New Business Owner? You’ll Want To Know These Financial Terms
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You may be familiar with the financial terms that go with running a business, but chances are, if you're starting out as a new entrepreneur, you'll want to learn more.
"Entrepreneurs go into business with a variety of pre-existing skills," says Erin Osterhaus in a QuickBooks blog. "Some are natural salespeople while others have the ability to come up with ideas that sell themselves."
"But—while there may be a handful of entrepreneurs who are truly financially savvy—the majority cringe at the thought of preparing financial statements and managing the books of their small business."
It may not seem necessary to learn financial terms if you have a bookkeeper or use accounting software but doing so could help you better understand, manage and grow your business.
So whether you're at the start or looking for a quick refresher, check out this list of essential finance terms — in recognition of Financial Literacy Month in April.
Accounts Receivable and Accounts Payable. These two are considered finance 101 for any new entrepreneur or business owner.
Accounts payables, often listed as A/P or AP, are your company's obligations to pay any debts owed, whether that debt means to lenders, suppliers, or creditors. It includes short and long-term debt obligations.
The counterpart to accounts payable is accounts receivable, known as A/R or AR, which are the funds that customers owe your company for products or services.
Financial Capital. Another basic but critical term is financial capital, which refers to the overall wealth of a business.
Your company's financial capital (vs. human or social) is demonstrated via cash accounts, assets, and/or investments.
There's fixed capital, which refers to the long-term worth of your business, and working capital, which includes cash on hand or other financial resources necessary for maintaining the day-to-day operation of your business.
Assets. Assets are anything your business owns that is of economic value. Typical assets include cash on hand, buildings, equipment, inventory, and accounts receivable.
"An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses or improve sales, regardless of whether it's manufacturing equipment or a patent," according to an Investopedia definition.
You may also broadly categorize assets into current assets, fixed assets, financial investments, and intangible assets.
Current assets are short-term financial resources that you anticipate to convert into cash within a year, while fixed assets are long-term resources, such as equipment and buildings.
Intangible assets are what the descriptor implies - economic resources that have no physical presence, such as patents, trademarks, and copyrights.
Financial assets refer to investments in the assets and securities of other institutions, such as stocks, sovereign and corporate bonds.
Burn Rate. Burn rate refers to how much money is needed for your business to cover all expenses during a certain timeframe, typically a month, according to bookkeeper Billie Ann Grigg in a NerdWallet post.
Grigg shares that it’s an amount that indicates how fast your business "burns through" capital.
"Knowing the burn rate for your company can help you prevent potential headwinds and discover margin opportunities," she writes in the NerdWallet post.
Cash Flow. One of the essential terms to understand, it's a term experienced entrepreneurs and experts say signifies the financial health of your business.
As the two words indicate, cash flow is the total amount of money that comes in and out of a business. It describes the difference between available cash at the beginning of an accounting period and the end of the period.
Incoming cash comes in from various sources, including sales, loan proceeds, investments, the sale of assets, etc. In contrast, outgoing cash pays for operating and direct expenses, principal debt service, and the purchase of assets.