Are you a business owner?
Most entrepreneurs think that simply knowing the concept of how money moves is enough. There is actually more than that, with important business terms that you must know.
When faced with unavoidable challenges or opportunities to expand their companies, business owners often take on a business loan to supplement their plans.
Read on and challenge yourself. Let’s test your knowledge with these ten financial terms that a business owner should know.
An asset is anything that helps grow and adds value to your company; things that bring the money in and these are categorized as short-term or long-term.
Short-term or current assets are things that you can easily sell or consume and turn into money through the usual business operation in a short period or within the span of a year.
Examples: These include your cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets.
Long-term or non-current assets are things that your business can benefit from for a longer period of time or beyond the normal operating cycle of a year.
Examples: These can be either tangible or intangible including your company’s properties, plant, equipment, long-term investments, patents, copyright, franchises, goodwill, trademarks, branding, and software.
Liabilities are the opposite of assets for these are things that bring out the money from your company. They are also categorized as short-term and long-term.
Short-term or current liabilities are your debts or account payables within the one-year operating cycle including your unpaid supplier invoices, trade account payables, wages, and taxes.
Long-term or non-current liabilities are your financial obligations to your creditors that are due beyond the one-year operating cycle including your debentures, long-term loans, bonds payable, deferred tax, and long-term lease obligations or rent.
Revenue is the basic amount your company generates without any deduction or simply your total sales and is categorized into operating and non-operating revenues.
Operating revenue is the sales generated by your company’s primary activities or core businesses. As an example, if you are a retailer, your operating revenue is generated through selling your merchandise.
Non-operating revenues are sales that you earn from activities other than your primary activities. This kind of revenue is a financial gain that you cannot predict as it is unusual and typically non-recurring like the proceeds from sales of an asset.
Expenses are the costs to operate your business including but not limited to your rent, utilities, salaries, supplies, and raw materials. It may be classified as recurring and non-recurring.
Recurring expenses or fixed expenses are your general and administrative operating expenses, while non-recurring expenses are the one-time expenses that you may not want or need to continue over time.
5. Cost of Goods Sold (COGS)
COGS is the amount it costs you to produce the products that you sell in your company including the cost of your raw materials and labor, but does not include your distribution and sales force cost or any other operating expenses for this is solely the direct cost of creating your product.
6. Gross VS Net Profit
Gross and net profits are both dependent on the total revenue of your company but here’s the difference:
TOTAL REVENUE – COGS = GROSS PROFIT
Your gross profit will measure the efficiency of your company in managing your labor and supplies during the production process. You can increase your gross profit by either lowering your COGS or selling your products at a higher price.
TOTAL REVENUE – TOTAL EXPENSES = NET PROFIT
Your net profit shows how much your company gained or lost after deducting all your expenses and will measure how well you manage and run all aspects of your business from production to sales.
7. Cash flow
Cash flow is an important indicator of the financial health of your business. This financial term is the movement or “flow” of your resources.
If you have more money coming in than going out, you have a positive cash flow. But if you have more money coming out than going in, you have a negative cash flow and you probably have to check on your company’s operation, expenses, and product pricing.
For entrepreneurs who are facing a negative cash flow, U Credit offers affordable loans to tide through rainy days.
8. Balance Sheet
Your balance sheet shows the current financial position of your business in terms of your assets, liabilities, and ownership equity for a certain period. In here, your total assets and total liabilities will be reflected wherein your company’s equity or net worth will be based which is determined through your total assets less your total liability.
Depreciation is an occurrence wherein your assets’ value decreases. Depreciation happens over time when your assets start to age, wear and tear, or even lose their purpose or get replaced by more useful things.
You should anticipate depreciation most especially for tangible assets for it is unavoidable.
Equity is better understood as the amount of money you have invested in the company or the percentage of shares you own in the company. It represents the amount of money that will be returned to you and other shareholders after all assets are liquidated and all liabilities are paid off. If your company is profitable, your equity as an owner or shareholder also increases.
So, how did you fare with our mini test?
These are the top ten words that you as a business owner should be knowledgeable about for it will help you understand the world of business better. It is best to know these financial terms.
Some words are usually mistakenly interchanged by some business owners, but after reading this, you are probably not one of them.