Are you aware of finance terms every entrepreneur should know? If not, you’re at the right place. If you are intending to start a business, you will undoubtedly need to clarify what your company performs to raise funds from investors. You must also be able to communicate in their language. To effectively present your business strategy, it’s a good idea to be familiar with industry jargon.
Whether you’re just starting as an entrepreneur or you’re a seasoned CEO, there are a few financial words you should be familiar with. They will benefit you not only when speaking with your financial advisor, but also when speaking with your coworkers, an investor, or a possible client. Hence, here are 10 basic financial terms every entrepreneur should know:
1. Assets
Assets represent the monetary value of the company’s possessions. This could include, among other things, land, automobiles, merchandise, cash, furniture, accounts receivable, patents, and copyrights. Fixed, current, tangible, and intangible assets are the four types of assets.
-Fixed assets are those that cannot be readily changed into cash and are purchased for long-term usages, such as land and buildings.
-Inventory, cash, and investments are examples of current assets that can be easily converted into cash.
-The term “tangible assets” refers to items that can be touched. A machine is an example.
-Patents and copyrights are examples of intangible assets that cannot be touched.
2. Liabilities
When we talk about liabilities, we’re referring to any debt that the company has accumulated since its inception. Credit card debt, money due to vendors, and bank loans are all examples of this. Current and fixed liabilities are the two types of liabilities.
3. Equity
The term “equity” refers to a person’s share of a company’s ownership. In terms of accounting,
So, this formula will tell you the market value of your company: equity = assets – liabilities.
4. Working capital
Working capital is to assess a company’s efficiency and short-term financial health. You can use the following formula to determine working capital:
Working capital = current assets – current liabilities
A working capital ratio (current asset/current liabilities) is to determine if a company can pay its short-term debts. In terms of working capital, a ratio of 1.2 to 2 is a desirable place to be.
5. Bottom Line
This is the bottom line of the income statement’s final amount. It refers to a company’s overall earnings. You’ve probably heard the phrase “affecting the bottom line,” which refers to factors that raise or decrease a company’s profitability.
6. Gross Margin
The gross margin is the percentage of a company’s sales earnings that it keeps after deducting the costs of producing the product or service. This percentage is then help to cover costs such as rent, salaries, and other expenses.
7. Cost Of Sales
This is the price of the raw ingredients and the manufacturing process. There are two types of costs: fixed and variable. Fixed costs are costs that remain constant regardless of how many things are produced. Therefore, they’re simple to figure out. Variable costs vary based on how many things you manufacture, and they are more difficult to predict.
8. Cash Flow
This refers to the monthly flow of funds through your company. You may figure out your cash flow by comparing your cash balance at the beginning and end of a period.
9. Capital investment
A company’s capital investment is the purchase of physical assets for the purpose of achieving its long-term business goals and objectives. Hence, assets obtained as capital investments include real estate, manufacturing buildings, and machinery.
10. Concentration
When we talk about concentration, we’re talking about the percentage of your company’s revenue that comes from its clients. If you just work with one or a few clients, this is called overconcentration, and it can be detrimental to your business.
Now that you are aware of finance terms every entrepreneur should know, you will be less perplexed while speaking with the finance gurus in your business circle.
Read our must-know terms for investors here.