People who go into the business world come from all sorts of different backgrounds. Some people are naturals or may have come from adjacent fields of work, while others may be truly starting from the ground up.
No matter your background, it can be helpful to keep your knowledge of the business world sharp. Understanding business finance terms can be a big part of communicating and navigating the business world.
Whether you’re reviewing these terms to keep fresh or learning them for the first time, knowing these terms can be key to a successful career as an entrepreneur. Read on and we’ll walk you through which terms you should be familiar with.
No list of financial terms would be complete with talking about assets. Assets are alphabetically the most important term worth knowing, but also might be highest in terms of importance as well.
What is an asset? An asset is any sort of economic resource that a business has access to. This could be everything from intellectual property to an oven kept in the kitchen of a restaurant.
Assets can be broken down into a few different kinds of categories: tangible, intangible, fixed, and current. Tangible assets refer to any kind of asset you can physically touch, including cash, a piece of equipment, or a piece of real estate. Intangible assets can’t be touched but can be just or even more valuable.
Examples of intangible assets include franchise agreements, intellectual property, trademarks, and copyrights. These intangible assets can provide huge amounts of financial gain if used properly.
Current vs. fixed assets is another type of differentiation between types of assets. Current assets are things that can be quickly turned into cash. This is also known as liquid assets. Anything that can be easily and quickly sold and turned into cash would fall under this category.
Things that are less flexible are known as fixed assets. Real estate, for example, can be quite complicated to untangle yourself from. It may take a lot of time to be turned into a cash form. It would be classified as a fixed asset.
This term is very important to the long-term success of your business. This term refers to the movement of money through your business on a monthly basis. This includes the income you bring in and the expenses where you let money out.
Cash flows in from customers, clients, and debts payable to you. It flows out through expenses, rent, and debts you owe to other businesses. Understanding your cash flow can be essential in managing the money for your business and in making important decisions.
Businesses generally track cash flow in what is known as a cash flow statement. These statements help to show whether a business is solvent or insolvent, which is a fancy way of saying whether the business can pay its bills or not based on current spending and earning.
The eventual goal for every business is of course to be cash flow positive, but sometimes it takes being cash flow negative to get a business off the ground and going.
When it comes to business, what really is important at the very end of the day? The bottom line. And that’s exactly what the net profit is.
The net profit is the total amount that a business has gained or lost over a business period. This period is usually a month but may vary by situation. Net profit is determined by subtracting all business expenses from a period’s total revenue.
This will leave you with how much your business has actually come away with at the end of the day. This metric is often used to see if a business’ earnings are growing and shrinking over time.
If a business isn’t pulling out a net profit after some months of operating, there are likely to shut down. Being in negative numbers in terms of net profit is known as being ‘in the red.’
Overdraft is when a business pulls more money from their bank account than they have. In most cases, the bank will charge you an overdraft fee for this withdrawal.
In many cases, a bank won’t warn you or keep track of dwindling fees. That means it can be easy to go into overdraft without realizing it if you are not keeping track of your available funds.
Some businesses have overdraft accounts, which means the bank will continue to allow you to draw funds despite not having enough available funds in your account. Having this special kind of account can help you avoid overdraft fees.
Not everyone can get an overdraft account though. It requires having a strong and trusting relationship with a bank.
Some companies split their capital into shares and sell them in order to create additional capital for the company. Owning a share doesn’t entitle one control over the day-to-day operations of a business. But it does entitle the shareholder to a cut of the company’s profits.
A company may have a few shareholders or may have hundreds of thousands. It all depends on the way the company is organized and how capital is allocated.
Understanding Key Finance Terms
The business world can be exciting and thrilling, but it can be quite complicated too. Understanding key finance terms can make it easier to navigate the business world and eventually find success.
Need more help reviewing the basics of business? Check out our economic basics page for more help.