Financial Terms Every Business Owner Should Know
Get business savvy by knowing the language of finance and accounting.
The 4th to 10th of September is National Know Your Numbers Week – Do you know yours?
The financial terms behind your business can often be confusing and scary for business owners and entrepreneurs without an accounting or financial background!
Today, we will dive into some of the most used financial terms that all business owners should know.
Assets
Everything your business owns (if a Limited Company) that has monetary value are called an asset, such as company car/vans, investments, or property.
Balance Sheet
A balance sheet gives information on what a company owns (assets) and what it owes (liabilities) at the end of a certain period.
Break-Even Point (BEP)
Break-even is the point where the business’s revenue equals the total costs. The business is neither in profit nor at a loss. The business has covered costs = Broke even.
Capital
This is the amount of money you invest or borrow – the initial lump sum/start-up costs.
Corporation Tax
A tax that companies pay on their profits annually.
Creditor
Someone or a business that you owe money to.
Equity
Equity represents ownership in a company.
When a Dragon on Dragons Den says, “I will offer £50,000 for a 20% stake,” they are stating they will invest £50K to own 20% of your business.
Fixed Costs
Costs that do not change regardless of how much you use, such as your monthly insurance cost.
Gross Income/Gross Earnings
What you have billed/earned before taxes are taken out.
Income Statement
An income statement gives the financial picture of a company over a period of time. It reveals the business’s loss or profit by comparing the total revenue with the total expenses.
Net Income/Net Earnings
What you have billed/earned after tax and outgoings have been subtracted.
National Insurance (NI)
A government tax that all earners pay that is deducted directly from employees’ wages and pays for things such as benefits, pensions and the NHS. Employers also pay a percentage on top of the National Insurance deducted from their employees.
Pay As You Earn (PAYE)
The business will deduct PAYE and collect taxes to pay to the HMRC from an individual’s salary before they have been paid.
Profit and Loss (P&L)
Profit occurs when a business’s revenue is greater than the total cost. By contrast, a loss happens when the total costs exceed total revenues.
A revenue surplus is vital to business growth, as the extra funds can be used to purchase new machinery, more raw materials or hire more employees. Repeated losses can bring about a cashflow shortage and result in business failure.
Revenue
The total sales of a business’s products and services. Revenue is calculated by multiplying the price per unit by the number of units sold.
Variable Costs
Costs that vary each month, such as materials or fuel allowance.
What financial terms or financial/accounting tasks scare you the most in your business? How did you get your business finance education – Did you learn on the job, or is it like speaking a foreign language when talking to your accountant?
Leave a comment below or let me know if you would like a deeper dive into any of the terms we have spoken about today.
Are you serious about growing your business?
Do you want to regain your vision and dream that led you to form your own business in the first place?
As your coach, I’ll work with you in 5 key areas.
The emphasis on each area depends on your needs, the type of business you have and your goals.
The key areas are:
- Sales
- Marketing and advertising
- Team building and recruitment
- Systems and Business Development
- Customer service.
Email me at: richardcharles@actioncoach.com
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