Entering the entrepreneurial world without investments makes financial management completely one self’s stress. Further, it becomes strange to speak to an external finance professional when you are solely handling the finances of your organisation. You may want to have meetings with potential investors, external accountants and a lot more parties to grow and enhance your organisation but might be unaware of the technical jargons used in accounting and finance. Here are some of the basic essential terms every entrepreneur should know to manage his company’s finances:
Assets are the economic resources of a business. These may be inventories present in the office, trademark and copyright, office furniture and supplies, etc. The totality of assets determines the actual value of a business. The business may consider selling these assets during difficult times of the business to manage its liabilities.
The liabilities are the debts that arise in a business during maintenance and growth of its operations. It includes bank loans, money owed to vendors, credit card debts, payments due to product manufacturers, etc. There are two major liabilities of a business i.e., current liability and long-term liabilities. The current liabilities are the immediate debts such as money owed to the suppliers. The long-term liabilities, as the name suggests, are the long-term debts such as loans or accounts payable.
These are the costs that a business bears during the course of business. These may be regular costs such as legal costs, rent, salary, advertisement or marketing costs, utilities, etc. Every business aims to keep its expenses as low as possible to remain financially solid.
Cash flow is the movement of cash in the overall conduct of business. It includes all the incomes as well as the expenses. Every company should track its cash flow to determine its long-term solvency. The overall status of the cash flow is determined by considering the opening cash balance at the start and the ending cash balance after studying the movement of in and out of cash in the business.
This shows the total earning or what the business has lost in a month. the bottom line works as the last figure on the ledger. This term is also used to understand if the business is experiencing increasing or decreasing earnings.
A financial report is a document that gives a comprehensive statement of business transactions and expenditures incurred during the conduct of the financial matters of the business. This report is prepared in a way that it can be used for the internal as well as external users.
It is a formal document that lists all the financial activities carried out in a business.
Cash flow statement
It is a statement that shows the flow of money in and out of the business during a particular time period. It involves the movement of cash while carrying out operating activities, investing activities and financing activities.
The income statement is also termed as a profit and loss statement that shows the incomes earned and expenses occurred from all the activities in the business during a particular time period.
A balance sheet gives a snapshot of the company’s financial position. It shows the amount of assets with the business, liabilities due and equity present in the business.
Profit and Loss
Profit is the amount earned from customers after deducting the expenses occurred in order to earn the revenue. In order to remain healthy and stable in the market, it is important for a business to earn regular profits. The profits and losses are generally recorded in a profit and loss statement that shows the net profit or net loss just like the income statement.
The total money present in the business determines the total capital of the business. These may be in terms of assets or investments in the business that forms the capital. Capital is of two types, i.e., debt and equity.
The accounts receivable is a document that shows the amount the clients owing to the business. The client is given an invoice showing the amount it owes. If not paid, the debt is legally enforceable. It appears on the asset side of the balance sheet.
Every asset in a business declines in value with time. It is important for a business to recover the depreciation cost in order to buy a new asset when the current asset completely depreciates. For taxation purposes, the business may show depreciation as a cost that can be deducted to find the net profit.
The valuation shows the overall worth of a business. Valuation is an important concept because when the investors invest in a business, they first look forward to the overall worth of a business. This can be accomplished using the valuation concept.
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