9 Key Financial Terms Small Business Owners Need to Understand
Most small business owners are new to the world of business finance. Maybe you have the skills needed to run your business’s core operations, but you are new to managing the books, and you have a range of Financial Terms that you don’t understand.
Small business owners need to learn these terms because they will help them understand their business’s financial side. Having an idea or an existing skill set is good, but you need to know that you can run a financially viable business.
While you could do a deep dive with business financing terms glossary, most of us will not need to become experts to run a business. With that said, there are a few key terms that every small business owner should know.
Assets should be at the top of the list when learning small business finance terms. Assets are anything your company owns that has financial value. This includes everything from cash and inventory to real estate, supplies, and equipment.
Your liabilities are the opposite of your assets. Any financial obligation your business has to pay out is a liability. This would include things like business debt, utility bills, and payroll.
Capital expenditures cover the cost of things that will provide long-term value to the company. Examples of capital expenditures would be things like land, vehicles, and equipment. Capital expenditures are usually considered long-term investments in the company rather than regular operating expenses.
The direct costs are the costs that can be directly attributed to providing a product or service to customers. Direct costs would include materials, the cost of production, and the wages of the production staff.
The markup is the amount above the direct cost of providing a product or service that you charge to turn a profit and cover expenses. For example, let’s say your business spends $130, making a product that sells for $180. In this example, the markup is $50.
As the name suggests, this term refers to the figure on your balance sheet’s bottom line. It can be the net income or the net profit of your business. With net income, you are merely subtracting direct costs from revenue. With net profit, you are also subtracting things like overhead and administrative expenses.
This is the rate at which a company spends money. It is usually represented as a monthly figure that totals all of the costs that keep the business running. This is especially important for new companies because the burn rate can tell the owner how much money they need to have to operate the business while they build up a customer base.
The gross margin is the percentage of revenue that translates to income over a time period. It is the company’s net revenue minus direct costs. With gross margin, you can see the percentage of your company’s revenue that ends up as net income. As an example, let’s say your business had $10,000 of revenue in a month, and the gross margin is 20%. That would mean the net income for that time was $2,000.
Profit margin is similar to gross margin, but it tells you the amount of profit you get from your company’s total revenue. To assess your profit margin, you would take your total sales and subtract direct costs and overhead expenses. You would then divide that figure by total revenue to get a percentage.
Knowing a few basic terms allows you to gain a much better understanding of your business’s financial state. You might still need to consult with professionals for more complex matters. Basic knowledge of financial terms can go a long way toward helping you manage your business finances.