Understanding business financial terms

Understanding business financial terms

If you don’t have a financial background, business numbers could start looking a lot like a foreign language. Yet, it’s imperative that you understand them so that you can accurately gauge the health of your business.

Here are 7 business financial terms you need to understand:

1. Cash flow: This figure is calculated by subtracting your operating expenses from your company’s revenue from normal business activities.
2. Net income/profit: This is the figure you get when you subtract all your expenses from your revenue.
3. Sales: This is the volume and value of sales you make. It’s important to understand reasons for dips and troughs in your sales cycles.
4. Price point: This is the value that you can sell your products or services to make a profit. You must know what your costs are in order to price your products and services correctly.
5. Gross profit: This is the difference between your turnover less your costs. It doesn’t take into account your overheads.
6. Inventory: This is how much stock you have. If your inventory gets too low, you won’t be able to supply your customers, if your inventory figure starts rising, you may not be making enough sales.
7. Assets: These are all the items that belong to your business that have value, for example, your stock, furniture, databases, software, intellectual property and procedures.
8. Liabilities: This is what the company owes, its debt.
9. Bottom line: This is what a company’s made or lost after expenses have been taken off the revenue earned.
10. Creditor: The people and companies your company owes money to.
11. Debtor: The people and companies that owe your business money.

If you break these down to their core meanings, they’re not that difficult to understand. Here are some financial reports you will need to get your head around too…