Financial Terms Every Business Owner Should Know
Whether you are just starting a business or you are a seasoned business leader, there are certain financial terms which are essential for you to know. Below are 6 key financial terms you should know:
Assets are anything that the company owns that has monetary value. Examples of assets include furniture, cash, land, accounts receivable, and copyrights. Assets are divided into four categories: fixed, current, tangible, and intangible.
· Fixed assets are assets that cannot be converted into cash quickly and are purchased for long-term use, e.g., buildings and land.
· Current assets are those assets that can be converted into cash quickly like investments and inventory.
· Tangible assets are things that can be touched like a vehicle.
· Intangible assets are assets that cannot be touched like patents.
These refer to the debts that a business has since its inception. This includes money owed to suppliers, bank loans, and credit card debt. Liabilities are divided into current and fixed liabilities.
· Current liabilities relate to your suppliers and must be paid off within a year.
· Fixed liabilities are like a bank loan and is settled over more than one year.
The equity refers to the ownership one has for a company. Equity can be sold to investors who will then have a share in your business.
4. Gross margin
The gross margin refers to the percentage of the sales earnings that a company keeps after the costs for producing product or service are deducted. This percentage is then used to pay for overheads like rent, salaries and more.
5. Cash flow
This refers to the movement of money through your business every month. By looking at your cash balance at the start and end of a certain period you can determine your cash flow.
When looking at concentration, we are considering what percentage of business the company is doing with the clients in the business. If you do business with a one or a few clients, then this is considered overconcentration and can pose a problem/ risk to your business.
By learning these terms, you will be more financially savvy when speaking in business circles.