Financial Jargon Every Business Owner Should Know
Do you struggle to understand your business figures? Get lost in accountant-speak? Worry no more, I got you…
Today, we are going to talk about financial jargon every business owner should know.
We are going to talk about how to understand the financial jargon banded about by accountants, bookkeepers and Dragon Den types in order get the best out of your business
It’s important to know and understand financial jargon and information for 3 reasons:
- Understanding your financials will help you make better decisions in your business – If you’re thinking of investing or expanding your business, and your perhaps not sure if have enough profit in the business, understanding the terminology within your accounts will help you make financial decisions based on your actual figures and not finger in the air guessing
- Understanding the financial jargon will help you talk to accountants, bookkeepers and financial people on a proper level. For example, in the UK, if you’ve ever seen Dragons Den (or the American vision and a Shark Tank) when the budding entrepreneur goes into the room the investors will ask them things like: “what is your gross profit? “, “What’s your gross margin?”, “What was the turnover this past financial year? What was your net profit last quarter? You should be able to answer those questions and, more importantly, understand what those questions mean.
- You will need to know your financials (and all its lingo) when you come to sell your business. You need good financial information in order to get the valuation but, it is most important that you are able to answer the potential buyers or potential investors questions.
The Top Nine Financial Jargons Terms To Know
Before you get excited, there are way more terms than 9 in accounts, however, we would be here allllllllllll year if went through them all. As we are busy people I have created a more complete Financial Glossary right here, just for you, no email needed.
For the watchers
For the readers
Your balance sheet is how much your business is worth. Your balance sheet will show how much you have in assets, such as equipment or property that you own, or liabilities, such as loans or lease contracts that you hold
The cost of sales is the direct cost to make a sale. For example, in the cleaning industry, your cost of sale is the cost of the labour of the cleaner and the cleaning material supplied for that cleaner
Creditors are who you or your business owes money to. That can be another individual or another business
Debtors are people who owe you or your business money. Again, this can include other individuals or other businesses
Fixed costs are the costs to your business that do not change regardless of whether your turnover goes up or goes down. Fixed costs include things like your rent, any lease costs, and insurances
The big four
The big 4 are the financial terms that every man and his dog seems to have heard of but might not know the definitions of.
Gross profit is what is left over after the direct costs have been deducted from sales. So, this is deducting the cost of the labour and the materials we spoke about above from what you have charged
Profit margin is the difference between the value of the sale and the cost to make those sales. In your business, this is the cost that you’ve charged your service out at minus the direct costs as above + Overheads + your profit margin (money you make) – your profit margin is expressed as a percentage. You want your profit margins to be a minimum of 15/18%. Ideally, you want to have 20% profit margin added to your services, with some more specialised services aiming up to 35-40%
Profit is the amount left over after taking away all costs from the gross profit.
Net profit is what left after you’ve paid all taxes.
So, with profit, you’ve removed the direct costs and your overheads, and with the net profit your removing in all your taxes – Net Profit is the true profit of your business and this is what you have to reinvest, pay dividends, etc.
The turnover in your business is the amount of money that’s gone through your business typically measured over a year. Your turnover is every sale and any other revenue that your business makes.
There is an old saying in business and if you learn one thing today let it be this little catchphrase.
Turnover is vanity, profit is sanity, cash is king
Your business could turnover a million pounds but if your profit margin is 2% and you’re making no money then your turnover doesn’t mean Jack to anybody who knows anything about figures.
Profit is sanity – if you have a profit figure at the end of each month/quarter/year you know your business is doing well, it’s making money, and you’re on the right path
Cash is King – if you’ve got cash flow in your business and by that, I mean money you can put your hands on whenever you need to put your hands on it, then your business is true-blue healthy and doing very well so give yourself a big clap
Has this post helped your financial knowledge, has it been useful for you? Let me know in the comments if this post has helped, or if you have any questions on this post, I’m all ears
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