In the business world, there are lots of terms, acronyms and jargon that get thrown around on a daily basis. In particular, there are lots of financial phrases that you probably hear a lot.
But no matter how big or small your business and no matter your key role within the business, it is always important to have a good understanding of these basic financial terms.
Despite this, plenty of professionals hear and even use lots of financial terms without really knowing what they mean, and this can be detrimental to financial planning and the overall success of your business.
That’s where this guide comes in.
Below, we’ve pulled together a list of 13 key financial terms that every business owner should know. Although some of these might seem obvious at first, you’d be surprised how often these key terms are misused or misunderstood.
Read on to find out more.
A very common term we hear used a lot in business is revenue. Revenue refers to any money coming into the business as a result of sales of your goods or services. This is typically used to describe the amount made without taking into account expenses. This should not be confused with income.
Although income and revenue both speak to the financial position of your business, they should not be used interchangeably. The income of your business is the total revenue minus the cost of expenses such as materials, taxes, etc.
A very popular word in the business lexicon is turnover. In a nutshell, this means the total value of sales you have made, typically in a year but it can be over a different period (say quarterly). It is essentially another way of saying revenue.
4. Net profit
The net profit of a business, sometimes used in place of the term income, refers to your turnover/revenue once you have deducted expenses.
Expenses, sometimes referred to as expenditures are the costs incurred by a business. When talking about expenses, this might include rent, payroll, insurance, supplies, technology, travel, subscriptions, maintenance fees, etc., any money that you are paying out for business purposes.
6. Return on investment
Return on investment, often abbreviated to ROI, is used across a number of business functions. However, in terms of finances, ROI means the financial rewards your business gains from the things it invests in.
For example, if you invest in advertising, your return on investment is the number of sales and therefore money that you generate as a result of the advertising campaign.
7. Balance Sheet
In the introduction, we mentioned the importance of key terms for financial planning, and when it comes to preparing your business for the coming months, you’re going to need to understand the term balance sheet.
This is a financial statement that shows your business’s assets (more on this next), expenses, profits and losses. A balance sheet is often used to check the financial standing of a business and to make predictions and plans for the year ahead.
You might not be convinced that assets are strictly a financial thing, but in this case, it refers to any items of value that are owned by your business. These can be both tangible and intangible things such as premises, machinery, tools, vehicles, or intellectual property, branding, customer base etc.
All of these assets are considered important when valuing your business. Plus, some of these may contribute to your expenses throughout the year.
Whether you need payroll or not in your business will depend on whether you have employees or you're a one-man band. That being said, it always helps to understand terms like this as you might need them in the future.
Payroll is a list or database of your employees that are entitled to payments and benefits from your company, and it outlines what everyone is entitled to receive each month/year.
10. Cash flow
Cash flow is a term used to refer to cash entering and leaving a business (almost as if it were flowing like water, hence the name). Cash flow can be positive or negative depending on whether you've got more money coming in than going out, or vice versa.
11. Accounting period
You might have heard the term accounting period, and this refers to a pre-arranged period of time during which all important accounting functions take place. This is typically 12 months, but it doesn’t have to be; it can be any given period of time.
This should not be confused with a financial year, which we will look at next.
12. Financial year
When talking about a financial year, this term is typically used for tax and accounting purposes, and unlike an accounting period, this never changes. In the UK the financial year runs from 6th April each year.
13. Fixed costs/overheads
We’ve touched on expenses above, but your fixed costs sometimes referred to as your overheads, are slightly different. This term refers to the day-to-day running costs of your business, such as rent, electricity, etc.
These are called fixed costs as they don’t vary based on the number of sales made (or not made as the case may be). In contrast, expenses may change if you require more or fewer materials or other resources to meet demand.
Are you clued up on these key financial phrases?
Although 13 may be unlucky for some, understanding these 13 key financial phrases is going to mean good things for your business. Whether they are all relevant to you right now or not doesn’t matter.
The more you know about your finances, and the better you understand these terms, the better prepared you are to assess your own financial standing, make plans for the future and generally feel more confident in your own abilities.
This is the key to success, especially if you run a small business.
So go on, get reading and make sure you are familiar with all of the above!