Properly managed finances are key to long-term success for any business. And while you can hire a professional accountant to help with money matters, there’s still plenty of value to knowing a thing or two yourself. Become a more empowered business owner by familiarizing yourself with these accounting terms:
1. Financial statements: Are records of your business’s financial situation. When you apply for a business loan, most lenders will want to see four financial statements: the balance sheet, income statement, cash flow statement and statement of owners’ or shareholders’ equity.
2. Balance sheet: A document that outlines your business’s financial status at a point in time. It reports assets, liabilities and equity.
3. Income statement: Shows revenues, expenses and profit or loss for a specific period of time. Profit or loss is determined by subtracting expenses from revenue.
4. Cash flow statement: Describes the sources of your business’s money and shows how that money was spent over a period of time.
5. Asset: Anything owned by your business that’s of monetary value. An asset can be tangible like land, equipment or cash, or it can be intangible like a patent or franchise agreement. Assets are shown in terms of cash value on the balance sheet.
6. Liability: A debt your business owes such as a loan, salary, income tax or rent. On the balance sheet, liabilities are classified by current and long-term liabilities.
7. Equity: The value of your business’s assets minus any liabilities. If your business is a sole proprietorship or partnership, equity is also known as “owner’s equity.”
8. Draw: Also known as an “owner’s draw,” this is money you take out of your business for personal use. Business owners can do this by writing a check to themselves from a business checking account.
9. Revenue: The sum of all money collected for goods or services sold (before expenses are subtracted).
10. Expenses: The costs incurred by your business to generate income. Fixed expenses stay consistent, such as with rent or salaries, while variable expenses, like raw materials and commissions, fluctuate according to the market.
11. Accounts receivable: Money owed to your business by your customers. This is considered an asset on the balance sheet.
12. Fiscal year: A period of time that a business uses for accounting purposes and to prepare financial statements. It can coincide with the calendar year or take place during a different 12-month period.
13. Depreciation: Some of your business’s assets, such as vehicles or equipment, will decline in value, or depreciate, over time. Used as a tax deduction, depreciation can help your business recover the cost of some expenses.
14. Capital/working capital: This is the money your business has for paying bills or investing. It equals current assets minus liabilities.
15. General ledger: The complete recording of your company’s financial transactions over its lifetime. This includes assets, equity, expenses, liabilities and revenue.
Get a Handle on Your Business’s Finances
Still need more accounting guidance? Or do you simply want to give your business a financial boost? Get in touch with the financial experts at Central Minnesota Credit Union. Together, we can look over your business’s finances and get you on-track for success. Schedule a consultation with our your local Commercial Banking Officer: https://mycmcu.org/business/business-contact-us.html