In the dynamic and challenging world of business, financial knowledge is key. It is advised that business owners and entrepreneurs are well equipped with an understanding of financial terms, as it not only helps them manage their finances more effectively but is also a helpful tool to give them the confidence to make informed decisions that can drive success and growth to their business.
UK business magazine SME Today calculated that as of 2023, over 25% of all Brits lack the adequate knowledge to make smart financial decisions. This indicates that there needs to be better comprehension in order to manage risks and maintain financial stability.
From gross profit margins to overheads, this article will demonstrate the essential terms you need to know to help your business flourish financially.
Having extensive financial literacy comes with an array of advantages, not to mention giving you a headstart when competing with other businesses. Other benefits include:
Brush up your financial knowledge by learning the following business terms.
A period of reference where management accounts and financial statements are prepared.
An amount of money that a business owes to its suppliers or vendors for goods and services received but not yet paid.
Opposite to accounts payable, accounts receivable is a record of money your business is owed by its customers.
An acquisition is a corporate transaction through a company buying out the assets or shares of another company.
An asset is an item of value that the business owns. They can include physical items such as plant machinery, office equipment and vehicles.
Balance sheets provide information based on the company’s assets, liabilities, and equity.
Working capital measures the health of the business. It is calculated as current assets minus current liabilities. If a business demonstrates positive working capital it can provide future opportunities to grow and invest in the company.
Cash accounting is a bookkeeping method that records receiving income and expenses once paid.
Cash flow is the movement of money entering and leaving the business’s account. If you have a positive cash flow, it indicates that your business receives more money than it spends. Poor cash flow can result in spending more than your business makes, making it difficult to manage your debts.
Credit control refers to the management of a company’s accounts receivable in order to avoid financial risks for both parties. It involves monitoring the credit that has been extended by a business to its client.
A creditor is an individual or business that lends money to another company. For example, banks and credit unions. A creditor has the opportunity to determine whether a debtor is eligible for payments such as a loan or credit card.
In contrast to a creditor, a debtor is an individual who borrows money. For example, a client or mortgage lender. Repayments would be made over a period of time based on the agreement between the debtor and the creditor.
Double-entry is a type of accounting system where debit and credit transactions are recorded. They must be equal in order to maintain balance.
For example, if you run a business that makes a sale of goods with £1,000 to a customer on credit, the double-entry would be as follows:
The double-entry works by recording the debit increase in your cash account that you received from the customer, while you credit in your sales revenue because you have earned the £1,000 revenue from the sale. Crediting a revenue account will increase its balance.
An amount of money that is paid as a cost in a company’s accounts.
The management of money that is available to a company or individual.
A gross profit is the turnover of your total sales minus the total cost of sales. A gross profit margin measures a business’s gross profit compared to its revenues through a percentage.
The amount of money received into an account from your customers from the goods or services your company provides, although it can also be earned through investments. An income statement (also known as a profit and loss account) represents the company’s revenues and expenses during a particular period of time.
An inventory is the ownership of materials or stock that a business buys to sell to the customer.
In terms of financial accounting, a liability is what a business owes, such as goods or money.
The measurement of how quickly a business can pay off its short-term liabilities.
In business terms, a loan is a sum of finance that is borrowed with an agreement of payment, often with additional interest.
A markup refers to what is added to prices in order to make money. It is the difference between the final selling price of goods and products and the cost price.
A merger combines two or more companies to form a new entity or integrate their operations and ownership. This is usually achieved by creating a large-scale organisation that profits off increased market power.
Net profit is your gross profit once you subtract your business’s costs and expenses. For example, if your gross profit totaled £8,000 and your expenditures cost you £3,000, your net profit is £5,000.
Overheads are your company’s day-to-day running costs. These may include rent, office supplies and insurance. Overheads are also known as “fixed costs” due to the fact the prices do not usually change.
Petty cash involves small amounts of money belonging to a business for daily purchases such as coffee, tea bags and milk. These small items still need to be accounted for.
Return on investment (ROI) measures the profitability of an investment made. For example, if your business invested in pay-per-click advertising, the return on investment is the ratio of your net profit to the total cost.
A year-end is the end period of your company’s accounting date. It marks the end of a calendar month, such as 31st December.
We understand that when it comes to organising your business’s finances, it can sometimes be an overwhelming and sometimes confusing process. Our team of trusted experts can guide you with the correct financial expertise and the best solution possible for your business.
To get started, contact us today.