Know Your Business Finance: 5 Business Terms About Finance All Business Owners Should Know
The traditional business model is ever-evolving. Business owners must stay ahead of the learning curve, with terminology in particular.
Understanding fundamental business terms increases business fluency. Owners find it easier to comprehend and communicate financial conversations.
Technology and trends in business change at a rapid pace. Grasping financial terms expands creative and constructive thinking in the business world. This knowledge helps discern how the world’s economy works from a business perspective.
If you’re new to running a business and haven’t studied business theory, read this. Here are five financial terms you need to know for business.
1. Accounts Payable
Every business must pay its debts. Whether to creditors, customers, or lenders, these payments fall under accounts payable.
This business finance term reflects as an obligation on your finance ledger. It can represent long-term or short-term liability. Often used as “AP,” it means your finance division must make payments to whom they’re due.
All business owners start businesses for one intention—to make money. The term asset is a favorable term for any company. It describes everything that is of value to your business.
Office and plant equipment, supplies, business real estate and money in the bank are all assets. These are your business’ resources used to produce value. In short, whatever you own that converts into cash.
Whenever you hear the word assets, expect the term liability or liabilities to follow. Assets are yours. Liabilities are what you owe to everyone else.
Utility bills, rental payments, and online installment loans are all examples of liabilities. These are outstanding debts a business must pay each month or per agreement.
4. Profit Margin
Profit margin has to do with the percentage of revenue a company gets to keep as profit.
A simple accounting formula dictates that amount each month. Businesses must consider costs and overhead expenses. Both get deducted from a sales figure. Then you take that total and divide it by the business’ total revenue.
The remaining figure is your gross margin. A good profit margin is a strong indication of a business’ value. More profit means more value.
Every single financial transaction a business does falls under bookkeeping. It’s how companies keep a record of things like sales, payments, receipts, and purchases.
Accounts payable and profit margin calculations are both bookkeeping entries.
In general, a breakdown of bookkeeping looks similar to this:
- Master Ledger
- Income and Expenses
- Credits and Debits
- Bank Resolutions
- Financial Statement
The financial health of a business relies on accurate bookkeeping. Take control of your business’ finances by grasping an intensive understanding of bookkeeping.
Learn These Business Terms
Small business owners should keep track of their business like they do their health. To do so means staying abreast of changes in trends and education.
Understanding business terms is a key way to remain current. Don’t overlook unfamiliar terms. Learn them to expand your knowledge of the business sector.
Take a look at some of our case studies for insight into topics leading the business world.