Business Terms All Local Small Business Owners Should KAnow
Local Small Business Owners come from all walks of life and it isn’t uncommon for most new local small business owners to not be familiar with many of the key business terms they will be coming across or asked about. Nor will many of them know they should be doing or keeping track of some of these items. If you are one of them, don’t worry you aren’t alone, we are here to help.
While there are many business terms out there, we will focus on the core ones that all local business owners should know and why.
Each of your businesses are unique but these terms will pretty much cross all businesses types in some degree or another.
Technically we could call all of these business terms – Bookkeeping Terms. For our purposes we will break them down into four groups to help make the link between the terms easier to understand how they impact or reflect within your local small business.
Terms – Specific to Charging Customers / Clients
These will be terms that specifically refer to money you collect from your customers / clients.
Accounts Receivable – Accounts receivable includes money owed by customers to a company or individual as payment for goods and/or services. It is considered an asset on a company’s balance sheet, since it assumes a client is legally obligated to pay this amount.
General Ledger – This is the complete recording of a company’s financial transactions over the lifetime of the organization. This can be either an excel sheet or accounting service. Many small business owners use QuickBooks or an online service like Freshbooks.
Sales / Revenue – The exchange of goods or services for money. When referred to as revenue is will include any credits or discounts for returned merchandise.
Terms – Specific to Tracking Expenses
Each business has expenses. However not all expenses are equal. They each have a different category that they technically fall under. Here we will explore the terms commonly associated with your expenses.
Accruals – These are expenses that have been incurred but are not yet paid. They also could be sales that have been completed but not yet billed. Accruals relate to items that will hit your books soon, either in the positive or negative, but haven’t yet, normally due to the time it takes to complete the accounting processes.
Costs of Goods Sold (COGS) – Are the raw materials & labor costs associated with creating a product to sell, the cost of finished goods for resale or the cost of delivering a service. (or combination of)
Depreciation – Typically used for tax purposes. Depreciation is the decrease of an item’s value over time due to use. Usually used with larger pieces of equipment that can be written off on tax returns based on their depreciation to help with profitability. These are items that are used for more than a year. See an accountant for what you can depreciate annually.
Expenses – Expenses are the overhead to run your business such as rent, marketing, utilities, accounting, legal, payroll, admin support, taxes, and interest. Typically, there are four types of expenses: fixed, variable, accrued and operational.
Fixed Expense – Fixed expenses stay consistent from month-to-month, year-to-year. This typically includes expenses like manager salaries, rent, utilities, and insurance. More common with brick and mortar businesses. These costs are not affected by fluctuations in sales, production or the market.
Variable Expense Variable expenses are tied to the company’s production. These costs can go up or down based on increases and decreases in production or sales. For example, if you have to hire more help, seasonal businesses that have swings in other costs. Employee payroll for most small businesses unless they have set crews year round.
Accrued Expense – Accrued expenses are single accounting expenses that are being reported but haven’t yet been paid.
Operational Expense – Operational expenses are costs that are necessary for a company to conduct business. Operational expenses can also be both fixed or variable.
Liabilities – Liabilities are debts that a company is responsible to pay in both the short & long term. Typically, debt of the business such as accounts payable or money owed such as invoices to vendors, your lease, bank loans or payroll.
Terms – Tracking of Sales & Expenses Together
In a nut shell your business is based off what you take in vs what you spend. However, there are other factors like inventory and other carrying costs. So in this section we will cover the terms associated with looking at your business a whole. From what comes in to what goes out and what just sits.
Accrual Basis Accounting – The accrual accounting method allows for some flexibility when expenses and income are recognized. In this method, companies report when income is earned and when expenses are incurred. Since this isn’t as common with local small business owners, please make sure you consult with an accountant before using this method.
Cash Basis Accounting – Most local small business owners use the cash basis accounting method. Cash basis accounting is a straightforward accounting method that is particularly useful for small or new businesses. Revenues and expenditures are recorded when payments are received and sent.
Assets – Assets are everything that a company owns that has value. Typically, this is your equipment, property, land, cash and tools. But intangible assets, such as company stock, copyrights, patents and trademarks, can also fall under this category if you happen to have them.
Bad Debt Expense – This is an entry on a company’s income statement that tracks non-collectible accounts receivable (i.e. “bad debt”) during a specific period of time. Basically invoices that do not look like they will be paid and you are writing off.
Burn rate – How much money it costs you to run your business each month. You want to know your monthly burn rate so that you know how much money you need to keep in reserves as it is best to have at least six months of operating capital at all times.
Capital / Working Capital – Commonly referred to as the amount of money a company has to invest or spend on necessary items for the business, capital is money that can be accessed, not including company assets or liabilities.
Fiscal Year – A fiscal year is a period of time that a company uses for accounting purposes and in preparing financial statements. For the vast majority of local small business owners, the fiscal year will match the calendar year. Some larger companies will use say October to help with closing out the books for the year and prepare all financial statements for federal and state tax time.
Gross Margin – The gross margin is what you make prior to subtracting you expenses. So total revenue minus your cost of goods. Sales – COGS = Gross Margin. So for example if you have $4500 in sales and $1500 in cost of goods, your gross profits are $3000 or 66.6% ($3000 / $4500)
Profit Margin – Your Profit margin is what is left after you subtract not only the product costs but also after you pay your expenses. Sales – product costs (costs of goods) – Expenses = Profit. So profit margin is percent difference. For example: Total sales are $4000, costs of goods are $1500, expenses were $1000 so $4500 – $1500 – $1000 = $2000. Profit is $2000. To find the Profit Margin you divided the Profit by Sales so $2000 / $4500 = 44.4% profit margin.
Terms – Your Business Report Cards
These are the Documents you should have to verify the health of your business. As a self-employed person, you might need these for purchasing a home or dealing with a bank. They are the snapshots of your business. The most successful business owners are always looking at these on a weekly if not monthly basis to determine opportunities as well as successes. The three you definitely want to use on regular bases are your Sales Plan / Forecasting, Profit & Loss (P/L) and your Balance Sheet.
Balance Sheet – A balance sheet is an overview of a company’s financial status, including assets, liabilities and equity. The balance sheet shows the business’s financial position at specific moment in time.
Break Even Analysis – When your business’s expenses match your sales revenue. The goal is to get your business quickly to a break even point. It typically takes at least 12-18 months for a small business to break even.
Cash Flow Statement – This statement is a snapshot of the cash in the company and where it flows from one month to the other. You use this to evaluate your cash position in your business.
Equity – Equity is the amount of money that has been invested in the company by its owners. This can also be referred to as “owner’s equity.” Most local small business owners are sole proprietors or have maybe two or three folks. Larger companies can also issue stock shares as part of their equity but this doesn’t impact the vast majority of local small business owners unless they grow dramatically.
Sales Plan / Forecasting – A sales plan / forecasting tool is critical to growing your business. It is the process of using historical data to predict future business trends. It can include sales, inventory planning, costs, etc. You will want to keep ongoing records of what impacts your business daily, weekly or monthly to use in the next years forecasting. For example, is sales are down to bad weather, then in the future you adjust to offset this impact on the next goal.
Profit and Loss Statement – Also referred to as a “P&L,” a profit and loss statement is basically a report card of your business. The report is usually generated by the business owner or its accountant that lists earnings, expenses and net profits for a given period of time. Typically, you will do by month with a yearly roll up. May be referred also as an income statement.
Hopefully you are familiar with some if not all of these terms. We will continue to create tools & resources to help you use some of these items in your business to increase both sales and profits.
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