Every small or large business owner should be familiar with the following terms. Why? Because at least twice a year (or even monthly) you should review your company’s financial health, using these terms as your checklist:
Accounts Payable is money your business owes to other businesses for outstanding invoices for goods and services.
Accounts Receivable is the amount of money your company is owed after you have provided goods or services to your clients.
Accrued Expenses is money your business owes to others, such as taxes, interest on loans, employment tax or insurance payments.
Assets are the things your business owns: inventory, machinery, computers and accounts receivables.
Balance Sheet– Look at your Balance sheet once per month. It gives you the overall health of your company by listing your Assets and Liabilities.
Cash Flow is simply the cash moving in and out of your business. When a business receives more cash than it sends out, it is cash flow positive. When a business spends more cash than it receives, that business is cash flow negative.
Cost of Goods Sold is the full cost for the production of the goods or services a business sells – raw materials, leasing machinery, paying employees, renting space, supplies, advertising, etc.
Gross Profit is your sales minus your cost of goods sold. Your profit.
Gross Profit Margin is the ratio of the sales that you keep as gross profit. The formula to calculate this is (Gross Profit /Net Sales) x 100. This formula will inform you how much money you actually make on each item or service sold.
Income Statement or Profit and Loss Statement shows all the money your business makes, its expenses, and its profit. You should review your profit and Loss Statement every month, to control your expenses or increase your sales.
Liabilities are what the business owes to others, such as loans, mortgages or taxes.
Net Income is your gross profit minus every single expense during the reported period. You may have high sales and revenue, and low cost of goods, but after loans and mortgages and taxes, you may actually be losing money every month.
Owner’s Equity is the total investment you have put into the business.
Prepaid Expenses are advance payment for future expenses. Prepaid expenses are usually paid once per month or year for insurance, rent, internet expenses, accounting fees, car or equipment leases, etc. You must account for these on a monthly basis, even if you pay them once per month.
Small business owners must be familiar with these terms and monitor their sales, expenses and cash flow every month to know how healthy your business is, and where you can make improvements to increase your profit.