An entrepreneur is a personality who starts and manages a business, often taking on financial risks. They may work alone or with others. He or she identifies needs in the marketplace, develops ideas to fill those needs, creates new products, services, or business models, and dispense funds for research and development.
To manage and expand your business as an entrepreneur, you must be familiar with important business jargon. These terms will help you make well-informed decisions that could affect the success of your company in addition to facilitating effective communication with accountants, investors, and other stakeholders. These twelve business terms are essential for any entrepreneur to understand.
Cash Flow
Money coming into and going out of your business is referred to as cash flow. More money coming in than going out is known as positive cash flow, and this is essential for paying staff, funding expansion plans, and covering operating costs. If outflows exceed inflows, then it becomes negative.
While public companies must report their cash flows on their financial statements, in order to let the investors know the business’ financial health, businesses in medium and small (including start-ups) can also perform the same function, to give their financial backers a transparent indication about the overall operational health of the ventures.
Profit and Loss Statement (P&L)
Basically, here we are talking about a financial statement that summarises the revenues, costs, expenses, and profits/losses of a company during a specified period (usually over one fiscal year). These records provide information about a company’s ability to generate revenues, manage costs, and make profits.
A profit and loss (P&L) statement is one of the financial statements prepared by companies, along with the balance sheet and the cash flow statement. Investors and analysts then use this information to assess the profitability of the company, often combining this information with insights from the three financial statements. An investor, for example, can calculate a company’s return on equity (ROE) by comparing its net income (as shown on the P&L) to its level of shareholder equity (as shown on the balance sheet).
Gross Profit Vs Net Profit
Just like “Cash Flow” and “P&L Statement,” an entrepreneur must also know “Gross Profit” and “Net Income,” which are critical profitability metrics for any company.
Gross profit is the amount of money that remains after production costs have been subtracted from revenue. It helps investors understand how much profit a company generates from producing and selling its goods and services. On the other hand, net income is what is left after all expenses and costs, including taxes, have been deducted from revenue. Investors can use net income to assess a company’s overall profitability. By understanding the differences between gross profit and net income, investors can determine whether a company is making a profit and identify areas where it may be losing money.
Balance Sheet
This term refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure.
We are talking about a document that provides a snapshot of what a business owns and owes, as well as the amount invested by shareholders. Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios.
Accounts Receivable And Accounts Payable
Small business owners and first-time entrepreneurs must know the difference between accounts payable and accounts receivable, to gain a better understanding of their accounting process. Accounts payable or AP is an account on a company’s general ledger that represents an obligation to pay off a debt to creditors/suppliers. In short, it’s the money owed by the entrepreneur’s business to third parties.
Accounts Receivable or AR, on the other hand, refers to outstanding invoices that are owed to a business by its customers. It represents a line of credit that has been extended from the client to the customer.
Both AP and AR are crucial basics for small businesses across the world, as late payments are often a significant issue for them, with the latter causing severe cash flow problems, leading to working capital getting tied up on the balance sheet.
Cost Of Goods Sold (COGS)
The term refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labour directly used to create the good, while excluding indirect expenses like distribution costs and sales force costs.
COGS is an important financial metric as it is subtracted from a company’s revenues to determine its gross profit. Gross profit is a profitability measure that evaluates how efficiently a company is managing its labour and supplies during the production process.
Cost of Goods Sold (COGS) is considered a business expense and is recorded on income statements. Understanding COGS helps analysts, investors, and managers estimate a company’s net income. An increase in COGS leads to a decrease in net income. Although this situation may be advantageous for tax purposes, it results in lower profits for shareholders. Therefore, businesses strive to keep their COGS low to maximise net profits.
Return On Investment
Return on investment (ROI) is a performance measure that evaluates the efficiency or profitability of an investment or compares the efficiency of several different investments.
ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. Key factors that influence ROI include the initial investment amount, ongoing maintenance costs, and the cash flow generated by the investment.
Break-Even Point
The sales level at which your total revenue and total costs are equal—that is, when your business is neither profitable nor losing money—is known as the break-even point. When establishing pricing plans and sales goals, entrepreneurs must comprehend this crucial milestone.
Gross Margin
The percentage of revenue that remains after deducting COGS is known as the gross margin. It aids in assessing how effectively a company manufactures and markets its goods. A higher gross margin indicates that a greater portion of revenue is being retained by the company as profit.
Working Capital
The difference between your current assets (such as cash and inventory) and current liabilities (such as accounts payable) is known as working capital. It shows how liquid your company is and how well-equipped it is to handle upcoming costs and commitments.
Equity
The ownership interest in your company is represented by equity. It is the company’s worth following the deduction of liabilities from assets. Profits, outside investors, or personal investments can all provide equity.
Debt Financing
When a business borrows money to finance operations or expansion, this is known as debt financing. Loans, bonds, or credit lines are some examples of this kind of funding that needs to be paid back over time with interest.