Is your accountant speaking Greek to you?
… And we don’t mean that your accountant hails from the Mediterranean. For non-financially inclined business owners, there’s a vocab that you need to get a handle on so that you can improve your financial fluency and better understand your financial situation.
Here are some terms and definitions you should know:
1. Amortisation: This means spreading a cost over time. It’s often used to spread the cost of intangible assets (a franchise agreement, for example) over its lifespan.
2. Assets: These are things you own that will benefit your business in the future. They include current assets (accounts receivable, for example) that will be converted into cash within the year, and fixed assets (real estate, for example), which generate long-term income.
3. Balance sheet: This shows your business’s worth, including assets, liabilities, and shareholders’ equity.
4. Capital gain: This explains the increase in value of an asset or investment, over and above what you paid for it.
5. Cash flow: This is the net balance of money flowing in and out of your business, at a specific point.
6. Cash flow statement: This statement gives you a detailed analysis of the business you’ve generated and the cash you’ve spent over a specified time.
7. Compound interest: This is interest on interest. Depending on whether the interest is applied to savings or debt, it either increases savings or increases debt.
8. Depreciation: This refers to how an asset loses value, or how much the asset is used, over time.
9. Equity: This is what a business owner owns after assets and liabilities have been accounted for.
10. Income statement: This financial report shows your income and expenses for the month or a specified period. An income statement is sometimes also referred to as a profit and loss (P&L) statement.
11. Liabilities: This is what you owe – accounts payable, wages, and debt, for example. Liabilities can be current (due imminently, or within the year), and long-term (which are paid off over time).
12. Liquidity: This refers to how quickly you’re able to convert assets to cash. This is why you’ll hear cash being referred to as a liquid asset.
13. Net worth: This describes your financial health and is calculated by deducting what you own (assets) from what you owe (liabilities).
14. Profit margin: When you divide your net income by your revenue or net profit by your sales, you’ll determine your profit margin or the profitability of your business.
15. Return on investment (ROI): This is used to determine whether a project, for example, is worthwhile by comparing the investment cost with your anticipated income from the project.
16. Working capital: The money available for daily operations is your working capital. It’s the difference between your current assets and current liabilities.
If you’re looking for an advisor who won’t speak Greek to you, call Counteractive today.