Last editedJul 20212 min read
The world of business is full of jargon and scary finance words. If you’re a small business owner, or just keeping an eye on your own bank balance, then getting clued up on financial terms is always going to be useful. You don’t have to be rivalling the skills of a professional accountant, but knowing basic financial terms can help you navigate the world of business loans and investors. Here’s 10 to get you started.
1. Net income
Arguably the most important financial words for any business owner – net income. Your net income is your total earnings. Also referred to as profit, if your net income has gone up, that’s a good thing for you, your shareholders, and your staff.
Revenue is the income that is generated through regular business operations. Revenue is key to keeping a business going and shows how successfully the business is making money.
Your assets are what your business owns. That can be properly, equipment, supplies, or readily available cash. In financial terms, things your company owns will always mean assets, and what you owe will always be known as a liability.
Liabilities are the debts your company owes. This financial terminology may sound scary, but liability doesn’t always mean a huge debt. It can also be used to describe things like your utility bills or rent. Definitely one of the important business terms to know, if you find your liabilities are getting bigger, you’ll need to form an action plan before it’s too late.
5. Cost of Goods Sold (COGS)
One of the key financial terms to know when it comes to production, COGS means the cost of all materials and labor required by the products you make or services you offer. These costs also include manufacturing overheads, but not indirect expenses like distribution costs.
6. Gross profit
Your net sales revenue minus COGS gives you your gross profit. So, a high gross profit means your company has more money available to invest back into the business or pay off liabilities. If the gross profit of a company is falling, then the business may want to look at cheaper ways to run production, like sourcing more affordable materials.
7. Gross profit margin
Many of these financial terms to know may sound very similar and a little confusing, so it’s important to learn the difference. Gross profit margin is basically the next step after finding gross profit. Once you have found your gross profit, you can take this figure and divide it by revenue to see your gross profit as a percentage. The gross profit shows how much capital a business has retained on each dollar of sales.
8. Burn rate
The burn rate is the number one business term to know if you’re a start-up. It refers to how quickly you are spending money, or burning through your cash. Start-ups will usually have to spend more money than they make to get up and running. Keeping a close eye on just how fast they are spending can give a solid picture of just how much longer they have before they are in real trouble.
Runway is the time a company has before it runs out of money. For example, if a start-up has a cash runway of two years, it means they have enough money to operate for that amount of time before they are no longer solvent. If you’re just starting out then ‘runway’ is one of the financial terms that needs to be top of mind. Essentially, the runway is how long your company has left to live, and finding ways to generate more income, such as through investors, before D-Day is essential.
Of all the business terms to know, solvency may be the one you’ve heard be used in the most ominous of ways. That’s because being solvent is the be-all and end-all of a company, so it’s definitely up there as one of the scariest finance words. Solvency refers to a company’s ability to cover its liabilities and be financially stable in the long term. If a business goes under, it’s no longer solvent and will need to enter administration.
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