If you’ve ever sat through a meeting with your accountant or stared blankly at your bookkeeping software, wondering what half the terms mean, you’re not alone. There are a ton of financial words flying around, and it can be hard to keep up. However, as a small business owner, you’re expected to be the CEO, marketing director, customer service team, and the fractional controller. Knowing key financial terms can make a huge difference in how confidently you run things, especially when tax time comes or you’re trying to figure out why your cash flow is tight.
In this blog, we’ve compiled a glossary of everyday financial terms you should know and how they apply to your business.
Money Coming In and Going Out
Revenue
Revenue, also known as sales or income, is the total amount your business earns before any expenses are taken out. If you sell $10,000 in cupcakes monthly, that’s $10,000 in revenue.
Cost of Goods Sold (COGS)
COGS are the direct costs of creating your product or service. For a bakery, this includes flour, sugar, and eggs. If you’re a consultant, it might be software or subcontractor fees.
Gross Profit
Gross profit is your revenue minus your COGS. It’s a quick way to see if you’re charging enough to cover the cost of delivering your product or service.
Net Profit (aka the Bottom Line)
Net profit is what’s left after you subtract every single expense, i.e., rent, payroll, insurance, and subscriptions, from your revenue. If there’s nothing left, that’s a red flag. If there’s a lot left, you’re doing something right.
The Money You Owe vs. The Money You’re Owed
Accounts Receivable (AR)
Accounts receivable is money people owe you. If you’ve sent out an invoice and haven’t been paid yet, it’s sitting in your accounts receivable.
Accounts Payable (AP)
Accounts payable is money you owe. Think unpaid bills, vendor invoices, or credit card balances. It’s your list of “to-pays.”
What You Own and What You Owe
Assets
Assets are everything your business owns that has value. This includes the cash in your business bank account, equipment, vehicles, and even outstanding invoices (yep, AR counts as an asset).
Liabilities
Liabilities are everything your business owes, such as credit card debt, business loans, unpaid bills, or taxes due.
Equity
Equity is what’s left after subtracting liabilities from assets. Simply put, it’s what you’d walk away with if you sold everything and paid off all your debts.
Terms That Pop Up During Tax Time or Bank Meetings
Cash Flow
Cash flow shows how money moves in and out of your business, regardless of profit. You can be profitable on paper, but still encounter problems if your clients are slow to pay and your bills are due now.
Fiscal Year
A fiscal year is another way of saying your business’s 12-month accounting period. Some businesses go with the calendar year (January to December), but others pick a fiscal year that better aligns with their busy seasons.
Depreciation
Depreciation is how accountants deal with expensive equipment (like computers or machinery) that loses value over time. You get to write off some of the costs yearly rather than all at once.
P&L Statement (Profit and Loss)
Also called an income statement, a P&L summarizes your business’s revenues, costs, and expenses over a specific period, usually monthly, quarterly, or annually. It tells you if you made money or lost money.
A Few More That Are Worth Knowing
Chart of Accounts
Your chart of accounts includes all the categories your transactions go into, such as sales, utilities, office supplies, and payroll. When it’s well-organized, your bookkeeping is 10x easier.
Bookkeeping
Bookkeeping is the day-to-day task of tracking all the money moving in and out of your business. This includes recording income, logging expenses, and reconciling your bank statements.
Reconciliation
Reconciliation is the process of comparing your bank statements to your books to ensure everything matches. It helps catch errors, missed expenses, or duplicate charges.
Trust the Outsourced Accounting Team at Current Accounting for Further Financial Guidance
No one starts a business because they love financial spreadsheets (unless you’re an accountant like us). However, gaining the appropriate financial knowledge can make a real difference in how smoothly your business runs. At Current Accounting, we’re here to help you make sense of your numbers, not overwhelm you with complicated terminology.
If you ever run into a term that’s throwing you off, our Charleston accounting firm is just a call away and is always happy to explain things in plain English. Reach out to learn more. Whether you need help with financial reporting, everyday accounting functions, or fractional controller services, we have you covered.
