Cracking the Commercial Code: 7 Finance Terms Every Business Owner Should Know

0
872
Business Owner

Small business owners wear several hats. These entrepreneurs have to be communicators, creators, managers, and more. To be successful, small business owners need to have a working knowledge of business jargon, especially economic terminology. 

Knowing basic finance terms helps small business owners communicate effectively with their accountants, lawyers, and lenders. 

Assets

In a company, assets are the items that add value to the business. Assets can include everything from equipment, real estate, cash, and supplies. Company assets offer a future benefit, as they can generate cash flow and improve the bottom line. Assets can also include patents and other intangible items like trademarks and copyrights. 

Liabilities

Assets and liabilities often go hand-in-hand, as they are on opposite sides of the balance sheet. Liabilities include the amounts that a company or person owes. When an organization has a liability, they settle it by paying with money, services, or other assets or goods. Liabilities include every loan, bond, expense, mortgage, or cash advance for your business.

Bottom line

Financial experts use this term when talking about a company’s profit or net income. The bottom line is where your business is financially at the end of a term. It’s the amount of money you have when figuring your income minus expenses. Think of this term as the bottom line of an equation determining what your business has earned after deducting overhead costs. 

Your bottom line could be a positive number if you are making money. It can be a negative number if you aren’t making a profit. 

Cash flow

Cash flow is the amount of cash coming and going from a business. If your company is performing an expense report for small business regularly to have a positive cash flow, more money is coming in than the amount leaving it. Cash flow helps companies to pay expenses and employees. Businesses with cash management problems can struggle to pay their short-term debts, and many end up closing their doors. 

Inventory

Inventory is a quick way of describing the stock and materials businesses buy and sell for a profit. When you track your business’s assets and liabilities, you record your inventory as an asset, as it should help you make money for your company. 

Markup

Businesses make money by adding a markup to the items in their inventory. If you spent $10 making an item, you should add a markup that helps you cover your business costs so you make a profit. 

Your markup should include the amount your business needs to make a profit. It’s common for companies to have markups over 30 percent. So you could price your $10 at $13 or more. 

ROI

ROI is the return on investment or the financial benefits you get from investing in marketing, new equipment, or employees. You can figure your ROI by dividing the net profit by total investment, then multiplying the outcome by 100. 

Wrap up

Learning basic financial terms can help you better communicate with your financial advisors. You’ll learn to make better financial decisions for your business when you understand the terms and rules of the business world.