As a small business owner, there are a number of financial terms that will be necessary for you to know and understand. These are terms that you will see used and thrown around in your everyday endeavors with customers, clients, business partners, vendors, and financial institutions.
You don’t need to be a wordsmith, however, it is extremely important that you at least have a grasp on what they mean and how they are used so that you can more successfully run your business. It may take a lot of research to not only find what these terms you should know are but also what they mean.
Complete and easy dictionary of financial terms
Lucky for you, we at Camino Financial have compiled a dictionary-style list of the most important and basic financial terms that every small business owner should know. While there are certainly more financial terms than what is listed below, these are the ones that every business owner—no matter their experience or industry—should grasp.
Accounts Payable (AP or A/P)
This is a list of your financial obligations to any creditors. It could include a financial institution where you have a loan, an auto company where you leased a company car or an office supply store where you have a line of credit.
Accounts Receivable (AR or A/R)
This is basically the opposite of Accounts Payable. It’s a list of money that’s owed to you from whatever sources of income you have. AR is also known as your assets since it’s a legally binding agreement between you and someone who owes you money.
These are business expenses you have already incurred but haven’t hit your books yet. Examples of accruals are employee wages as well as payroll taxes.
Annual Percentage Rate
This is a financial term that will come into play when you take out a loan or line of credit. It’s the annual cost of any money that you borrow, with the principal and any fees/interest that you’re required to pay back.
This is a valuation of your business that is conducted by a trained professional. Appraisals can be done to determine the overall worth of your overall business, equipment that you own or real estate, for example.
Anything that has value and that your business owns. This could include cash, AR and any equipment, inventory and/or property that the business owns.
This is the most essential and basic financial report that you’ll have for your business. It provides a quick peek into what your business’ value is at any time. It has a complete list of all your liabilities as well as your assets.
This is hopefully something you’ll never have to consider. It’s a law that business owners (and individuals) can use if they face a debt so significant that they won’t be able to pay back. A court will ultimately decide the outcome of the bankruptcy case, which could result in your debts being wiped clean—although your credit score will take an enormous hit.
This is the overall wealth your business has, based on its cash, assets and any investments. There are two types of capital:
Fixed Capital refers to the wealth of your business over the long-term, based on goods, equipment, property, and intellectual property, for example.
Working Capital refers to the resources that are necessary for running the business’ day-to-day. Cash, inventory, and accounts receivables are examples of working capital.
This is basically your business’ liquidity or the amount of cash that “flows” into and out of the business. Reports on cash flow often represent a set time, either a year, quarter or month.
This financial term refers to any assets you have that you are pledging as part of a loan. If you default on the loan, the financial institution will then take over ownership of the collateral. Collateral could include any property or equipment you own. Collateral is often required for some business loans, especially for newer businesses.
Quite simply, this is the total amount of credit that a lender or financial institution is willing to extend you. A credit limit on a business credit card, for example, might be $10,000.
You may be familiar with a credit score as it pertains to your personal financial situation. It’s a score that is based on how many debts you hold and how well you have paid them back—with a higher score being better. Your business has a credit score, too, based on similar factors.
Assets lose value over time, and this is referred to as depreciation. The most common example would be an car, which incrementally goes down in value as each day passes. As a business owner, you’ll use depreciation to your advantage at tax-filing time.
Employer Identification Number (EIN)
This is an official identifier for your business. Like your Social Security Number, or ITIN, it is obtained through the Internal Revenue Service and used to file your business taxes.
These are assets that you own and that aren’t likely to be sold or lost in the near future. We’re talking about physical items here, such as computer equipment, property, furniture, and other business-related equipment.
Fixed Interest Rate
This is an interest rate that will never change over the life of any loan. This is very appealing to small business owners, as the state of the financial market won’t determine how much they owe on their loans over time.
This refers to an individual who will basically vouch for your ability to pay back a loan. New small business owners will often be required to provide a guarantor for the initial loans they want to take. The guarantor will be responsible for paying back the loan if you cannot.
Gross profit is one of the most common financial terms business owners refer to often. It is calculated by subtracting your total expenses (or costs) from your total sales (or income).
Unlike a fixed asset, these items aren’t represented by a physical object. They can be any intellectual property or patents you own, for example.
An invoice is a bill that you send to people who owe you money. Most often, it will be sent to clients of yours who you charge for products and/or services on a regular basis.
This is an obligation you hold to repay a debt of any kind. It’s a legal term, and refers to any debts on your balance sheet—no matter the repayment terms, or when the obligation comes due.
This financial term indicates the time your assets can be turned into cash. If your business is very liquid, it’s said to be more financially flexible. In this case, a popular product that you sell often would be considered liquid, while a huge warehouse facility you own would be considered much less liquid.
This financial term refers to the amount of money that you borrowed on a loan.
Also known as an income statement, it’s a very important document that shows the viability of your business from a financial perspective. Many investors and lenders will want to see this before extending you credit or loaning you money. This report will show what your business has spent and earned—and what the net result is—over a specific time period.
This is a loan or a line of credit that requires collateral for you to take. It is considered secure because the financial institution can take ownership of the item if you don’t pay back the loan.
This is a loan that isn’t tied to any of your assets (you don’t need to put up collateral). Credit cards are often unsecured lines of credit.
The most common financial terms within arm’s reach
These are just a few key financial terms that you should familiarize yourself with as a small business owner. It’s important to know not just what they mean, but how they are used in the day-to-day operations of a business. The more you know, the more successful you are likely to be.
At Camino Financial, we strive to provide all of our customers with educational and informational resources to live up to our motto of “No Business Left Behind”. To receive more financial information, management tips, and ways to grow your business, subscribe to the Camino Financial Newsletter.