Many owners start their companies with the goal of becoming a “jack of all trades.” However, as their businesses grow, they often don’t have the time to learn how to be a successful business leader. They can improve their financial decisions by taking the time to understand more about accounting.
These accounting terms can help small business owners understand fundamental principles to help them run their operations smoothly. However, they should be cautioned that these terms are only meant for informational purposes and should not be used to make financial decisions.
Cash Flow
A cash flow measures the amount of money that flows into and out of a business at any time. It’s a calculation that shows all transactions throughout the year, such as investments, loans, and operations. Review the company’s monthly and annual cash flow statements to keep track of the money flow. Additionally, keep a record of all transactions throughout the year to ensure that the company has the necessary cash to cover its expenses.
Marginal Cost
A company’s marginal cost is the difference between the profit it makes from selling one more unit and the cost of production. It can be determined by dividing the total cost of goods sold by the number of products it wants to make. Knowing this can help determine if increasing production will result in a profit. However, it’s also essential to remember that this can be done with the help of new equipment or hiring more workers.
Gross and Net Profit
The gross profit is the amount that a company makes after deducting the cost of its product or service. Net profit is the amount a company has left after paying all its other expenses, such as rent, salaries, and debt payments. Many businesses make the mistake of thinking that net profit is a better measure of their company’s financial health than gross profit. Understanding the difference can help you set the correct prices for your products and services.
Balance Sheet
A balance sheet is a record of the company’s assets, such as equipment and property, as well as its debts, loans, and purchases on credit. It also shows the value of these assets to the company’s owners.
Accrual Accounting
Instead of tracking expenses and revenues based on when they were paid, accrual accounting focuses on when a company incurred these expenses. This method more accurately assesses a company’s long-term value and profitability.
Burn Rate
The burn rate measures how long a company can keep operating without a profit. It can be helpful in early-stage companies seeking funding or for those already struggling to stay afloat. This number can help determine how long a company can survive until it can self-sustain.
Break Even Analysis
A break-even analysis is a process that can help determine how a company can achieve profitability. It can also help analyze the impact of pricing decisions on its financial health.
Getting to know the ins and outs of your company can be challenging, especially if you’re not familiar with the accounting terms used by other companies. Understanding these terms can help you keep track of your financial records and improve your company’s performance.