13 Important Business Financial Terms to Understand for Success

As a small business owner, understanding your financials and the story they tell about your business’s health is crucial to success.  Following are 13 important business terms to help you better understand your financial statements.

1. Assets: Everything a business owns that has value, including cash, investments, equipment, and property. Keeping track of assets helps businesses understand their financial strengths and make informed decisions about investments and growth.
2. Depreciation: It is the decrease in value of an asset over time, often used to calculate tax deductions. Understanding depreciation helps businesses make informed decisions about investments in assets, budgeting, and tax planning.
3. Accounts Receivable: The amount of money a business is owed by its customers for goods or services provided but not yet paid for. Tracking this figure helps businesses manage cash flow and ensure timely payment from customers.
4. Inventory: It is the stock of goods a business keeps on hand to sell to customers. Monitoring inventory helps businesses avoid stock shortages and overstocking, and make informed decisions about production and purchasing.
5. Liabilities: The amount of money a business owes to others, including loans, mortgages, and accounts payable. Monitoring liabilities helps businesses understand their financial obligations and make decisions about borrowing, payments, and risk management.
6. Accounts Payable: The amount of money a business owes to its suppliers for goods or services purchased but not yet paid for. Managing this figure helps businesses maintain positive relationships with suppliers and avoid financial difficulties.
7. Equity: This is the difference between a business’s assets and liabilities, representing the owner’s stake in the business. Understanding equity helps businesses make decisions about ownership, investments, and business strategies.
8. Gross Revenue: This is the total amount of money a business earns from its sales before deducting any expenses or cost of goods sold. Understanding this figure helps businesses monitor their sales performance and make informed decisions.
9. Gross Profit and Gross Profit Margin: Gross Profit is your total revenue minus your cost of goods sold. Gross Profit Margin is calculated by dividing the gross profit by the net sales (gross revenue minus returns, allowances and discounts). Monitoring this figure helps businesses understand their profitability and make decisions about pricing, production, and sales strategies.
10. Net Profit: This term refers to the amount of money a business earns after deducting all its expenses, including taxes. Knowing this figure helps businesses understand their financial health and what decisions to make regarding investments, expansion, and other financial options and goals.
11. Taxable Income: It is the amount of a business’s income that is subject to taxation, calculated by subtracting expenses and cost of goods from gross revenue. Knowing taxable income helps businesses understand their tax obligations and make informed decisions about expenses and financial strategies.
12. Cash Flow: It is the movement of money in and out of a business, including cash received from sales, payments made to suppliers, and other expenses. Monitoring cash flow helps businesses ensure they have enough funds to meet their obligations and make informed decisions about spending.
13. Budget: It is a financial plan for a business that sets revenue and expense goals for a specific period of time. Creating and sticking to a budget helps businesses monitor their financial performance, make informed decisions about spending, and achieve their financial goals.

In conclusion, having a good understanding of these 13 important business financial terms is crucial for the success and growth of any business. These are all key metrics that provide valuable insights into a business’s financial health and performance. By monitoring these figures, business owners can make informed decisions about sales, expenses, investments, and other financial strategies to achieve their goals and secure long-term success.