According to the Small Business Administration, from 2005 to 2017, 78.6 percent of small businesses were only able to last for one year.
Most likely, business people do not understand how to study profits, expenses, accounting, and other business finance matters that should affect business success.
Understanding the term business finance helps you prevent these problems and the business will flourish in the years to come.
Bookkeeping is chronological transaction documentation. As a business owner, you can record and monitor transactions in bookkeeping or Excel journals, or use accounting software that automatically tracks and monitors each transaction.
Business owners can use one of two processes in the accounting section: cash accounting or accrual accounting.
- Accounting Cash
Income records are not added until you have actually received a check or cash, and expenses are not deducted until paid. Cash ignores any receivables or payables, i.e. unpaid bills or payments.
Calculate income and expenses when they occur, not when they are paid. Accrual accounting is most commonly applied to businesses that provide and buy services or products that require credit.
3. General Ledger
General journals are also called ledgers, in your general journals, you track and record account balances per period chronologically. You must monitor account balances, credit, and debits, which are then used to get the big picture of your entire business.
Assets are anything that your company has that is worth something commonly also called an asset. There are various ways to categorize business assets, but the two most basic categories are “smooth” and “fixed.”
It can be converted into cash in one year. Examples such as business accounts, stock, and merchandise.
Use long-term, repetitive assets without intending to sell, such as your office space or heavy equipment.
Earnings, income, and sales are all terms for money that other people pay you for a service or product, or an investment that someone else makes in your business. If you give credit to customers, it means they owe your business to be paid later. Unpaid bills by customers fall into a category called accounts receivable.
6. Cost of Sales
Sales costs are variable costs that usually go up when you increase sales. For example, the labor and materials involved in preparing a product for sale will count towards the cost of sales.
7. Gross Profit Margin
Gross profit margin is the amount that you make before you deduct the cost of goods and services from your income. For example, if you buy a toy from a producer for 100,000 rupees, and then sell a toy for 130 thousand rupees, your gross profit margin will be 30 thousand rupees.
8. Net Profit Margin
How much money does your business make? Net profit margins reveal the answer after you reduce all expenses and expenses. This can be labor or advertisements that you buy on social media.
For example, if it costs 30 thousand rupees to make toys 100 thousand rupees plus the cost of 20 thousand rupees for marketing, the net profit margin will be 50 thousand rupees (100 thousand rupees – 30 thousand rupees – 20 thousand rupees = 50 thousand rupees).
Spending or purchases that you make for your business, such as point-of-sale devices, or insurance. If you make this purchase on credit, this fee is known as trade debt.
Every debt that you must pay is considered a liability. Liabilities may include employee wages or money that you owe to suppliers.
Expensive assets, such as buildings or laptops, are long-term investments in your business. However, some assets (such as furniture and vehicles) will lose their value over time due to age, obsolescence, or because they are no longer useful. Depreciation or depreciation reduces the value of these assets.
Equity is the portion that you or your business partner has or has invested in the business, less the liabilities paid.
Equity can also be called “capital,” and may include “capital investment” in fixed assets for long-term use, such as the building that you buy for your office.
13. Trial Balance
At the end of an accounting period – like at the end of a month or quarter – a business calculates the debits and credits they currently have in the ledger. If you notice that the balance sheet is unbalanced, look for errors and adjustments.
14. Balance Sheet
The balance sheet is a statement of all your assets, liabilities, and equity at a certain point in time, after completing the trial balance.
Your balance sheet may be important if you hope to sell your business in the future. The balance sheet must show what assets the business has after you add liabilities and shared equity.
15. Income Statement
An income statement is also known as a profit and loss statement, which shows how much money you make and how much you have spent over a certain period of time, such as a quarter or a year. The income statement is an assessment of your profit and loss to determine your net income for a quarter or one year.
16. Statement of Cash Flows
Cash flow statements are real-time reports that monitor how much cash comes in and where the money comes from (not credit), minus cash issued.
Cash inflows are the sum of all incoming cash, from products or services that are sold and paid directly. Total cash outflows are the amount of money you spend on your business, for example, buying inventory. Maintaining a healthy cash flow condition can help you avoid bankruptcy.
Although at first, business finance terms might look complicated and frightening, the more you understand about finance, the better you plan for the future of your business and make sound business decisions based on realistic calculations.
A strong understanding of the financial prospects of a business can also help you convince investors, be better prepared when paying taxes, and decide you should invest money in business.