The language used in accounting can guide your business’s financial decisions and shape the future of your enterprise—if you know what your accountant is saying. To navigate your business’s financial landscape, you’ll need to master the basic terminology. As a small business owner, which accounting terms should you know like the back of your hand?
When your business sells goods or provides services to a customer on credit, the amount that customer owes falls under the “accounts receivable” category. It’s money that you can expect to come into your business in the future. Managing your accounts receivable involves prompt invoicing and following up on overdue payments.
Simply put, this is the money flowing into and out of your business. If you’ve got positive cash flow, your liquid assets are increasing; meanwhile, negative cash flow indicates that you’re spending more than you’re bringing in. Monitor your cash flow closely to make sure you’ve got enough to continue operating and growing.
Your balance sheet is a snapshot of your business’s financial condition at a specific moment in time. It details what you own (assets), what you owe (liabilities), and the overall value of your business. Understanding how to read your balance sheet can give you a clearer picture of your company’s financial health.
A rollover for business startups, commonly called a ROBS, is a business funding opportunity that allows you to use your retirement funds to start a business without incurring early withdrawal penalties. You set up a 401(k) program for your business and roll your funds from your old 401(k) into the new one! Keep in mind, though, that if your venture fails to turn a profit, your personal retirement monies are at risk.
When you subtract the cost of goods sold (COGS) at your business from its total sales revenue, you end up with a figure called the gross profit. It reflects your company’s core profitability before overhead costs and indirect costs like admin and marketing expenses. A healthy gross profit margin indicates a financially sound business operation.
As you acclimate to being a small business owner, understanding key accounting terms becomes an indispensable part of the journey. By demystifying and firmly grasping these concepts, you empower yourself to make informed decisions that directly improve your bottom line.
Curious about ROBS arrangements or other financing options to get your small business off the ground? Pango Financial’s funding solutions tool can provide you with valuable information.