Introduction
Running a successful company requires a solid understanding of its finances. Many startup entrepreneurs overlook this aspect because it feels unfamiliar or complicated—but this is a critical mistake.
Think of your financials as the dashboard of a car. They provide essential information to help you make informed decisions. For instance, if you notice your profit margin has been shrinking, you might discover that one of your key suppliers has raised their prices.
This insight allows you to make strategic adjustments, such as increasing your own prices to maintain profitability. On the other hand, if you don’t know how to interpret your financial statements—or worse, if you ignore them—your business could be running at a loss for too long, potentially forcing you to shut down.
The good news is that reading and understanding financial statements isn’t as difficult as it seems. In fact, they’re quite logical once you familiarize yourself with them. The key takeaway is this: you can’t build a successful company if you’re operating in the dark when it comes to your financials.
To help you get started, I’ve included a glossary of basic financial terms. Use it as a reference when reading my blog posts and other content on the site.
Alphabetical Glossary of Financial Terms
Accounts Payable: Money that the business owes to suppliers or vendors for goods or services received but not yet paid for.
Accounts Receivable: Money that customers owe the business for goods or services that have been delivered but not yet paid for.
Accrual Accounting: An accounting method where revenue and expenses are recorded when they are earned or incurred, not when cash is received or paid.
Amortization: The process of spreading the cost of an intangible asset over its useful life.
Assets: Resources owned by a business that have economic value, such as cash, equipment, and inventory.
Balance Sheet: A financial statement that shows a company’s assets, liabilities, and equity at a specific point in time, providing a snapshot of the company’s financial position.
Break-even Point: The point at which total revenue equals total costs, meaning the business is neither making a profit nor incurring a loss.
Budget: A financial plan that estimates revenue and expenses over a certain period, helping businesses plan for future financial activity and track their spending.
Capital: Money or other resources that a business uses to fund its operations or grow.
Capital Expenditures (CapEx): Money spent on acquiring or improving long-term assets like equipment, buildings, or vehicles.
Capital Gains: Profit made from the sale of a capital asset, such as real estate, equipment, or stock.
Capitalization: Recording a cost as an asset on a company’s balance sheet rather than expensing it immediately. The cost is then depreciated or amortized over the useful life of the asset.
Cash Accounting: An accounting method where transactions are only recorded when cash is exchanged.
Cash Flow: The movement of money in and out of a business. Positive cash flow means more money is coming in than going out, while negative cash flow means the opposite.
Cost of Goods Sold (COGS): The direct costs associated with producing or purchasing the products sold by a business.
Depreciation: The gradual reduction in the value of a tangible asset over time, often due to wear and tear.
Depreciation Schedule: A timetable for how an asset’s value will decrease over time, and how that reduction will be accounted for in financial statements.
Dividends: Payments made to shareholders from a company’s profits.
Equity: The ownership interest in a business, calculated as assets minus liabilities.
Expenses: The costs incurred in the process of generating revenue, such as rent, salaries, and utilities.
Forecasting: The process of predicting future financial performance based on historical data, market trends, and other variables.
Gross Margin: The percentage of revenue left after subtracting COGS.
Gross Profit: The amount of money a business makes from sales after subtracting the cost of goods sold (COGS) but before deducting other expenses.
Income Statement (Profit and Loss Statement): A financial report that shows a company’s revenue, expenses, and profit over a period of time.
Interest: The cost of borrowing money, typically expressed as an annual percentage rate (APR).
Inventory: The goods a business holds for sale or production.
Liabilities: Financial obligations or debts a business owes to others, such as loans or unpaid invoices.
Liquidity: The ability of a business to quickly convert assets into cash without losing value.
Loan Principal: The original amount of money borrowed in a loan, not including interest.
Net Margin: The percentage of revenue that is profit after all expenses are deducted.
Net Profit (Net Income): The money left over after all expenses have been deducted from revenue.
Operating Expenses (OpEx): The day-to-day expenses required to run a business, such as rent, utilities, and salaries.
Overhead: Indirect, ongoing costs to operate a business, such as rent, utilities, and administrative salaries.
Payroll: The process of paying employees for their work, including calculating wages, withholding taxes, and distributing payments.
Retained Earnings: The portion of a company’s profit that is kept in the business instead of being distributed to shareholders as dividends.
Return on Investment (ROI): A measure of how much profit is made from an investment relative to its cost.
Revenue: The total amount of money generated from the sale of goods or services before any expenses are deducted.
Tax Deduction: An expense that can be subtracted from a business’s taxable income, reducing the amount of tax owed.
Tax Liability: The amount of tax a business owes to the government.
Valuation: The process of determining the value or worth of a business or an asset.
Working Capital: The money a business has available for day-to-day operations, calculated as current assets minus current liabilities.
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