Basic Finance Terms Every Business Owner Should Be Familiar With

Basic Finance Terms Every Business Owner Should Be Familiar With

March 15, 2021 0

As an owner of an SME in Africa, how many finance terms do you know? Owning a business is not a one-stop journey. It requires learning, pausing, and forging ahead, unafraid to take new paths when necessary. It’s a constant learning curve for both rookies and entrepreneurs with great ideas. But there’s no manual for being an entrepreneur.

So, how do you know what you should? Here are basic finance terms every business owner should be familiar with. If you’re a small or medium business owner, these terms are necessary to learn them to avoid being cheated or other unforeseen circumstances. 

Accounts Payable and Accounts Receivable

This is a business finance term representing obligations that your small business has to pay, such as debts to suppliers, creditors, and lenders. It could either be long term or short term, depending on the credit type provided by the lender to your business. Accounts Receivable, as the name implies, has to do with the money you expect to receive from your debtors as well.

Assets and Liabilities

This refers to anything your business owns, both tangible and intangible, that has value. Examples of items listed as business assets are cash on hand, buildings, inventory, equipment, accounts receivable and every other thing that could be turned into cash. Liabilities, on the other hand, are financial obligations that a business incurs that hasn’t been paid and has the ability to reduce the business’ cash or assets.

Basic Finance Terms Every Business Owner Should Be Familiar With
Business owners should understand basic finance terms

Balance Sheet

This shows your business’s financial position; in recent time, the name has been changed from ‘Balance Sheet’ to ‘Statement of Financial Position’. Just one look at your balance sheet and anyone would be able to tell your company’s net worth. It can also be seen as a summary of all your assets and liabilities. 

Income Statement

This is an important financial report that investors and lenders usually request to see whenever they’re evaluating your business and its viability. Your income statement is also referred to as a profit and loss statement. It addresses your business’s bottom line, stating how much your business earned and spent over a particular period of time. The result you get from calculating your income statement could either be a net gain or a net loss.

Bookkeeping

This is an accounting method that has to do with recording your business’s financial transactions. It means that you keep your books, recording all the inflow and outflow transactions your business makes in all the right subsidiary books.

Accrual Basis

This has to do with recording income at the time of it being earned, and also recording expenses immediately they occur. It is the most common accounting approach employed by larger businesses to main financial transactions. Accruals are expenses that have been incurred by the business but are yet to be recorded in its books. They include payroll and wages. 

Capital

This is usually referred to as your business’s overall wealth. It is demonstrated by your cash accounts, investments, and assets. It could either be tangible in form of buildings, equipment, and durable goods or it could be intangible in form of intellectual property and goodwill. 

Working Capital

This is different from fixed capital. It is made up of the necessary financial resources that your business needs to maintain its daily operation. It is the cash on hand or instruments that can be quickly converted to cash. 

Cash Flow

This is the amount of operating cash flowing through your business over a period of time, thereby affecting your business’s liquidity. It reflects activity for a particular period of time, which is usually one month or one accounting period. As a small business owner, it is important that you’re able to maintain tight control of your cash flow.

Cash Flow Projections

Your business decisions in future are dependent on your accurate cash flow projections. You’ll need to depend on previous cash flow patterns to plan ahead for upcoming expenditures. The patterns you observe will provide a comprehensive report on how you receive and spend your cash. 

Depreciation

Assets are liable to lose their value as time goes on due to things like wear and tear, and when this happens, we say that an asset has depreciated in value. Businesses can make use of different depreciation methods and rates to reduce the value of their assets, decreasing the recorded value of assets in the business. 

Fixed Asset

This is a tangible and long-term asset that is used for the business to achieve its goals. Items classified as fixed assets include computer equipment, furniture, real estate, and equipment. Consequently, they are different from current assets which are short term assets that could be written off in a one year period.

Gross Profit

This has to do with the money left after subtracting your direct costs and expenses from your total sales or income. Your expenses are made up of raw materials, labour costs, transportation of goods, etc., that had to go in for you to make your revenue in the first place.

Lawretta Egba
Lawretta Egba
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