determine the profitability of your business.
The P&L statement lists revenues and gains as well as expenses and losses over a specific period of time (typically every three months for small businesses). It calculates your all-important "bottom line" so you know if you're operating at a loss or turning a profit.
3. Gross vs net profit
Gross profit is what remains when you subtract the cost of goods sold (COGS) from your total revenue. Net profit, on the other hand, drills deeper. It reveals your exact dollar per profit of sales after subtracting all operating expenses, including COGS, taxes, interest paid on debt, etc.
Gross and net profit are both profitability ratios. They are key for measuring business performance against an industry benchmark and your competitors.
4. Balance sheet
The balance sheet offers a snapshot of your overall financial position at a particular moment in time. It lists the assets (such as cash, inventory, accounts receivable, and equipment); liabilities (like accounts payable, income tax, and employee salaries); and shareholder capital. In a nutshell, the balance sheet shows what you own, as well as what you owe.
5. Accounts receivable & accounts payable
Simply put, accounts receivable is money your business is owed by customers for goods or services sold. It is considered an asset on your balance sheet. On the other hand, accounts payable is money you owe suppliers and any bills you have yet to pay, so it's listed as a liability on your balance sheet.
And there you have it – five key terms to help you build your financial vocabulary, join the conversation, and empower smarter decision-making. If you’d like to dig a little deeper, we’re holding a breakfast seminar “Understanding Business Financials” where our bookkeeping team will be explaining the above terms plus more, so that you can leave feeling confident that you’re in full control of your business!
Get your tickets here
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