If you are new to running a small business or even if you have vast experience as a business owner, certain business terms may seem like some sort of foreign language to you.
Don’t worry; you’re not alone. Many of them can be confusing. But the best way to achieve success and help your business grow is by acquainting yourself with as many business terms as you can. This way, you’ll be able to understand much better how your business works and how to help it thrive.
We’re sharing with you the most common business terms alongside a simple explanation of each one. That way, you can have the knowledge you need to run a successful business.
Uncomplicated And Extensive Dictionary of Business Terms
Often found on the balance sheet in the liabilities section, accounts payable is how much money you owe for goods or services given to you.
Also found on the balance sheet in the assets section. Accounts receivable is how much money your business is owed for goods or services you have provided.
Another term found on the balance sheet, assets are something that is owned by your company that has future value (that can be measured). Examples of this would be cash, accounts receivable, inventory, prepaid expenses, property, and equipment. Definitely, one of the most important business terms.
The balance sheet is what business owners use to determine their financial situation. It lists liabilities, stockholder’s equity, and assets.
Your brand is the image that the public remembers about your business.
A brand consists of several visual elements, like a logo, slogan, and advertisement. But a brand can also include actions taken by the business. If your company does community service, that’s also a part of your brand.
Capital is what you need to produce goods or services.
In most cases, people who say capital are referring to financial capital or, in other words, the money used to purchase goods and services.
However, it is essential to remember that capital is anything that you can use to produce goods or services, so there are non-financial types of capital like:
Human capital: people who work for you/help produce products and services.
Social capital: the relationships you have with suppliers, customers, and the government.
Cash flow is how money is moving in and out of your business.
If more money is coming into your business than out of your business, you have a positive cash flow, which is ideal.
The opposite is a negative cash flow, which, of course, is bad for business.
Equity for small businesses is the owner’s share of the company. This includes assets but also includes profits made by the business. It is important to note that equity is NOT the same thing as capital, as capital can come from many different places than the owner.
These are the operational costs needed for the business to make money on goods and services sold.
Business owners can sometimes mix up expenses and liabilities, but they are not the same. Expenses refer only to revenues and are subtracted from revenues to calculate the profit of the business.
The critical difference between the gross margin and profit margin is that the gross margin looks only at the costs of production, NOT the total costs (remember that there are costs that exist outside of production, like employee wages or advertising costs).
Inventory refers to the tangible goods that a business currently has. It is often used to refer to the products that are in stock that the company is going to sell to consumers, but sometimes it can also refer to the raw materials used to make those goods.
An investment is money you spend in the hope that your assets will increase in the future.
Let’s say you decide to buy a company vehicle to start offering deliveries. The cost of the car itself is a liability, but you hope that due to the number of new orders you can fulfill, your assets (accounts receivable in this case) will increase.
Investments can be something to get short term gains, but some companies will take losses for a while in hopes of eventually making it up later (also called a long term investment).
Another term found on the balance sheet, liabilities are what your company owes to someone else. This includes things like costs for materials (part of accounts payable), employee salaries (also called wages payable), or taxes.
A market is a place where goods and services are exchanged.
What comes to mind is probably a physical shop like a supermarket where the consumer buys goods or services directly from the company. However, there are a lot of different types of markets, some of which are not physical at all.
The internet provides hundreds of markets, including ordering sites like Amazon or bidding sites like eBay.
This is what happens when your expenses are higher than revenues. This is clearly not ideal, and you will want to try to avoid this whenever possible.
Commonly referred to as a business’s “bottom line,” your net profit is your total revenues minus your overall expenses.
Profit margins are different than net profits. Profit margins are used to determine how much your revenues exceed your total costs of sales.
Let’s say that Business A has $100,000 in revenue and $80,000 in total expenses, while Business B has $50,000 in revenue and $10,000 in total expenses. While Business A has more revenues than Business B, they only have a profit margin of $20,000, while Business B has a profit margin of $40,000.
The return on investment, abbreviated as ROI, is used to see how beneficial an investment is to a business.
The ROI is calculated by taking the current value of the investment and subtracting it from the cost of the investment and dividing that number again by the cost of investment. Usually, the higher the ROI, the better the investment.
Revenue is the money you earn from selling a particular good or service. It is not the same as net profit, which also takes into consideration account expenses.
It is often calculated by multiplying the price of the goods or services with the number of units sold.
Business Terms Help You Succeed as a Business Owner
We hope this dictionary of business terms helped clear up some confusion regarding common business terms. If you find it challenging to keep up with these terms at first, don’t worry. You’ll get used to the terms and become a business pro in no time!
At Camino Financial, we always fulfill our motto “No Business Left Behind,” and part of this is offering these tips and tricks to help you be the best business owner you can be.