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mall business owners, sole proprietors, freelancers, and the self-employed are often motivated by passion, creativity, ingenuity, or even one great idea. In order to turn all of that inspiration into a successful business, they must become experts in financial management, marketing, customer relationships, and much much more. To help new and aspiring dreamers and doers develop their financial literacy, we’ve created a get-started business finance glossary. Here are 14 essential finance terms every owner needs to know to get started running their own business.
14 common business terms
The following list includes many of the most common business terms to know for effective planning and a deep understanding of your operations.
Cash flow
Cash flow refers to the money moving in and out of a business over a certain period. It can be positive (more money coming in than going out) or negative (more money going out than coming in).
Novo's business checking account can help you accurately track your cash flow with a single view of all your financial information in one place.
Balance sheet
A balance sheet is a financial statement that shows a company's assets, liabilities and equity at a specific point in time. In simpler terms, with a balance sheet, business owners have a snapshot of what their company owns, what it owes and the net value of the company.
Profit and loss statement
Also known as an income statement, a profit and loss (P&L) statement provides information about a company's revenues, costs, and expenses over time, showing how these result in the net profit or loss.
Gross margin
Gross margin is the difference between revenue and cost of goods sold (COGS). The COGS includes the materials and labor required to produce your products but doesn't include other expenses such as distribution and marketing costs. To calculate your gross profit margin, subtract your COGS from your net sales (revenue). Then divide that number by your net sales. Multiply the result by 100 to get a percentage.
ROI (return on investment)
A measure used to evaluate the efficiency or profitability of an investment is a return on investment (ROI). You can calculate ROI by dividing the net profit from an investment by the cost of the investment. ROI usually comes in percentages.
Equity
In a business context, equity refers to the ownership interest in the company after subtracting liabilities from assets. In the context of personal finance, it's the value of an asset after paying all debts or liens.
Asset
An asset is anything of value a person or company owns. Your assets can be physical (e.g., real estate or equipment), intangible (e.g., patents or trademarks), or financial (e.g., cash or investments).
Liabilities
Liabilities are what a person or company owes to others. They usually come in the form of loans, accounts payable, wages payable, or other debts.
Depreciation
The reduction in the value of an asset over time, often due to wear and tear, is depreciation. In accounting, professionals see depreciation as an expense over the asset's useful life.
Overhead
Overhead refers to ongoing business expenses not directly attributed to creating a product or service. This could include rent, utilities, insurance, and salaries of employees not directly involved in production.
Accounts receivable/accounts payable
Accounts receivable are the amounts a company has a right to collect because it sold goods or services on credit. Accounts payable are the amounts a company owes because it purchased goods or services on credit.
Owner's equity
Also known as shareholder's equity, owner's equity is the amount a company would get back after the asset liquidation and debt payment.
B2B/B2C
B2B stands for "business-to-business." It refers to transactions between businesses, such as between a manufacturer and a wholesaler.
B2C stands for "business-to-consumer" and refers to transactions between a business and its end consumers.
Conversion rate
In digital marketing, the conversion rate is the percentage of users who take a desired action. For example, website visitors who purchase a product or service, sign up for a newsletter or complete a form have "converted," and you can calculate the percentage of those who do with the overall number of site visitors to measure campaign effectiveness.
Importance of understanding business terms
It pays to be familiar with basic business terms for several reasons. For one, you're able to plan ahead financially and glean critical information you need to run your organization. By expanding your business vocabulary, you'll make well-informed decisions. You're also better positioned to have meaningful conversations with your peers and financial professionals.
Financial management
When you know business terminology, you're in a better position to interpret financial documents, reports, and analyses. With this understanding, you can make more informed decisions about your business's financial health.
Effective communication with financial professionals
As a business owner, you must communicate effectively with financial professionals, whether that be accountants, financial advisors, or lenders. When you can speak the same language, your communication becomes more efficient and accurate. Knowing business terminology means you'll be able to convey your financial needs, goals, and challenges to financial professionals. It will also help you interpret the advice, reports, and recommendations you receive.
Making informed business decisions
When you're familiar with terms like ROI, equity, depreciation, overhead, and conversion rate, you can evaluate the profitability and feasibility of various business initiatives. Understanding terms related to sales, such as accounts receivable and accounts payable, helps you manage cash flow and optimize your working capital.
Resources for learning about business terms
Languages evolve, so learning business terms and concepts should be an ongoing process. These resources will provide a solid start.
Online resources and courses
- Investopedia: This is a comprehensive online resource that offers an array of definitions, articles, and tutorials on various business and finance topics. Its dictionary of financial terms is particularly helpful.
- Coursera: Coursera offers business courses from top universities and organizations worldwide. Classes like "Introduction to Business" or "Business Foundations" can be useful for learning business terms.
- edX: Like Coursera, edX offers numerous online courses in business from leading institutions. The MicroMasters programs in business can be particularly enriching.
Books and publications
- Harvard Business Review: HBR is a professional magazine highly respected in the business world. It publishes articles on many business topics, which often introduce and explain complex business terms.
- The Economist: A weekly international news and business publication known for its in-depth analysis is The Economist. Reading it can help familiarize you with business terms in context.
- "The Wall Street Journal Guide to Understanding Money and Investing" by Kenneth M. Morris: This guide introduces terms and concepts related to business, finance, and investing in a clear, easy-to-understand way.
Professional associations and networking opportunities
- American Business Association (ABA): The ABA offers resources, networking opportunities, and events for professionals in various business fields.
- Chamber of Commerce: Local chapters often organize networking events and provide resources for learning.
- LinkedIn: While not a traditional professional association, LinkedIn is a valuable networking tool. You can connect with professionals in your field of interest, follow leading thinkers, and join discussion groups related to business.
Next steps
Understanding business terms is not just about learning a new lexicon. It's about empowering yourself with knowledge. Don't shy away from terms that seem complex or confusing at first glance. Make an effort to understand and apply them in your business operations, and you'll see positive results in no time.
Regularly read reputable business publications, take relevant online courses, and network with other professionals to keep learning and growing. The business world is dynamic, with new concepts and terms introduced regularly. Keep yourself informed, stay curious, and continue to learn.
Stay on top of your business finances with a clear view of your cashflow and expenses in your Novo dashboard. Get started today.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
Novo is a fintech, not a bank. Banking services provided by Middlesex Federal Savings, F.A.: Member FDIC.
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