For new entrepreneurs in particular, the world of business is not an easy place to step into on top of this there are a large number of financial terms you will need to know.
It is a world that will likely be unknown to you as of yet, and one of the biggest hurdles to jump over is the jargon being used by people on a daily basis.
You need to get to grip with the key terms you are going to be coming across almost every day, and you need to do it fast.
This is where we step in to help you out. Besides, you can’t be much of a business owner without knowing what others are saying to you.
Common financial terms
During your business journey you will come across a number of common financial terms in the day to day running of your venture. We have put together a number of financial terms that will help any businessperson more easily navigate through the realms of business loans and investors.
It is worth noting that financial terms are different to payment terms.
Lets take a look at the following financial phrases for you:
Cost of Goods Sold (COGS)
Gross profit margin
Net income –
Net income is going to be one of the most important terms you’ll come across throughout your entire career. Your net income simply refers to your total earnings. This can also be called profit, and if your net income rises, it is a positive thing, not only for you, but also for your shareholders and staff members.
Revenue is key to keeping a business afloat and will indicate how successfully you are making money. Revenue is the income generated through regular business operations, such as sales, etc.
Assets are the things your business venture owns, such as property, machinery, equipment, supplies, and readily available money. Things your business owns are called assets, and things your business owes are known as liabilities.
As previously touched upon, liabilities are the debts your company owes. This isn’t something for you to fear necessarily, as a liability isn’t always referring to a huge amount of debt. It can also be applied to your utility bills, or the monthly rent fee attached to your premises. If your liabilities continue to grow, you will need to formulate a plan of action on how to decrease them before it becomes too late.
Cost of goods sold (COGS) –
This is one of the key financial terms regarding production, so you’ll be all the better for knowing it. COGS refers to the overall cost of materials and labour your products and services require to be produced. So basically, COGS informs you of how much the things you sell cost to create.
Gross profit –
Your gross profit is your net sales revenue minus your COGS. You should aim to maintain a high level of gross profit, so that your business venture has more available cash to invest in certain areas or pay off liabilities. If you ever find your gross profit levels to be falling, you should look for cheaper ways to run production, such as using more affordable materials for the creation of your products or services.
Gross profit margin –
This is where things can start becoming more confusing for newcomers, as many financial terms sound similar to one another. Therefore, it is key that you learn the minor differences, so that you can communicate effectively and work with a heightened level of confidence.
Gross profit margin is simply the next step after discovering your gross profit. Once you have found this, you can divide the number by the revenue to see your gross profit as a percentage. The gross profit will inform you on how much capital your company has retained on each £ of sales.
Burn rate –
If you are the owner of a start-up business venture, you will need to know all about burn rate. This basically refers to how quickly you are spending cash (burning through money). Start-ups often have to spend more money than they are making during the early stages of their careers to get things off the ground and keep the ship sailing.
Maintaining a careful watch on how much you are spending is a great way of knowing how close you are to being in financial trouble. This is something you will obviously want to avoid at all costs.
If you come across the word ‘runway’ in a financial setting, it will be referring to the amount of time an organisation has before it runs out of cash. For instance, if a new business has a runway of two years, it means they have enough money to operate for the next 24-month period. Beyond this point, they will become insolvent without a further injection of funding. If you are new to the world of business, this needs to be one of the earliest terms you learn.
Runway gives your business an end point if no more money comes its way, so as you approach the end, you will know you need cash and fast.
Solvency refers to the possession of assets in excess of liabilities; in other words, the ability to pay your debts. If your business is solvent, it is alive and kicking, with at least some level of financial stability. Indeed, being solvent is the be-all and end-all of any business venture of the planet, so it is a rather scary term for us to end on.
If your company becomes insolvent, with will enter administration and eventually close down completely.