You didn’t start a small business to be a CFO, but as you know, managing your finances is an important key to success. Here’s a list of 14 terms you need to know if you’re overseeing your business’ finances. Learning the basics is one step closer to mastering them!
1. Business Credit - Did you know your business has a credit score just as you do, personally? However, business credit has it’s very own scoring system (which varies among the different business credit bureaus). In short, your business credit shows how likely your business is to pay back money owed. Be sure to get your business in a good financial position by building up your business credit.
2. Budget – As you probably know well, your business budget is accounting for exactly how much money you expect your business to spend. The difficult part of budgeting for business is remembering to include everything. Usually, business budgets contain expenses such as: leases, automobiles, marketing/advertising, technology expenses, supplies and salaries/wages. Essentially, everything that costs you money. Be sure to verify that you are including all company costs. Your budget is crucial because it will help you better define your company’s financial goals.
3. Balance Sheet – Your balance sheet lists your assets, equity and liabilities, giving you an overall look at your company’s financial position. You use a balance sheet to see if your company is balanced (get it?) and do so by adding the equity and liabilities to come up with the assets. If they are equal, your financials are in good shape.
4. Break-even Point – This is the first goal your business should reach for. When you reach the break-even point, it means you’ve reached the point where your sales cover your overhead. Any money you make after this point is profit.
5. Cash Flow - Cash flow is describing the movement of money in and out of the company. You will want to keep track of this with cash flow statements which should, for any given time period, show how much the company brought in vs. how much was paid out. Watching your cash flow is a great way to keep an eye on your financial health. The more often you check your cash flow, the better.
6. Capitalization – This refers to how your company is paying for fixed assets (i.e. facilities, equipment and other similar resources). Also known as invested capital, this is the sum of your company’s retained earnings, stock and long-term debt.
7. Depreciation - Your assets can lose value over time, depending on use and longevity. You will want to keep track on how your assets depreciate for your taxes. Why? You can deduct the cost of tangible assets you purchase as business expenses.
8. Gross Profit - Gross profit is simply the difference between how much you make from the sell of a product and how much it costs you to produce it. If you’re a service-based business, your costs reference the price of the labor to provide it.
9. Marginal Cost - There is a cost to your company every time you produce your product or provide your service. As you know, this cost can fluctuate, depending on changing supply or labor cost. This change is marginal cost. By keeping an eye on this amount, you will know if you need to change your price or fee to keep your profits balanced.
10. MACRS – Want to know how much of an asset’s value you can write off? You can do so with the “modified accelerated cost recovery system” method. This system helps make figuring out depreciation more tangible and allows you to be smarter when writing off your assets. Learn how to calculate depreciation with MACRS.
11. Liability – Does your company owe a debt? If so, simply enough, this is a “liability”.
12. APR – Annual Percentage Rate is ALL fees and interest on a loan for the year. It will always be expressed as a percentage.
13. Amortization – Amortization is making regular payments on a loan or debt over time. This can make sense when you want to pay back larger expenses over time. You can calculate your amortization schedule here.
14. Compound Interest - Taking past accumulated interest into consideration, rather than just interest on the principal loan amount, is how compound interest is calculated. You can calculate compound interest here.
These are just 14 of the many terms you should know about for your small business finances. Which terms have you found to be the most “need-to-know”? Let us know in the comments below!
This article was originally published on Funding Gates. Funding Gates is the world’s first CRM platform for receivables management. Serving as an online credit department for small businesses, Funding Gates is set on making managing receivables the easiest part of running a business.