Not every small business owner can boast of being financially savvy. Each have their own strengths – excellent domain knowledge, sales prowess, operations and marketing knowledge, smooth people management skills, and yet they might lack in-depth knowledge of the financial workings of their company. Even if your go-to-guy is your CFO or your accountant, it makes sense for every businessperson – be it big or small - to have a basic understanding of your company’s finances.
As your business grows, you will be expected to know certain business concepts when you talk to your clients, investors or even partners. These financial terms and concepts will arm you with the knowledge that will finally allow you take better decisions and craft improved strategies.
Here are 9 finance and business terms that every business owner should know about.
Important Terms
1. Net worth
Simply speaking, your net worth is the difference between your assets and liabilities. Assets are your cumulative business financial holdings like machinery, land, furniture etc. that are fixed assets and cash and receivables that are current assets. Liabilities are the debts that your business owes to other entities. These may be current liabilities like payments to be made to suppliers, or long-term liabilities like loans that need to be paid back in many years. The difference between all these assets and liabilities gives your net worth, which is an indicator of your financial health.
2. Capital gains and losses
Capital gains or losses refer to the difference between the cost of the asset when purchased and price received on it while selling it off. In other words, capital gain refers to the gain that the asset holder receives when he transacts on his assets like land. The flipside is capital loss. Tax calculations are separate for short term capital gains and long term capital gain/losses.
3. GST
The Goods and Service Tax or GST has replaced many indirect taxes in India, and it is a multistage comprehensive destination based tax system. Every business must have an understanding of the taxes and register for GST, which is a kind of centralized process of indirect tax. For very small businesses with turnover less than Rs. 10 lakhs, GST registration is not mandatory.
4. Asset allocation
Asset allocation refers to where your money is invested, i.e. stocks, bonds or cash, which can be classified as the three major asset classes. These asset classes differ in terms of liquidity, returns and risk, so one should carefully analyse and then invest. Diversification is one of the most sensible investment advice that one needs to sincerely follow. Make decisions based on your risk appetite and time horizon and expect returns accordingly.
5. GAAP
Recording and maintaining books of accounts are a major part of any business. It is vital for the accountants to follow the Generally Accepted Accounting Principles while preparing these books and as business person, it is important to have a basic understanding of this and arrange for regular audits to keep the books of accounts up-to-date.
6. Business Credit Score
Credit score is a numerical score that refers to the credit worthiness of your business. This is to make sure that your business credit score does not influence your personal credit score. Also, banks will refer to your business credit score while considering whether or not to extend loans to your business. It is vital for businesses to maintain a good credit score to be able to secure loans at the time of need without facing any hassles.
7. Balance sheet
Balance Sheet is a statement describing the financial position of the company as on a particular date in terms of total assets, liabilities and shareholder’s equity. An indicator of the net worth of a firm, the balance sheet is a summary of financials that can be viewed to gauge the financial position of the firm. The balance sheet provides a basis for computing the rates of return and the capital structure.
8. Working Capital
The working capital of a company refers to the operating liquidity of a company in short term, and is represented by difference between the current assets and current liabilities. It is the operating capital which is used in the day-to-day operations of the company. Current assets are the short term assets like cash and accounts receivables and once the current liabilities like the accounts payable are deducted, the working capital figure is arrived .
9. Profit and Loss Statement
A profit and loss statement is a summary of the income and expenses done by the business in a given time, mostly a financial year. One of the key financial statements prepared by every firm, the profit and loss statement shows how the firm converts it revenues into net profits or losses while considering the expenses done to achieve them. Simply speaking, a profit and loss statement showcases a company’s efficiency to generate sales, manage expenses and overall generate profits.
Understanding these business terms will help you learn about your company’s performance better and help you grow your business better.
