Many of us that are just starting a business must begin to understand financial terms when working with accountants and lenders. The following provides the basic information.
Cash Flow:
Is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance).
Income Statement:
Reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business obtains its revenues and expenses through both operating and non-operating activities.
Revenue: Income a business has from its normal business activities, usually from the sale of goods and/or services to customers.
Expenses: The costs a business incurs through its operations to earn revenue.
Fixed Costs: A cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Examples are rent, insurance, etc.
Variable Costs: A cost that varies with the sales revenue of a company. Variable costs include raw material, electricity, labor, distribution costs, etc.
SG&A: Selling, general and administrative expenses are the sum of all direct and indirect selling expenses and all general and administrative expenses of a company. Examples are an Accountant and sales commissions.
Net Income: The amount of earnings after all expenses have been deducted from sales revenue.
Balance Sheet: A statement of the financial position of a business which states the assets, liabilities, and owners’ equity at a particular point in time.
Assets: Items of ownership convertible into cash; total resources of a person or business, such as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate.
Liabilities: Company's financial debt or obligations that arise during the course of its business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.
Owner’s Equity: Represents the owner's investment in the business minus the owner's draws or withdrawals from the business plus the net income (or minus the net loss) since the business began. Mathematically, the amount of Owner's Equity is the amount of assets minus the amount of liabilities.
Debt – Long term: Amount owed for a period exceeding 12 months from the date of the balance sheet. It could be in the form of a bank loan, mortgage bonds, debenture, or other obligations not due for one year.
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